Clause 34 makes minor changes to the video games tax relief to make it compliant with state aid approval and to clarify that only those games qualifying for relief need to be treated as separate trades. The changes will ensure that UK games companies are able to benefit from the tax relief from 1 April 2014.
Video games tax relief legislation was introduced by the Government in the Finance Act 2013 as part of a package to support our creative industries, along with the reliefs for animation and high-end television that we have just discussed. As with other successful creative sector tax reliefs, video games required state aid approval from the European Commission before the relief could be implemented. The Commission took the decision to open a formal investigation into the scheme for video games and the Government worked closely with industry and the Commission throughout the investigation to ensure that state aid approval was received as quickly as possible.
State aid approval from the European Commission was received in March and is subject to some minor changes to the games legislation in the Finance Act 2013. The changes made by clause 34 will amend the video games tax relief to replace the “used or consumed rule” by a definition that encompasses expenditure on goods or any services provided anywhere within the European economic area. To ensure that the relief benefits those games producers in the UK there will be a cap on subcontracting of £1 million. That ensures that games developers do not place the majority of work outside the UK, and protects UK businesses.
As some games developers may have many games in production, we are also clarifying that only those video games that benefit from this relief are treated as separate trades for tax purposes. That removes a potential cost and administrative burden on those successful companies. The tax relief plays an important role in enabling companies within the video games industry to make valuable economic and cultural contributions to the UK as part of a dynamic and diversified economy. This tax relief will have a substantial impact on our UK video games industry, benefiting companies across the UK, from Dundee to Brighton.
As the Minister knows, this industry is highly competitive and is facing massive pressures from north America, particularly Canada. We have seen the export of jobs from Scotland to Canada. How does this regime compare with those in north America? Does it allow British companies to compete before they think of offshoring?
The hon. Gentleman is right. It is worth recognising that the UK is regarded as having a world-leading video games industry, and long may that continue. I have not done an analysis of how we compare with other regimes, but there is no doubt that in keeping this regime under review, the Government would be conscious, as any Government would, of what other regimes around the world offered. As I have already set out, we need to be cognisant of state aid rules from the European Community. I have already mentioned that one of the changes made by the clause, which amends the tax relief, will ensure that games developers do not place the majority of work outside the UK, and therefore protects UK businesses. I am sure we would all welcome that.
I will also outline one change to be made. To be eligible for tax relief a video game must be certified as culturally British. Schedule 16 to the Finance Act 2013 included the power to introduce a points-based cultural test for the relief. The purpose of the test is to determine whether a video game may be certified as a culturally British game by the Secretary of State for Culture, Media and Sport.
A statutory instrument to that effect will be introduced through the negative procedure immediately after the Bill receives Royal Assent. We will also keep the new relief under review alongside other measures in the Government package of corporate tax reform, to ensure that they benefit businesses in the way intended, and to ensure that the new regime is not exploited for tax avoidance or fraudulent purposes.
Government amendment 1 is a minor drafting amendment to replace the words “UK expenditure” with “EEA expenditure”. A number of changes in drafting from UK to EEA were required and unfortunately that is a typographical error in the Bill. We need to make the change to ensure that the legislation works as intended.
In conclusion, the new video game relief will help maintain the UK’s position as a world leader in producing video games, so encouraging investment.
I wonder whether the Minister can flesh out what is a culturally British game in an international context. As my hon. Friend the Member for Islwyn pointed out, there is an awful lot of competition. A games company in my constituency has been established for the best part of 20 years but has offices in Hong Kong, mainland China and the USA. I am not convinced that there would be an international market for “Grand Theft Croquet”.
I thank the hon. Gentleman for that very good observation. I am told that video games can be cultural in the same way as films and TV programmes. He may be interested to know that video game music is becoming popular and mainstream, in the way that we listen to film scores. I understand that the cultural test considers the game’s content, cultural contribution, where the production takes place and the nationality and residency of the people involved in the production, to ensure that support is targeted at culturally British and European games. I think that is as far as I can go for the hon. Gentleman at this stage, but I am happy to continue the discussion and my education on the matter.
As I was saying, as a world leader in producing video games, we want to encourage investment and promote sustainability in the industry. I therefore hope that the amendment will be made, and that the amended clause stands part of the Bill.
I will keep my comments brief, because the Opposition strongly support the video games relief. The relief was announced in the final Budget of the previous Government in 2010, and we were disappointed when the current Chancellor decided against implementing what he described as “poorly targeted” proposals. We are pleased that there has been a U-turn on the issue and that we are debating the nuances of the relief today rather than its substance.
There have been some setbacks for companies that are awaiting the benefits of the relief, in terms of negotiations regarding state aid. I had one or two queries about the definitions of “culturally British”, but I think my hon. Friend the Member for Gateshead has shot my fox. The Minister has provided a helpful response to that query.
Will the Minister confirm that Government amendment 1 will conclude the deliberations with the European Commission, and that the matter is now resolved? In that case, in light of the EU competition chief’s comments, particularly in relation to distinctive culturally British games, do we now have a greater degree of clarity than in last year’s Finance Bill Committee, when we were left quite unsure whether the video games industry would begin to see this much needed and welcome relief, considering that it has now been in place for more than a month? What has been the initial impact assessment?
Given that the relief has been in place for only a month, it is difficult to assess at this stage quite how many companies are benefiting immediately. However, as we have heard from hon. Members, the interest in the clause stems from the fact that hon. Members across the House have companies in their constituencies that will benefit. That is why it was important to get matters resolved with the European Commission and to introduce the relief.
The hon. Lady asked whether the state aid process is at an end. I am able to say that yes, the matter is now resolved. We were able to bring the relief into effect only on 1 April this year, when we received state aid approval from the EU.
Video games tax relief is estimated to cost £10 million in 2014-15, but, as I have already said, indications from the industry are that it will have a valuable impact on it, and reactions so far to its introduction have been extremely positive.