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Revealed: global video games giants avoiding millions in UK tax

Revealed: global video games giants avoiding millions in UK tax

Four large companies – including Sony and Sega – have claimed close to half of all relief from a culture-focused tax policy.

UK tax policy intended to boost the domestic video games industry has been used by some of the world’s largest entertainment companies to avoid paying tens of millions of pounds in corporation tax, a Guardian investigation has found.

WarnerMedia, which owns the British game development companies that make the Lego and Batman: Arkham series, has claimed up to £60m in corporation tax relief, according to company filings.

Sony, the owner of PlayStation, claimed almost £30m. Japanese multinational Sega claimed up to £20m, according to audits of its UK subsidiaries that make the strategy-based Total War games and the hit sports series Football Manager.

Video Games Tax Relief (VGTR), which enables game developers to claim back up to 20% of certain production costs, was introduced in 2014 after years of lobbying by the industry.

As well as other culture-focused tax policies, such as those promoting British film and television, VGTR has remained popular, not only with the titans of the sector but also with small firms who consider it a lifeline to help produce games on a budget. Claiming the relief is legal, and some of the tiniest developers – down to one or two staff – told the Guardian it had kept them afloat. One independent developer said it was “crucial to keeping the lights on”.

However, concerns were raised early that the tax breaks, which the UK government promoted as helping small and medium-size businesses, might be exploited. An official consultation in 2012 warned it “should not create substantial additional avoidance opportunities”.

The next year, the European Commission launched an investigation into whether the policy was unfair. It eventually approved the scheme, but only after stating that it had been convinced VGTR would focus on “a small number of distinctive, culturally British games which have increasing difficulties to find private financing”.

Five years since the policy passed, a Guardian review of its impact suggests the opposite may be true. Close to half of all the relief went to four large foreign-based companies. Scores of games that have few, if any, apparent British cultural references have been awarded large rebates.

Official figures show VGTR was also overwhelmingly more lucrative for larger-scale video game projects. Claims for more than £500,000 have taken at least 80% of the total tax relief, despite accounting for only a small fraction of claims. These were dominated by big developers.

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While claims for big-budget games will be larger due to higher costs, smaller, low-budget developers have received much less of the pot. Applications for less than £50,000, while accounting for more than half of successful claims, were granted just roughly £10m of the total £324m in tax reductions.

Separately, the total cost to the taxpayer has ballooned to more than £100a year, almost three times higher than original government estimates.

The revelations into VGTR come two months after the investigative think-tank TaxWatch UK found that the makers of Grand Theft Auto V, one of the most profitable entertainment products of all time, paid no UK corporation tax between 2009 and 2018. Its New York-headquartered parent company, Take-Two Interactive, claimed £42m in VGTR through its UK developer, Rockstar North.

###pSony and Sega show the scheme had “become a cash cow for large, tax-dodging multinational corporations who are milking the system to extract hundreds of millions of pounds in subsidies from the British taxpayer.

“It is clear to me that much of the subsidy is unnecessary, as many of these corporations were producing hugely popular games since long before the introduction of VGTR,” Dunnagan said.

Promoters of the video games sector continue to back VGTR. Jo Twist, head of Ukie, the UK trade body that represents the games and interactive entertainment industry, said the relief had “played an important role in making the UK one of the best places to make games in the world”, adding she would encourage businesses of all sizes to apply.

WarnerMedia, owner of British developers Traveller’s Tales and Rocksteady Studios, declined to comment, as did Sega, which owns Sports Interactive and the Creative Assembly. Sony did not respond to requests for comment.

The impact of corporate tax breaks is fiercely debated, with some studies finding relief does little to create jobs or boost the economy. The UK already has one of the lowest corporation tax rates in the developed world.

A 2013 European Commission investigation into VGTR questioned whether the UK was providing tax breaks to an industry that was already thriving. It feared the aid might lead to predatory trade practices, with other countries cutting tax to be able to compete. The US, Singapore, Canada and France offer tax breaks to games developers.

The commission approved the aid a year later. In an effort to increase transparency, it passed regulations in 2016 requiring all tax relief of more than €500,000 to be published on a state aid website.

The UK government, however, has not fully disclosed where all the relief is going. HMRC said it is obliged to report only high-figure VGTR rebates to the commission since 2018. Separately, it denied freedom of information requests to identify firms that benefited most from the scheme, citing taxpayer confidentiality. It said all claims are carefully scrutinised.

Vitally, VGTR has also been widely promoted as being of cultural value in the UK, with games under development required to pass a “cultural test”. To qualify, games can score points on whether they include British or European cultural references. But the test is lenient, and games in fictional universes with no obvious British or European cultural content, such as Batman: Arkham, can still gather enough points to legitimately pass. Having staff or offices in the UK or European Economic Area also earns points, as does simply using the English language.

Regardless, the British Film Institute, which runs the test, has strongly backed the relief. It commissioned a report last year which claimed that for every £1 invested into the games industry via VGTR generated £4, based on employment and other economic spillover effects.

Katie Goode is one of four people at Triangular Pixels, a Cornwall-based independent developer that makes virtual reality games. She believes the test promotes British culture. Her team deliberately added Kernowek, or Cornish, as an in-game language because they knew it would help get the relief. “It’s been incredible for our business,” she said. “We’ve put the relief straight back into development and the local economy.”

But Goode also believes the scheme should have a clearer requirement for British cultural references. “It’s important to keep our culture alive, and I feel like VGTR’s original spirit was to make sure that happened.”

Source: https://www.theguardian.com

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