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Tax breaks for video games – the EU dimension

The Chancellor’s Budget Statement included something for the video games industry: 
“Today we also set Britain this industrial ambition. That we turn Britain into Europe’s technology centre.  We will start with digital content. The film tax credit, protected in our spending review, helped generate over £1 billion of film production investment in the UK last year alone. Today I am announcing our intention to introduce similar schemes for the video games, animation and high-end TV production industries. Not only will this help stop premium British TV programmes like Birdsong being made abroad, it will also attract top international investors like Disney and HBO to make more of their premium shows in the UK. It will support our brilliant video games and animation industries too.” 
Under European Union law a taxation benefit restricted to a single industry counts as state aid. That means it has to be reviewed by the European Commission under the applicable legislation. The focus will be on the exception permitted for “aid to promote culture and heritage conservation where such aid does not affect trading conditions and competition in the Union to an extent  that is contrary to the common interest.” (article 107 (3) (d) of the Treaty on the Functioning of the European Union (TFEU)). Just last week, the European Commission announced a consultation on a draft Communication “on state aid for films and other audiovisual works” setting out a new approval regime to replace the one that has just expired. 
 It warns: “Not all games necessarily qualify as audiovisual works or cultural products.” Therefore, the rules designed for film production cannot apply automatically to games. Consequently, this Communication does not cover aid granted to games. Any aid measures in support of games not meeting  the conditions of [existing block exemptions, which do not apply to aid in the form of a tax privilege] will continue to be addressed on a case-by-case basis. To the extent that the necessity of an aid scheme targeted at cultural and educative games can be demonstrated, the Commission will apply the aid intensity [ratio of state aid to commercial funding] criteria of this Communication [maximum 50%] by analogy. 
So films and “educative games” are likely to pass muster.  But will all kinds of video games qualify as “educative”? Watch this space. 
Jim McLean is a consultant at Balfour and Manson. His area of concentration includes procurement and state aid.