Tax breaks "not enough" to boost creative investments

Amy King
12 April 2012

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George Osborne recently announced tax breaks for UK-based gaming, animation and high-end TV production as part of his latest budget. The move has been well-received by the creative industries, but one VC professional questions the impact its narrow focus will have if this type of business is to become an attractive prospect for investors. Amy King reports

As part of the recent budget, George Osborne announced the extension of the tax breaks previously afforded to the film industry to the wider creative industries. In an attempt to plug the creative brain drain and catalyse competition on an international playing field, gaming, animation and high-end TV production will now be eligible for tax breaks.

These breaks will mean that if a creative venture which meets the criteria makes a profit, the development company would be able to reduce the tax payable on that profit. Furthermore, if it makes a loss, the company could claim a cash tax credit to lighten the financial impact.

It is hoped that targeted tax relief will help raise the profile of the sector and neutralise investor perception of risk so often and perhaps incorrectly associated with the creative industries. It could, therefore, be the first step towards attracting further venture capital investment in the UK creative industries.

However, some worry the move does not go far enough. "What we need to do is more industry-wide than industry-specific" says David Glick, founder of Edge Group, which focuses its VCT investments solely on the creative industries. "I welcome the tax breaks, I am glad the government has recognised the importance of creative industries, but I question whether the focus shouldn't really be on international competitiveness for the whole creative sector through wider tax changes" he explains. "A more holistic approach is needed to make the UK creative industries a truly attractive prospect for international investment and to prevent UK creative talent from going overseas."

The tax breaks have been particularly welcomed by the games industry, long perceived as the black sheep of the sector. Gaming is growing substantially as a market, last year overtaking video as the UK's largest entertainment sector according to research carried out by the Entertainment Retailers Association. Research found that despite the falling number in sales of physical console games, digital and app downloads powered the UK games market's sales figures of £1.93bn in 2011, ahead of video sales of £1.8bn and music on £1.06bn.

Indeed unquote" data reveals that gaming is a particularly strong sector within the creative industries, with the number of investments in gaming companies again on the rise following a fall in 2010. It seems this rise is set to continue, sustained by increasingly widespread use of smartphones, tablets and consoles.

According to Glick, there has been a shift in mass tastes "from ownership of product to experience of the event, and from passive receipt of content to a desire to interact with it. And this shift is underpinned by technology. After all, if you listen to music on an iPad, you are only actually using a fraction of its functionality." The rising success of gaming epitomises this shift towards experience and interaction.

Despite their suitability though, a recent Demos report suggested a serious lack of awareness on the part of games companies regarding their eligibility for investment funding. The creative industries are less suited to credit financing due to the perception of risk by lending institutions. Yet many remain unaware of the opportunities available by partnering with an EIS or VCT despite their potential suitability.

"Edge has a great advantage due to our industry experience and our strict focus on the sector. We all started out in the creative industries before turning to finance so we know people in the industry and their requirements" says Glick, "but I do think there is a lack of knowledge in how to access that finance."

The shift to digital and technological development that underpins the rise of gaming is both a blessing and a curse. On the one hand it has shattered the confines that limited gaming to computers and consoles, pushing it onto tablets, mobile phones and social networks. On the other hand, with the inexorable rise of digital downloads, the near-redundancy of bricks and mortar gaming retailers almost spelt game over for UK company GAME before turnaround specialist OpCapita stepped in.

With the shift to digital an explicit aim of the current government, as vocalised in the recent budget which aims to see the UK crowned as the European technology hub, it seems that the growth of gaming is set to continue, perhaps making it an increasingly attractive target for venture capital and private equity investment.