UK's proposed Games Tax Relief program under investigation by European Commission

Proposed tax breaks for game development in the U.K. are being examined by the European Commission, which said today that it has opened an "in-depth investigation" into whether the breaks are necessary.

In December, the U.K. Treasury announced plans to implement 25 percent tax breaks on up to 80 percent of the budget for U.K.-developed games, if they meet a "cultural test" based on how well a game promotes the country and its culture. The plan was set to go into effect April 1, but last month the Treasury announced a delay because the European Commission, the body that governs the European Union, had not approved the cultural test.

The European Commission said in a statement today that it has doubts about whether Games Tax Relief is necessary, since "there is no obvious market failure in this dynamic and growing sector and that such games are produced even without state aid." The organization's other concerns include worries that the program could cause "undue distortions of competition" in the U.K. game industry.

"The market for developing video games is dynamic and commercially promising. It is not clear whether the taxpayer should be subsidizing this activity," said Joaquin Almunia, the European Commission's vice president in charge of competition policy. "Such subsidies could even distort competition."

The European Commission will also investigate whether Games Tax Relief would be discriminating by limiting tax breaks to goods or services "used or consumed" in the U.K., and whether the program would lead to a rash of similar initiatives in other European Union member nations.

"It is not clear whether the taxpayer should be subsidizing this activity"

Two major trade associations representing U.K. developers and publishers expressed disappointment upon the European Commission's announcement today, but reiterated their belief in the importance of Games Tax Relief and said they remained confident in its future approval.

Dr. Richard Wilson, CEO of The Independent Game Developers Association (TIGA), called the investigation a "very disappointing hold-up which if prolonged could jeopardize much needed investment and job creation in the U.K.'s games industry," but characterized it as "a delay, not a defeat." Dr. Wilson pointed out in the TIGA statement that a similar program in France, as well as tax breaks for the U.K.'s film industry, also faced European Commission investigations before eventually being approved.

"We believe this support is crucial in opening up the opportunity for developers to make culturally British games, but also as a vital incentive for development studios and large multinationals to base their development in the U.K. and nurture the talent here," said Dr. Jo Twist, CEO of The Association for U.K. Interactive Entertainment (UKIE), in a statement today. She added, "The U.K. games industry needs tax breaks in place in order to be able to compete with other territories and to be able to grow to its full potential."