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Playing the Innovation Game

Authors: The Work Foundation Hasan Bakhshi and Juan Mateos Garcia, NESTA Policy & Research

14 December 2010

Over the last few years, video games have moved from the periphery to the mainstream. Not only as an entertainment medium (with video games releases such as Grand Theft Auto or Call of Duty eclipsing Hollywood’s blockbusters in terms of revenue), but also as an area of interest for UK policymakers. All political parties now acknowledge the growth potential of the UK video games sector, as well as the threats it faces, particularly from cheaper development territories in Asia and Eastern Europe, as well as Canada and France, where the government lavishes developers with generous subsidies.But the production tax credits that the UK video games companies have long called for are hard to justify in these days of austerity. What the government can do is ensure that those measures which are already in place don’t discriminate against a young and vibrant industry where disruptive technological change is ‘business as usual’.

In a previous policy briefing, The Money Game, we looked at ways to encourage investment into the sector, while more recently, in The Innovation Game, we examined the relevance of the R&D Tax Credit for video games companies. Our point is that, as currently configured, this scheme is not fit to support the sector’s innovation activities. Neither its locus of innovation (in the intersection between the creative industries and software development) nor its innovation processes (iterative, always with an eye on the user) map well on the design of the R&D tax credit, informed as it is by conventional understandings of innovation as a linear, science heavy process.

In the Innovation Game we call for adjustments to the scheme that we envisage will augment its impact on innovation by UK video games developers. They include better access to information about how to apply for credits, clarification of the status of innovation expenses which are crucial to the sector, more effective methods for the collection of data for claims, and improved sector expertise in the specialist units that administer the scheme. To be clear, we are not proposing a wholesale redefinition of R&D expenditures which would open the floodgates to the Exchequer. We are suggesting that minor changes to the way the scheme is administered will mean that bona fide R&D expenditures by video games companies qualify for tax relief.

The changes we propose may go a long way towards removing the barriers that UK video games companies face in applying and benefitting from the R&D Tax Credit, so that it can better support the innovation activities on which they will rely to stay ahead of cheaper competitors in the days to come.

NESTA is a sponsor of the Knowledge Economy 2 programme.