Mills & Reeve: Technology Law Update

Are you British enough to pay less tax? New tax reliefs to be introduced for British video games and television programmes

On 11 December 2012, HM Revenue & Customs (“HMRC”) and HM Treasury published draft legislation for new tax reliefs for high-end television and animation programmes, and video game development. It is intended that these reliefs will be introduced in Finance Act 2013, and they will be available for certain television and video game production companies that produce sufficiently “British” programmes and video games.

As with many tax reliefs, the detailed provisions are complex (and differ slightly as between video games and television programmes) but the basic conditions are:

Video games:

• “video game” is not defined (so is expected to take its ordinary meaning), but it specifically does not include:
  • anything produced for advertising or promotional purposes (though some minor in-game product placement may be acceptable); or
  • anything produced for gambling purposes.

Television programmes:

• must be a drama, documentary or animation;
• must not be within an excluded category of programme (eg, advertising, news/current affairs, quiz or panel show etc.); and
• in the case of programmes which are not animations:
  • must be commissioned to fill a time slot of over 30 minutes; and
  • average “core expenditure” on the programme must be at least £1 million per hour.

In each case, the video game or television programme must be intended for broadcast or supply to the general public, must be “culturally British” (and certified as such), and at least 25 per cent of the core expenditure relating to the video game or programme must be UK expenditure. The “British” test is interesting, not least because it really refers to Europe. HMRC has published draft Regulations setting out the various conditions (essentially, the test is a points system, with relief available if the video game or programme achieves sufficient points). The tests are slightly different for programmes, animations and video games – but a selection of the tests for video games will give a flavour of the requirements:

• the percentage of the video game set in the UK (or EEA);
• the number of UK (or EEA) characters in the game;
• whether the video game story is British (or relates to an EEA state);
• percentage of original dialogue recorded in English (or a “recognised regional or minority language”);
• the video game’s level of contribution to British culture;
• at least 50 per cent of certain types of work being carried out in the UK; and
• whether certain key personnel (project leader, scriptwriter, lead programmer, 50 per cent of the development team etc) are citizens of, or ordinarily resident in, Britain or an EEA state.

The new reliefs are to be welcomed – but does this mean that Lara Croft's future adventures will now be confined to these shores for tax reasons?

A race for protection -- a "patently" fast track

The Government has innovation and intellectual property protection in its sights again.  Not however like tax avoidance: more ideas for promoting protection are rolling off the stocks.

Vince Cable, the Business Secretary, has announced a package of measure to be introduced next year, especially to help young and innovative companies. Amongst them will be a fast track to trade mark protection and patent protection.

A trade mark will be registrable in a mere 5 days! One has to ask whether this is a good investment of effort, although it will be cheered by small businesses.  The much greater issue in the trade mark field is of trade mark “clutter” – the fact that there are so many trade marks registered by the Community Trade Mark Office (which of course also applies to the UK) for goods and services for which they are not used which means that it is often a long road to finding a trade mark which is free of obstacles to register.  To be fair the UK IPO is currently consulting also on this issue after some apparent disappointment of a report commissioned earlier this year, and the Max Planck Institute's report in 2011 (Allensbach Study -- see para 3.5, page 39: 21% see a problem, 79% do not see a problem or express no opinion -- a view which many professionals say conceals the fact that trad mark clearnace has become expensive and difficult).

The patent process can be shortened to 90 days (for a fee)  – compared with 4½ years in the UK (and much more in the European Patent Office).  The UK IPO already will grant patents in a year, on request and a favourable wind.  But 90 days does seem exciting, especially in the era of the Patent Box (the regime for obtaining income tax relief for profits products or services for which there is a UK or EPO patent registered).

More news on these innovations later.

The price of public support – what’s a trade mark worth

Starbucks and Google and others are being roundly criticized for not paying enough tax in the UK. This  was the subject of another round of criticism from MPs yesterday ("Tax paid by some global firms in UK ‘an insult'"), and more argument on Newnight last night

Much of the debate focusses on the issue of transfer pricing -- and in particular how much that brand is worth.  Is this a Google or Starbucks issue -- or is it in the hands of HMRC?

A transfer price should be chosen which reflects the real value of the goods, services or rights conveyed from abroad to the UK; that should give a sensible and fair result. One can of course hope (or entice) more of the value of those goods or services to be created in the UK.

However, it seems that there is an issue with HMRC setting - or agreeing - that value for the brand and trade mark rights. Perhaps a different approach should be taken.  Brand value is (substantially) a reflection of a customer's willingness to buy again – or to encourage their friends to buy again. Some brands clearly have some level of intrinsic value (in the sense that people want it because it is that brand, rather than because the brand signifies a satisfactory product or service) - "I must be seen wearing Channel"; but for others, especially those for lower cost, higher consumption goods, such as Starbucks, the key decision to go back is local customer experience. Now that local customer experience is precisely that – it is generated in the UK, and belongs initially to the provision of those goods or services in the UK.

Therefore supplies in the UK should not be subject to payment of a significant royalty for use of the brand, since the brand value has been built up, and initially resides, entirely locally - most customers rely on the brand because they or their friends in the UK bought something previously in the UK.

Of course typically the licence agreement under which the brand is licensed confers ownership of the rights in the brand, and any goodwill accruing, on the licensor – usually in a foreign (low tax) jurisdiction. But if that is the case, for each purchase of a product in the UK a small piece of value is transferred out of the UK - that piece of goodwill.  If that is the case, should not that value stream then attract tax, just as a remittance of dividends to the owner attracts tax? And pehaps that tax could be levied retrospectively? Comments please.

 

　

　

 

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Tax breaks for the games industry?

The Department for Culture, Media and Sport opened a consultation yesterday on the proposed test to identify the 'culturally British video games, animation and high end television' sectors which would qualify for the corporation tax reliefs announced in the March 2012 budget.

The intention behind the proposed tax break (which is still subject to State Aid approval by the European Commission) is to encourage more UK productions in these industries - similar to the tax breaks that are already offered to the film industry.

The deadline for responses is 29 October.