Global Video Games Giants: Playing the system or paying their fair share?

20th November 2019

Global Video Games Giants: Playing the system or paying their fair share?

A report from The Guardian, Revealed: global video games giants avoiding millions in UK tax, has shown that four large companies have claimed close to half of all Video Games Tax Relief (VGTR) since the scheme’s inception. The cost of Video Games Tax Relief has spiralled to over £100m a year, and since 2014 has seen WarnerMedia claim £60m, Sony £30m, and Sega £20m.

We have dug further into the accounts, and seen that not only are multinational companies claiming millions in relief, many are also engaging in tax avoidance, specifically profit shifting. This involves moving profits out of the UK so that no taxes are paid on UK generated profits. The effect of the shifting is that the UK accounts of the game developers show little or no profit being made. As many of these games are critically acclaimed best-sellers, and often part of long-running franchises, this claim is rather dubious.

Profit shifting by games companies was highlighted in our World Of TaxCraft investigation, which showed Activision Blizzard moved €5bn to sit with Dutch companies resident in Bermuda and Barbados that owned the intellectual property to the games. The Guardian study highlights that there are many more companies involved in this practice, and those companies in addition to moving profits out of the country, are claiming large sums of money in subsidy from the British taxpayer.

VGTR is a government scheme that allows UK developers to apply for tax relief from HMRC, subject to qualifying as “culturally British” under rather questionable BFI testing criteria. The relief is part of the wider Creative Sector Tax Relief, which also includes film production, animation, and high-end television.

Video Games Tax Relief is worth up to 20% of the core production costs of a game. Profitable games development companies are issued this as a relief, meaning a deduction from their corporation tax bill, with loss-making games companies are able to claim a payable tax credit at a rate of 25% of their total losses up to the total amount of qualifying expenditure.

We have studied two companies highlighted in the Guardian report to look at how the VGTR system is being used. These examples highlight both how generous the relief is and how it can be open to abuse by companies which engage in tax avoidance.

Example 1. Creative Assembly (Sega)

Japanese video game company Sega Games Co is an organisation which prides itself on the fact that it “does not take part in tax avoidance schemes”.1 In 2018, Sega had revenues of ¥250bn (£1.9bn) and owned subsidiaries across the world.

One of these subsidiaries is Creative Assembly, a UK based games development company, responsible for the long running Total War series, which has sold over 22 million copies2.

Creative Assembly
  2015 2016 2017 2018 Total
Turnover £30,285,066 £30,501,799 £45,804,938 £47,139,851 £153,731,654
Cost of Sales -£22,922,198 -£17,558,135 -£27,560,548 -£33,679,193 -£101,720,074
Gross Profit £7,362,868 £12,943,664 £18,244,390 £13,460,658 £52,011,580
Gross Margin 24.31% 42.44% 39.83% 28.55% n/a
Admin Expenses -£4,103,109 -£4,690,134 -£4,941,792 -£13,735,035
Operating Profit £7,362,868 £8,840,555 £13,554,256 £8,518,866 £38,276,545
Operating Margin 24.31% 28.98% 29.59% 18.07% n/a
Profit before Tax £6,244,494 £8,891,387 £13,554,256 £8,455,866 £37,146,003
Video Games Tax Relief £2,779,435 £1,828,352 £2,501,996 £3,567,481 £10,677,264
Tax £1,658,862 £92,595 £703,372 £3,239,757 £5,694,586
Profit for the year £7,903,356 £8,983,982 £14,257,628 £11,695,623 £42,840,589

Figure 1. Creative Assembly Accounts, 2015-2018.

On the face of it, Creative Assembly does not seem to be engaging in profit shifting, or at least, it does not have a particularly aggressive approach with regard to its transfer pricing structure. The company, unlike some other UK based developers owned by large multi-nationals, declares a pre-tax profit in the UK of around 25% of its revenue. Creative Assembly’s operating profit margin was 18% in 2018, which is considerably larger than its Japanese parent company which had an operating margin of 5.5%.

In the absence of any subsidy the company would normally pay corporation tax on these profits. However, VGTR allows Creative Assembly to wipe out its corporation tax bill entirely, and to increase its post-tax profits, through a tax credit. This presumably can be used to deduct from any future corporation tax liability.

Figure 2. Rome Total War II, a game in which you can set your own tax-rates.

Figure 3 shows how this works. In 2018, Creative Assembly had a pre-tax profit of just under £8.5m. Once various tax adjustments are made, including a backdated tax relief of £1.5m, and a 2018 relief of £3.5m – a total £5m in VGTR – Creative Assembly are able to eliminate any corporation tax they might have owed, ultimately increasing their post-tax profits by £3.2m.

Figure 3. Creative Assembly accounts 2018, taxation bill.

Example 2. Rocksteady Games (Warner Bros.)

Rocksteady Studios is a London based games developer, and subsidiary of Warner Bros. Interactive Entertainment, responsible for the “culturally British” Batman games. The studio made Batman Arkham Knight, the fastest selling game of 2015, which shifted some 5 million copies in its first 3 months. You would expect that a company behind a game as successful as this would make a profit, but scrutiny of Rocksteady’s accounts show that its only after government subsidy that this loss making enterprise turns a profit.

Rocksteady Studios
  2014 2015 2016 2017 Total
Turnover £11,271,000 £12,725,000 £13,251,000 £14,592,000 £51,839,000
Cost of Sales -£7,159,000 -£10,047,000 -£14,050,000 -£15,740,000 -£46,996,000
Gross Profit £4,112,000 £2,678,000 -£799,000 -£1,148,000 £4,843,000
Gross Margin 36.48% 21.05% -6.03% -7.87% n/a
Admin Expenses -£4,360,000 -£5,503,000 -£126,000 -£160,000 -£10,149,000
Operating Profit -£248,000 -£2,825,000 -£925,000 -£1,308,000 -£5,306,000
Operating Margin -2.20% -22.20% -6.98% -8.96% n/a
Profit before Tax -£232,000 -£2,791,000 -£897,000 -£1,292,000 -£5,212,000
Video Games Tax Relief £1,566,000 £3,234,000 £2,396,000 £2,783,000 £9,979,000
Tax £1,215,000 £3,511,000 £2,397,000 £3,011,000 £10,134,000
Profit for the year £983,000 £720,000 £1,500,000 £1,719,000 £4,922,000

Figure 4. Rocksteady Studios Accounts, 2014-2017.

The accounts of Rocksteady show the company making a pre-tax loss for every year between 2014 and 2017, despite creating a highly successful game. How can that be? According to the annual accounts of Rocksteady, rather than getting a share in the profits of the game, the company receives payments from its parent companies based on the total cost of production. This payment is not, according to the accounts, enough to pay for the total costs incurred by the company. As a result Rocksteady Studio appears to be permanently loss making.

These losses mean that the company can claim back almost £10m in VGTR as a credit, which pushes the company into a post-tax profit – all the while paying £0 in corporation tax. The result of this is that Rocksteady is being subsidised by the British tax payer to produce highly lucrative games for its American parent company. The company pays no tax on the profits derived from the production of those games in the UK.

Figure 5. Rocksteady Studios accounts 2017, taxation bill (Creative tax credits is VGTR).

Conclusions

British studios that actually create highly successful games are essentially subsidised by the British taxpayer – however, what is the British tax payer getting back?

The two companies which we have studied here demonstrate that the VGTR scheme is almost bound to ensure that the UK games industry will not pay corporation tax – regardless of how successful the industry becomes.

In the case of Sega, the company does not appear to be engaged in any obvious profit shifting, however, video games tax relief still manages to wipe out the taxable profit of the company.

Add in profit shifting and games companies can even claim money back. It is implausible that the games produced by Rocksteady are loss making, and the losses in the Rocksteady accounts appear to be the result of profit shifting by the company. The perversity of the VGTR regime is that it rewards this aggressive behaviour with more subsidy.

Video Games Tax Relief is a poorly executed scheme. The intent is to promote British culture, and to foster innovation amongst small independent games developers through subsidies. The reality is that this scheme is being used as state-aid, acting as corporate welfare for multi-national companies worth billions.

The relief is set to run until at least 2023, by which point it is expected to have cost well over half a billion pounds. We want to know why companies engaging in profit shifting are still able to claim VGTR? TaxWatch is calling for a comprehensive review of this scheme – the UK Government should investigate the matter before any more subsidy is given to multi-national organisations involved in profit shifting.

We have approached the studios for comment. A spokesperson for Creative Assembly said: “The amount of Corporation Tax paid by Creative Assembly is publicly available information”. Rocksteady Studios did not respond.

Photo by Marcin Lukasik on Unsplash