The UK gaming industry is widely recognised as being one of the most innovative, cutting-edge and entrepreneurial in the world. It continues to push the boundaries of what it’s possible to achieve as technology develops and consumer expectations change.

The stats

UKIE, the association for UK interactive entertainment, released impressive figures in 2018:

• £5.7 billion in consumer spend, up 10% from 2017;
• 37+ million people play games in the UK – the 6^th largest video game market;
• over 2250 active games companies across the full spectrum throughout the UK; and
• 62% of companies have been founded since 2010.

This continued growth has been confirmed by TIGA, the trade association representing the UK video games industry, in its May 2019 report:

• £1.8 billion contributed to the UK’s GDP;
• developer headcount grew to over 14,000, an increase of 8.1%;
• the number of jobs indirectly supported by gaming studios rose to over 26,000;
• direct and indirect tax revenues increased to £747 million; and
• annual investment by gaming studios rose to £818 million.

These reports all agree that a key factor in continued growth appears to be the introduction of the video games tax relief in 2014.

Video games tax relief

So, what is the video game tax relief?

This provides development companies relief on their UK corporation tax by allowing an additional deduction to be made for corporation tax purposes.

If this deduction leads to the development company making a loss, or if it had already made a loss (in which case the loss will be increased by virtue of the deduction), the loss can be surrendered to HMRC for a payable tax credit at the rate of 25%. The additional deduction and the tax credit are calculated by reference to EEA core expenditure, up to a maximum of 80% of the total core expenditure by the development company (i.e. effectively 20% of the total core expenditure).

The BFI Screen Business report in October 2018, based on 2016 figures, showed:

• £1.52 billion contributed to the UK economy (GVA);
• 20,000 + full time equivalent jobs supported;
• £1 invested via tax relief added £4 to the economy;
• £1.25 billion in production and development spend;
• £389.9 million accessed via the video game tax relief scheme;
• 27% inward investment since the video game tax relief was first introduced in 2014; and
• £1.75 billion in corporate investment since the video game tax relief was first introduced in 2014

According to GamesIndustry.biz, over £100 million is claimed in video games tax relief per year in the UK.

The aim of the video games tax relief is to encourage further growth in this industry and the statistics indicate that the UK gaming industry is going from strength to strength.

Continued growth and key considerations

With that in mind, what are the key areas and considerations for those involved with the gaming industry?

Crossovers and licensing partnerships

• More film and TV content is being produced than ever before. Netflix released more original content in 2019 than the entire TV industry did in 2005.
• This brings more opportunities to work with third parties to license IP based on the content that is now being produced.

Virtual reality

• The virtual/augmented reality markets are experiencing rapid growth and bring their own sets of risks and challenges.
• Virtual reality is still nascent, representing a fairly small market, with 26 million virtual reality headsets sold to consumers globally (compared to over 110 million PlayStation 4 console units sold, and around 55 million Switch consoles and 50 million Xbox One consoles). However, the VR hardware market is experiencing rapid growth, and as such, we are likely to see more attention paid to it by developers in the future.
• Oculus headset sales spiked in the run up to the release of Half Life: Alyx, arguably the first AAA VR-first game ever to release, with Facebook reporting an 80% increase in non-ad revenue, largely driven by sales of Oculus products.
• Oculus headsets have also been sold out everywhere during the pandemic and have been reselling for huge mark ups on Amazon and eBay.

Mobile gaming

• Mobile gaming is the fastest growing sector in the global video games market, with Newzoo predicting 13% year on year revenue growth in 2020, versus 7% for consoles and 5% for PC.
• Mobile games now account for 48% of the global gaming market.
• According to App Annie, mobile games account for 33% of all app downloads, 74% of consumer spend, and 10% of all time spent in apps.
• UKIE reports that there are 1,483 games companies producing mobile games in the UK (as of 2017), making it the largest mobile games workforce in the EU.

E-sports

• Despite being hit hard by the coronavirus pandemic, Newzoo predicts that global esports revenues will grow by nearly 2% in 2020, down from its pre-coronavirus estimate of almost 16% year-on-year growth. This is not based on a decrease in esports demand, nor a reduction in the supply of esports content, but because of delays and cancellations of international esports events and a move away from physical events.
• For 2021, Newzoo predicts growth of nearly 23%, which is only a slight downward revision from its pre-coronavirus estimate.

App-based monetisation

• Medium predicts in-game ads will take over from microtransactions and subscriptions as the predominant monetisation model for mobile games.
• According to GamesIndustry.biz, 73% of gamers indicated that they were happy with the ad-funded monetisation model for mobile games.

Multiple formats

• The exploitation of games in multiple formats (e.g. console, mobile and PC) allows video games to drive a franchise into new areas in a way that would not have been possible 10 years ago.
• Not only does this increase the potential audience but it can also assist in growing other areas, such as merchandising.

How can Kemp Little help?

We can provide games and gaming companies with the trusted advice they need, whether they are just starting up, or have been operating as an established business for many years.

Our gaming practice is split into:

Commercial

Kemp Little’s Commercial team advises on a wide range of commercial matters, including publishing deals, distribution arrangements, merchandising, sponsorship arrangements, white-labelling, gambling (including esports gambling), consumer terms, platform operations, advertising, mobile, F2P, blockchain, cryptocurrencies, Internet issues, EULAs, website terms, agreements with payment providers, competition terms and privacy policies, sourcing and cloud agreements, licensing agreements, confidential information and data use and exploitation.

Regulatory

We advise on a broad range of regulatory issues including data protection and privacy including compliance and management of breaches, consumer protection, advertising codes, application of the gambling regulatory regime to betting, prize competitions and loot boxes etc, virtual currencies, ICOs and regulation of payment providers.

Corporate

Our Corporate team can advise on company and business mergers and acquisitions, MBOs, joint ventures, investments (including SEIS and EIS fundraisings), corporate finance, crowd-funding, shareholder arrangements and corporate structuring.

Intellectual Property

Kemp Little’s IP team can assist with all aspects of IP strategy, from trade mark and design filings, clearance searches, portfolio maintenance and exploitation through to disputes, litigation and reputation management.

Employment

Kemp Little’s Employment team provides advice on the complete employment/consultancy life cycle, from hiring to firing, business immigration and international relocations, drafting contracts and policies, advising on and enforcing restrictive covenants, employee dispute resolution and handling tribunal claims and advice on the employment aspects of mergers, acquisitions and outsourcing.

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