Section 33 of the Finance Bill 2021 proposes to introduce a new section 481A “Relief for investment in digital games”. The section requires EU approval before it can be introduced.
The new legislation borrows heavily from some of the concepts already included in the Section 481 Film Tax Credit Relief legislation, but unfortunately, it has gone too far. It has taken the clawback provisions in their entirety from the section 481 film tax credit when it is not appropriate to do so.
The new legislation states that where the Revenue Commissioners have paid a tax credit to a digital games development company (“DGDC”), it is subsequently found that payment of all or part of the amount was incorrect, a clawback can occur. The persons on who the clawback can be assessed are
- the DGDC,
- any director of the DGDC, or
- each person who is either the beneficial owner of or able directly or indirectly to control more than 15 per cent of the ordinary share capital of the DGDC
The clawback is an amount equal to
(i) in the case of a company, four times, and
(ii) in the case of an individual, one hundred fortieths,
of so much of the digital games tax credit that was incorrectly claimed. In other words, the directors and owners of the DGDC can be exposed to personal liability if an error is made in claiming the digital tax credit.
The inclusion of such draconian clawback provisions can only be viewed in the context of why they were included in the film tax credit legislation. The film tax credit legislation provides for the film tax credit being paid in advance of any expenditure being incurred on the film, in certain circumstances, to assist in the cash flowing of the film. To balance the risk to the State in this cashflowing, the clawback provisions were introduced. The logic behind this is that if the State pays a film tax credit to a film production company before that company incurs the expenditure on which that tax credit is based, an additional guarantee is required to protect the State.
However, in the case of the digital tax credit, there is no advance tax credit. A DGDC may, in advance of the date of completion of the digital game, claim the interim digital games corporation tax credit where the claim is made within 12 months of the end of the accounting period in which the expenditure giving rise to the claim is incurred. This is not an advance tax credit. The interim tax credit system caters for the fact that the work on a digital game takes place over a long period and will extend into several accounting periods before it is finished. However, the digital game tax credit is not paid in advance of any expenditure being incurred, which is the critical point.
It is hard to imagine the international gaming industry reacting well to the possibility of personal liability for directors and owners, especially since no such personal liability exists under the R&D tax credit system, which is also based on expenditure incurred and is not paid in advance.
In order for this welcome initiative on a tax credit for digital games development to be successful, the personal liability for directors and owners of DGDC must be removed.