Around £1bn per year lost to fraud and error in R&D tax relief claims

20th July 2023 by Claire Ralph

£1.13bn – revised estimate of error and fraud in 2020-21 (previously £338m)
24.4% – revised rate of error and fraud in SME scheme (previously 5.5%)
£1.05bn – estimated error and fraud in 2022-23

HMRC have finally published initial data from their random enquiry programme (REP) into R&D tax relief claims which indicates significant underestimates in previous calculations of fraud and error in the schemes.

Data only enables them to restate 2020-21 figures at this stage (due to time lags in completing enquiries) but these suggest £1.13bn was lost to fraud and error in the schemes in that year, up from the £338m previously reported. The bulk of this problem arises within the scheme for small and medium sized enterprises (SMEs) which accounts for over £1bn of that loss. This equates to a staggering 24.4% rate of error and fraud in the SME scheme.

HMRC’s initial estimate of the most recent tax year (2022-23) is £1.05bn lost to error and fraud related to R&D tax schemes.

TaxWatch has been reporting on problems within the R&D claims industry for some time. In particular we have focused on the increasing number of largely unregulated advisers operating as ‘claims farms’. These have used hard sell sales techniques to persuade businesses to make claims for spending that at best pushes the boundaries of the rules and at worst clearly does not qualify. The advisers take a percentage cut of the benefit received so have an incentive to claim the largest amount possible. HMRC’s pay now, check later process means that money is paid out initially, resulting in firms claiming they have a 100% success rate. However, we are aware of cases where, when HMRC subsequently challenge a claim, the problem advisers leave their clients to deal with the enquiry, keeping the cut they have already taken.

Despite widespread discussion of these issues within the R&D claims industry, HMRC have been slow to tackle this problem. With almost 85,000 claims made in 2020-21and limited detail about each claim provided to HMRC then policing the schemes is a huge task. However, the failure to get a grip on this issue is likely to have fuelled abuse of the schemes as advisers’ confidence in their ability to get away with it increased.

Recent increases in compliance activity by HMRC have been widely reported. Unfortunately this is alongside recurring reports of lack of skilled and experienced staff to deal with what is complex legislation. TaxWatch has long identified concerns about resourcing of HMRC for compliance activity, particularly when skilled staff recover much more than they cost (HMRC report rates of return of around 18:1). An additional concern here is that poor handling of enquiries is discouraging genuine claimants from pursuing relief through these schemes. We are aware of one business that has actually moved its R&D facility outside the UK following frustrations at how their claim was being investigated. This could end up with the worst of both worlds whereby the businesses intended to be supported do not claim and those that don’t qualify walk away with the money.

HMRC has had its resources cut by large amounts over recent years while having to deal with significant extra responsibilities of Brexit and the Covid support schemes. The nature of the work means that new investigation resources cannot just be produced at short notice as it takes some years for people to be fully trained. The problem with R&D tax reliefs identified by this new data puts a spotlight on a more widespread problem of inadequate long term funding and planning of resources for HMRC. This requires attention before large amounts more money are lost.

R&D – still changing after all these years

14th March 2023 by Alex Dunnagan

R&D reliefs predicted to cost over £9bn by 2026-27 – by far the largest corporation tax relief
Fraud and error in schemes total over £1.1bn in last three years
R&D ‘claims farms’ continue to hard sell opportunities to claim refunds on expenditure that often does not qualify
Impact of changes to help tackle problem R&D claims firms not felt for another two years
HMRC not resourced to tackle historical incorrect claims

A new report by TaxWatch shows that R&D tax reliefs, by far the largest corporate tax relief, are not working as intended, while being subject to hundreds of millions of pounds a year in fraud and error. The last three years alone saw £1.1bn in fraud and error (21-22 £469m, 20-21 £336m, 19-20 £311m).

New measures introduced in the Autumn budget won’t be felt for nearly another two years, and do nothing to claw back the billions already lost. The lack of resourcing at HMRC means that historic fraud will effectively be forgotten about.

Boundary pushing is rife with unregulated advisers encouraging borderline fraudulent behaviour, while skimming off the top. Multiple R&D claims advisers are still advertising jobs for sales advisers to cold call businesses persuading them to make claims, while industry insiders believe that it is a saturated market and that most new claims are unlikely to be eligible.

Our research suggests that the reliefs aren’t always acting as intended. Many companies are only applying for the relief after being contacted by tax advisers, suggesting the work would have been carried out regardless of the relief.

It’s unclear if this money is going to “innovative projects in science and technology”. The ‘Financial and Insurance’ sector made 1,445 claims in 2021 on a spend of £2.59bn, averaging £1.8m per claim – likely a result of the huge salaries paid in finance. ‘Admin and Support Services’ made 5,015 claims that year, on a spend of £1.33bn – that’s a whole lot of innovation in admin.

The historically low level of HMRC compliance activity in R&D is a good example of how failing to take timely action results in increasing abuse as people become more confident in their ability to get away with it.

Issues around R&D tax relief seem likely to appear again in the Spring Statement but will the Chancellor fully tackle this ongoing problem?

Alex Dunnagan, Director at TaxWatch, said:

The changes we saw in the Autumn Statement should help clamp down on future abuse, but the fact is that these amendments do nothing to tackle the billions previously lost to fraud and error.

With such great returns on investment for HMRC compliance activity, it’s a no brainer that they should be properly resourced to pursue historical abuse

Given the huge sums of money available for R&D reliefs, it’s no surprise that an entire industry of advisers has appeared, with many encouraging companies to submit boundary pushing claims.

The Government needs to decide whether the relatively untargetted nature of these reliefs is actually increasing innovation.

The full report is available here.

This research featured in The Times.

Video Games Tax Relief costs five times as much as forecast

27th January 2023 by Alex Dunnagan

Video Games Tax Relief (VGTR) cost a record £197m last year, more than five times as much as it was anticipated to cost when it was introduced.¹ A total of £830m in subsidy to the video games industry has been paid since the relief was introduced, with numbers increasing every year as the following chart reveals:²

Amount of video games tax relief paid (£ million, receipts basis) 2014-15 to 2021-22

Despite being billed as a relief set up to help independent developers produce culturally British games, it is large firms that benefit, as revealed by HMRC’s commentary on statistics for VGTR in the creative industry:

“In the year ending March 2022, the majority of claims tend to be for smaller amounts, with 49% of all claims being for £50,000 or less; however, these claims are only responsible for 1% of the total amount paid out. Claims over £500,000 account for 88% of the total amount paid out.”⁴

Worse still, is the fact much of the tax relief has been taken by large multi-national companies, for here there is a huge risk they will game the system and ‘offshore’ the subsidised intellectual property, resulting in the profits, and tax on them, being collected elsewhere. This point was made by TaxWatch’s Acting Director when he gave evidence about Video Games Tax Relief in front of the Treasury Select Committee on Monday 19th December 2022.

Rockstar Games illustrates this risk. The Edinburgh-based company developed Grand Theft Auto V which is thought to have generated revenues of over $5bn, only to then sell the intellectual property to their US-based parent company Take-Two Interactive at more or less cost price.⁵ Take-Two Interactive distributed, and continues to distribute, the game globally, and ultimately makes the (taxable) profits.

In order to receive VGTR, a game has to be accredited as “Culturally British” by the BFI. Since the introduction of the relief in 2014 through to 31 March 2022, 1,500 games received this certification.³ Of these, only two were published by Rockstar, with Grand Theft Auto V receiving the accreditation in 2015, and Red Dead Redemption 2 in 2019.

Rockstar’s latest accounts reveal it obtained £79.8m in VGTR in 2021-2022, a sum that is more than twice the value of the original costing of this tax relief to the whole industry and 41% of all of the VGTR paid out last year. The amount obtained by Rockstar has risen each year, taking the total the US-owned company has claimed to a staggering £285m – or 31% of this tax relief over the years.

	2016	2017	2018	2019	2020	2021	2022	Total
Operating Profit	£3,515,268	£3,745,345	£8,242,790	£8,715,917	£9,519,819	£9,399,572	£11,789,662	£54,928,373
Tax on profit	£33,416,310	£13,121,157	£26,915,315	£40,035,440	£65,155,510	£64,359,515	£81,036,506	£324,039,753
VGTR	£11,278,530	£11,918,339	£19,116,178	£37,607,824	£56,684,144	£68,376,369	£79,837,384	£284,818,768
Profit after tax	£36,931,578	£16,884,972	£35,216,097	£48,773,567	£74,783,921	£73,831,443	£93,170,605	£379,592,183
Dividends	£0	£12,500,000	£15,000,000	£0	£40,000,000	£0	£0	£67,500,000

Together these show it is time for the UK Government to review the effectiveness of this corporate subsidy, and it is not just TaxWatch who is asking pertinent questions for during the Treasury Select Committee session Danny Kruger MP (Conservative) asked the CEO of UK Interactive Entertainment, the trade body for the games industry:

“…wouldn’t it be nice if some of the profits, which are the ultimate purpose of a commercial enterprise, were taxed in the UK? Do you not think that there would be some value in that?”⁶

We agree.

1Creative industries statistics commentary: August 2022, HMRC, 18 August 2022, https://www.gov.uk/government/statistics/creative-industries-statistics-august-2022/creative-industries-statistics-commentary-august-2022
“It is estimated that this generous new corporation tax relief will provide around £35 million of support per year to the sector.”, Video games companies to begin claiming tax relief, HM Treasury, 19 August 2014, https://www.gov.uk/government/news/video-games-companies-to-begin-claiming-tax-relief

2Creative industries statistics commentary: August 2022, HMRC, 18 August 2022, https://www.gov.uk/government/statistics/creative-industries-statistics-august-2022/creative-industries-statistics-commentary-august-2022

3This number has since increased, however, we are only looking at Creative Industries data up until the end of March 2022 as this is the most recent reporting period for Rockstar. Data available at – Video Games Certified as British through the cultural test for video games, BFI, https://www.bfi.org.uk/apply-british-certification-tax-relief/cultural-test-video-games
For more on this ‘cultural’ accreditation, and how a game set in the US about gangland crime can be classed as ‘culturally British’, see – Swedish goats, Japanese hedgehogs and Batman: the £324 million tax bung to the ‘culturally British’ gaming industry, TaxWatch, 20 November 2019, http://13.40.187.124/cultural_test_tax_relief/

4Creative industries statistics commentary: August 2022, HMRC, 18 August 2022, https://www.gov.uk/government/statistics/creative-industries-statistics-august-2022/creative-industries-statistics-commentary-august-2022

5The corporate structure of Rockstar is explained in our report Gaming The Tax System which we published in April 2019, http://13.40.187.124/reports/gaming-the-tax-system/

6Oral Evidence: Tax Reliefs, HC 723, House of Commons Treasury Committee, 19 December 2022, https://committees.parliament.uk/oralevidence/12468/pdf/

No Time To Pay Tax?

18th October 2020 by Alex Dunnagan

The UK companies behind the James Bond films have minimised tax for decades whilst receiving tens of millions of pounds in subsidy from the UK taxpayer.

TaxWatch’s latest report – No Time to Pay Tax? – delves into the accounts of EON Productions Limited and its associated companies (EON). We found that despite Skyfall and SPECTRE grossing just shy of $2bn at the box office, EON generated small profits and smaller tax bills in most years whilst profits in the hundreds of millions are declared overseas.

In recent years, the UK group of companies headed by EON Productions Limited has declared a pre-tax loss, while simultaneously receiving tens of millions of pounds in tax credits via the UK’s creative industry tax relief scheme.

International tax rules state that profits should be allocated based on where value is created, with tech companies often using this argument to explain why they only pay taxes in the US. If this is the case, why isn’t a significant amount of tax paid on the profits of Bond films in the UK?

Find out more in our latest report here.

A PDF version of our report is available here (printer-friendly version here)

This research was featured in The Observer and the Mail on Sunday among others.

Image by Glen Ratcliffe

No Time To Pay Tax?

18th October 2020 by Alex Dunnagan

18th October 2020

How EON Productions, the studio behind the James Bond films, has minimised UK tax for decades whilst receiving tens of millions of pounds in subsidy from the UK tax payer

Introduction

The British production company behind the hugely successful James Bond series is part of a structure which minimises UK corporation tax, despite generating substantial profits for its US owners and receiving over £100m in subsidy from the UK government. After two delays due to the ongoing pandemic, Bond, a fictional series about a British civil servant, is set to return to the big screen next Spring in the 25th instalment of what is the fourth highest grossing franchise of all time.¹

However, despite the franchise bringing in billions at the cinema and raking in hundreds of millions of dollars in profit, under a tax structure set up more than 50 years ago, the Bond franchise has managed to minimise corporation tax in the UK for decades.

This report looks in detail at the financial accounts of EON Productions Ltd and associated companies (together referred to as EON) over the past decade, a period which saw the production of Skyfall (2012), SPECTRE (2015), and No Time To Die (2021).

We make no allegation that the company is behaving illegally, now or in the past. However, our research raises questions about whether government subsidy to the film industry is well targeted, and at a time of constrained public finances, the use of tax minimisation strategies by such high profile British franchises must be a matter of public concern.

We found that despite Skyfall and SPECTRE grossing just shy of $2bn at the box office, EON generated small profits and smaller tax bills in most years whilst profits in the hundreds of millions are declared overseas.

In fact, in recent years, EON has declared a pre-tax loss, while simultaneously receiving tens of millions of pounds in tax credits via the UK’s creative industry tax relief scheme. Publicly available accounts reveal that SPECTRE received £30m in tax credits, with a further £47m for No Time To Die, taking the total subsidy for the last two films to a hefty £77m. The total amount of UK tax credits received since their introduction in 2007 is likely closer to the £120m mark, with leaked emails showing that Skyfall received £24m in tax credits,² and our calculations putting the amount Quantum of Solace received at around £21m.³

Dr No Tax – a history of tax avoidance at EON productions

The James Bond films are one of the longest running film series in history with the franchise grossing over $16bn to date.⁴ From the outset the Bond franchise was produced using a structure designed to minimise tax. The finance and distribution of the films is dealt with by an American company (be it United Artists, MGM, Sony, or now Universal) while the production is done by a British company. The rights to exploit the film are however owned by a non UK company.

In 1961 Harry Saltzman and Albert R. ‘Cubby’ Broccoli acquired the rights to Ian Fleming’s Bond novels and established EON Productions in the UK to make the films. At first, United Artists (UA), was contracted to provide 100 per cent of the finance and distribute the films.

Saltzman and Broccoli’s wives, Dana and Jacqueline then created a company in 1962 called Danjaq S.A. (a contraction of their names), incorporated in Lausanne, a picturesque town on the banks of Lake Geneva, Switzerland, the type of place that many of Commander Bond’s adversaries may have used to stash their ill gotten gains over the years.⁵ In an interview, Harry’s son Steven stated that Danjaq “was set up with shares that were actually bought privately by Dana and Jacqueline separately with cash they could demonstrate was not linked to their husbands.”⁶

Under the structure set up by Saltzman and Broccoli, EON would make the films in the UK and then sell the film to Danjaq, ensuring that the producer’s profit would end up in Switzerland taxed at a very favourable rate.⁷ It appears that Danjaq had no real function other than to hold the copyright and trademarks of 007. At the time, Danjaq’s sole director was the Swiss attorney Mr Schlaeppi. As was set out in a 1991 court case between Danjaq and then distributor MGM, Mr Schlaeppi admitted to knowing little about the film industry and working only in an administrative function. He performed this function for fifteen other corporations. As described in graphic terms by the judge in that case, “If put in anatomical terms, Switzerland is Danjaq’s stomach reflexively churning the enterprise’s profits, but it is hardly a nerve center”. In fact, in that case Danjaq argued that its principal place of business, if not Switzerland, must be Great Britain, due to the “substantial and long-standing presence” of EON in the UK. The argument rested on the proposition that Danjaq and EON are in effect the same entity.⁸

The Broccolis were eventually able to assume complete control over Danjaq, and with it the rights to Bond, when in 1986 they purchased Saltzman’s original stake from UA. Cubby was free to operate as the sole owner and producer, and was later succeeded by step-son Michael Wilson (then a tax lawyer) and his daughter Barbara Broccoli, who together run the franchise to this day.

Danjaq became incorporated in the United States in the 1990s in Delaware. However, although Danjaq has changed jurisdiction, and the financier and distributor has also changed over the decades, the key arrangement that allows for EON to minimise UK tax remains intact today.

EON still makes the films (but makes little profit from them), Danjaq still owns the rights, and distribution and finance are still dealt with by an outside third party.

In fact, EON state in their 2015 accounts that once the production of a film has been completed, “the film is sold for a price equal to the total cost of production less the amount received in respect of UK Film Tax Credits.”⁹ This ensures that minimal taxable profits arise in the UK as valuable rights to exploit the film are sold for no more than the cost of production.

Structures like this are not unusual in the film industry, but they do raise questions about whether they result in a fair distribution of profit between countries.

EON have stated on the record that the profits are all properly declared in the UK or the US, and that no profits are sheltered in tax havens. This suggests that the vast majority of profits made by the Danjaq and EON, and any taxes due on them are declared in the US.

How much profit is Bond really making?

As Danjaq is a Delaware company we cannot see how much profit it makes from each film. It is also not possible to simply deduct the costs of producing a film from cinema receipts in order to look at the profitability of a film.

The production cost only comprises part of the total cost of a film. In addition, studios and distributors will spend substantial amounts on marketing and the physical printing of copies. For your average blockbuster with a budget of $100m plus, a film’s production budget only makes up 37% of the total cost.¹⁰ On top of this cinemas also take a chunky percentage of total ticket sales.

On the revenue side, cinema sales make up less than half of a blockbuster’s revenues, with successful films making money for years though TV deals, DVD sales and airline broadcast fees.

All of this makes it very difficult to see a film’s total profitability from the outside.

However, by taking a detailed look at the evidence available for the last three Bond films we are able to get a good idea of how much real money is being made.

Skyfall

Detailed financial figures for Skyfall are available with thanks to the North Korean secret service.

In November 2014, a hacker group leaked over 170,000 emails from Sony Pictures Entertainment, thought to be in response to Sony releasing the film ‘The Interview’ which poked fun at Supreme Leader of North Korea Kim Jong-un. These emails give an insight into the otherwise obscure of film finance.

According to the leaked emails, Skyfall, which grossed $1.1bn worldwide, made $232m in profit for the distributors MGM and Sony, of which Sony kept 25 per cent despite putting up 50 per cent of the movie’s costs. A leaked document from Sony revealed that Danjaq earned $109m on Skyfall.¹¹ With these profits sitting outside the UK, EON was able to post pre-tax profits of less than £2m in the UK for the 2012 and 2013 years in which Skyfall was at the cinema. Danjaq’s profits were almost guaranteed. With the distributors putting up all the money to produce the films, Danjaq is understood to earn money from each ticket sale, in what is known as a “first-dollar gross” deal.¹²

SPECTRE

According to the accounts of B24 limited (the specific EON production company responsible for SPECTRE) the production cost of the film was £182m. Within the Sony leaks emails we can also see discussion among studio executives about box office projections for SPECTRE of $500m international and $209m in the US.¹³ The executives deem this to be enough in order to green-light the film to begin production, and is therefore almost certainly enough to break even, but would likely allow for some profit. Considering SPECTRE grossed $880m worldwide,¹⁴ not to mention the revenues generated from DVD/VOD sales, it is safe to assume that the total profit for this film was over $100m, with Danjaq receiving a substantial amount.

However, despite the billions in revenues and hundreds of millions in profit generated by SPECTRE and Skyfall, practically no profits are realized by the UK based production company responsible for creating the films.

EON’s accounts show a small pre-tax profit for 2008-2014 on a group level, which then turns into substantial pre-tax losses following the release of SPECTRE. While Skyfall and SPECTRE are grossing almost $2bn between them, and hundreds of millions of dollars in profit are going to MGM, Sony, and Danjaq, EON in the UK made a net pre-tax loss of £33m for the decade to 2018.

Film	Budget	Box Office	Tax Relief
Quantum of Solace	£106,891,959	$589,580,482	£21,378,391
Skyfall	£138,197,058	$1,108,561,013	£24,000,000
SPECTRE	£182,431,933	$880,674,609	£30,005,367
No Time To Die	£199,472,744	Released Spring 2021	£46,791,492

You Only Pay Twice – UK Film Tax Relief

Even though the producers of James Bond have arranged their affairs to make sure that very little profit stays in the UK, that has not stopped them from seeking substantial hand-outs from the UK government.

The way in which film tax relief works is that it allows for film production companies to claim a tax credit of up to 25% of the money they spend making the film in the UK (up to a maximum of 80% of the film’s core expenditure). This credit is deducted from any corporation tax bill if the film company makes a profit. If the company makes a loss, the company can claim cash back from HMRC. Since 2015, EON’s accounts show that it has been receiving the cash credit from HMRC arising from the production of the Bond films. The British taxpayer is effectively subsidising a highly profitable franchise that has been operating since the early 1960’s.

Film Tax Relief (FTR) is part of the UK Creative Sector Reliefs. All creative sector tax reliefs are designed to promote British culture, with productions having to pass a “cultural test” administered by the British Film Institute before accessing subsidy.

That James Bond is a product of British culture is beyond any doubt, and as a result it is perfectly entitled to claim UK tax credits on UK production spend. The story was written by a former WW2 British intelligence officer, about a British operative working for the UK’s Secret Intelligence Service MI6. Despite the world travels of 007, London will forever be the home of Bond. Barbara Broccoli, who alongside Michael Wilson was awarded an OBE in 2008 for services to the film industry,¹⁵ has gone on record about how British Bond films are, saying in 2009 “The Bond films were made in Great Britain, they were started by my father Albert Broccoli, he moved to the United Kingdom in 1952 and felt England was home.”¹⁶

While a lot of filming is done internationally, the productions are centered around Pinewood Studios, situated just outside of London, which has its own 007 stage. Editing and post-production work on SPECTRE was split between Pinewood and a further office in Soho.¹⁷

Brits are proud of the James Bond franchise. Daniel Craig in his capacity as Bond was paraded before the world at the London 2012 Olympics, acting as a bodyguard to the Queen as she made her way to the opening ceremony. This stunt delighted executives at Sony Pictures, who noted how it raised the profile of Bond in the year that Skyfall was released. Wishing to replicate this level of exposure, the studio executives contemplated having Bond present at multiple events in 2015, from the Super Bowl to the UEFA Champions League Final.¹⁸

Politicians are keen to show off the cultural export, with George Osborne, the then Chancellor of the Exchequer, tweeting in 2015:¹⁹

All of this means that Bond films are eligible for large amounts of subsidy from the UK government.

British Film Tax Relief is far from the only way in which the Bond films can claw back production costs. SPECTRE received at least $14m (and potentially up to $20m) in tax incentives from the Mexican government for the opening sequence to be shot in Mexico City and to show the country in a positive light. The president of MGM Jonathan Glickman said in an email “By all accounts we can still get the extra $6M by continuing to showcase the modern aspects of the city…Let’s continue to pursue whatever avenues we have available to maximize this incentive”.²⁰ The production also received millions from product placement. Last year The Mirror reported that No Time To Die had netted a franchise record of £75m in endorsement deals for the likes of Heineken and Aston Martin.²¹

Film Tax Relief was introduced in 2007. One of the pre-requisites for receiving Film Tax Relief is being certified as ‘culturally British’ by the BFI. Quantum of Solace was awarded this certification in 2008, as was Skyfall in 2012, followed by SPECTRE in 2015.

Although we only see tax relief in the accounts for SPECTRE and No Time To Die, given the cultural British accreditation, it is almost certain that both Quantum of Solace and Skyfall also received UK Film Tax Relief, and that we are unable to see it due to changes in accounting practice.

With a budget of £107m, we estimate that Quantum of Solace will have received around £21m in tax relief. A leaked Sony email from 14 October 2014 makes reference to $38m (£24m in 2012) in tax credits for Skyfall,²² the vast majority of which will be UK Film Tax Relief. Accounts for B24, the company behind SPECTRE, show the company receiving £30m in tax film credits. Accounts up to 31 December 2019 for No Time To Die show it has become the most expensive Bond film to date, with a cost of £200m, and with £47m so far claimed in credits – listed as “tax credit recognised in work in progress” in the accounts. Corresponding 2019 accounts are not yet available for EON.

This takes the tax credit received for SPECTRE and No Time To Die to £77m, and the estimated total tax credit for the four films since the introduction of the scheme to £122m.

Again, we stress there is nothing contrary to law about the Bond franchise claiming tax credits. As a UK production of a culturally British product, the producers of Bond are perfectly entitled to claim tax credits.

However, we do believe that this example raises legitimate questions about how the tax credits system works in practice.

On Her Majesty’s Service?

Bond films are produced in the UK, by a British company, and receive production subsidies from the UK government on that basis. It would therefore be reasonable to expect that most of the profit generated by the films is declared in the UK. This is certainly the expectation from some MPs. Mark Spencer, the Conservative MP for Sherwood, stated in Parliament during a debate on tax avoidance and multinational companies on 03 February 2016:

“We are blessed with a global taxation system agreement whereby companies pay tax not on the profit they make in the country but where they add the value and create the IP…. I was fortunate enough to go to the cinema to see “Spectre”, the latest James Bond movie, which was created in Pinewood Studios in the UK. Tax on the profits from those movies should be paid in this country, not all over the world.”²³

However, as our research has demonstrated, despite Bond’s decades long association with Britain which has seen the franchise become a landmark of British identity, when it comes to profits, Bond is not really British at all.

From the very beginning, the Bond franchise was structured to minimise UK corporation tax. The films used Swiss banks and shell companies in Switzerland and then Delaware in order to channel profits out of the UK.

No Time To Die, the latest film in the Bond series, has seen Universal Pictures step in to replace Sony, with Universal now set to distribute the film internationally. Though an important function, distribution and finance could arguably be provided by companies anywhere in the world. What can’t be substituted in James Bond is the British story, cast, production, and 007 stage at Pinewood Studios. If HMRC is unable to tax the profits on the Bond franchise, how does the government intend to fund MI6?

TaxWatch first contacted EON Productions Limited for a comment on our research in February 2020, and again in October 2020. EON ignored several requests to engage with us on this report and did not respond to four separate deadlines to provide a comment.

Eventually, a comment was provided via the law firm Schillings on behalf of EON, at 2.30pm on a Saturday, the day before publication. It reads as follows:

“Since the 1960s Danjaq has chosen to make the James Bond films in the UK through Eon Productions, resulting in the investment of more than half a billion dollars in the UK film industry, the employment of tens of thousands of people, and showcasing the talents of British film to the world.

All the income from the James Bond films received by Eon and Danjaq is subject to tax in either the UK or USA. None of the income is sheltered in a tax haven. Eon has utilized the UK tax credits to help fund the making of Bond films in the manner intended by the government. This has enabled the Bond films to continue to be made in the UK to the benefit of the UK film industry and UK economy.”

It is certainly the case that the production of Bond films does lead to a substantial amount of money being spent in the UK film industry, and this provides a substantial benefit for people working in the industry. However, it is not clear why this means that profits made by the film should be declared outside the UK.

Background research for this report was aided greatly by the book “Some Kind of Hero: The remarkable story of the James Bond films” by Matthew Field and Ajay Chowdhury (The History Press, 2015).

A PDF version of our report is available here (printer-friendly version here)

Image by Glen Ratcliffe

1 Some box office rankings place the James Bond films third in lists of highest grossing franchises of all time. These lists often involve the non EON films Casino Royale (1967) and Never Say Never Again (1983).

2 Email from Sony Executive Andrew Gumpert, dated October 14 2014, from the Sony Leaks, available here: https://wikileaks.org/sony/emails/emailid/80455 The majority, if not all, of this £24m is likely from the UK. However, given that it does not show in any publicly available accounts, we cannot be certain that this is all UK Film Tax Relief.

3 Accounts for B22, the EON Special Purpose Vehicle company that produced Quantum of Solace, show that Quantum of Solace has production costs of £107m. Film Tax Relief allows for a payable cash rebate of up to 25% of UK qualifying expenditure, up to 80% of core expenditure. 25% of 80% of £107m is £21.4m

4 $16.3bn in ticket sales when adjusted for inflation, research conducted by Forbes in 2018, available here: https://www.forbes.com/sites/jeffewing/2018/09/26/studied-not-stirred-bond-in-numbers-analyzes-everything-james-bond/#2ad7df284e1a. Unadjusted, the series has grossed $7.1bn, researched conducted by The Numbers, available here: https://www.the-numbers.com/movies/franchise/James-Bond#tab=summary

5 Scaramanga from The Man With The Golden Gun kept his money in a Swiss bank, as did Ernst Blofeld in On Her Majesty’s Secret Service.

6 Interview with Steven Saltzman, 16.11.2011, as featured on page 52 of Some Kind Of Hero, by Matthew Field and Ajay Chowdhury

7 Ibid.

8 In 1991 the holding company Danjaq and distributor MGM had a disagreement regarding MGM selling the distribution rights of the Bond film. Further details can be find in the court records for Danjaq, SA v. MGM/UA COMMUNICATIONS, available here: https://law.justia.com/cases/federal/district-courts/FSupp/773/194/1608047/

9 2.11 Revenue, Eon Productions Limited annual report and financial statements for the year ended 31 December 2015

10 Analysis by film industry data researcher Stephen Follows. A more thorough explainer on how blockbusters make money is available at his website here: https://stephenfollows.com/how-movies-make-money-hollywood-blockbusters/

11 Pursuit of James Bond Film Rights Kicks Into High Gear, article for the Wall Street Journal by film business journalist Ben Fritz, Available here: https://www.wsj.com/articles/pursuit-of-james-bond-film-rights-kicks-into-high-gear-1446156132

12 Article on the financial performance of Bond films, in entertainment journal Deadline Hollywood from 21 March 2016, available here: https://deadline.com/2016/03/spectre-profit-box-office-2015-james-bond-1201723528/

13 Spreadsheet “BOND 24 forecast 7.17.13.xlsx”, available at https://search.wikileaks.org/?q=bond+24+forecast

14 Worldwide Box Offce for SPECTRE, at The Numbers, available here: https://www.the-numbers.com/movie/Spectre#tab=summary

15 Barbara Broccoli net worth, at ‘The Richest’, available here: https://www.therichest.com/celebnetworth/celeb/producer/barbara-broccoli-net-worth/

16 Interview with Barbara Broccoli, BBC Berkshire, 07 April 2009,available here: http://www.bbc.co.uk/berkshire/content/articles/2009/04/07/albert_broccoli_cloisters_wing_feature.shtml

17 Interview from 01 March 2016 in Pro Video Coalition with the editor of SPECTRE, Lee Smith ACE, available here: https://www.provideocoalition.com/art-of-the-cut-with-lee-smith-on-cutting-007-s-spectre/

18 Email between Sony Executives, 29 September 2014, available here: https://wikileaks.org/sony/emails/emailid/199504

19 Tweet from then Chancellor of the Exchequer, George Osborne, on 30 May 2015, https://twitter.com/george_osborne/status/604711170902241280

20 Email from Jonathan Glickman, President of MGM, to Michael Wilson and Barbara Broccoli, among others, dated November 13 2014, from the Sony Leaks, available here: https://wikileaks.org/sony/emails/emailid/79884

21 Bollinger and Aston Martin bring in the big bucks for the next James Bond film, The Mirror, 20 Aril 2019, available here: https://www.mirror.co.uk/film/bollinger-aston-martin-bring-big-14439798

22 Email from Sony Executive Andrew Gumpert, dated October 14 2014, from the Sony Leaks, available here: https://wikileaks.org/sony/emails/emailid/80455

23 Tax Avoidance and Multinational Companies, 03 February 2016, https://hansard.parliament.uk/Commons/2016-02-03/debates/16020363000001/TaxAvoidanceAndMultinationalCompanies

Netflix UK revenues hit an estimated £1bn, but will the company start paying any corporation tax?

3rd February 2020 by George Turner

Netflix’s latest earnings report, published on 21 January, showed that 2019 was another bumper year for the company. Revenue in the 4th quarter was up 31% on the previous year, with the company clocking up $20bn in revenues worldwide over the course of the year.

Operating profit rose an enormous 61% in 2019 and the company reached 100m subscribers outside of the US. Pre-tax profits jumped from $1.2bn in 2018 to $2bn in 2019.

But how much of that profit will end up taxed in the UK?

The answer is likely to be not much. In 2018 the company reported revenues of £43.3m and profits of just £2m at its main UK company, Netflix Services UK, and paid no tax. In fact it received a tax credit under the creative industry tax relief scheme. This is despite the fact that in the same year, Netflix will have generated an estimated £860m in revenues from its UK customers. As we set out in our recent report, No Tax and Chill, subscription fees from UK customers are billed by Netflix from a company in the Netherlands. This explains why so little revenue and profit end up in the UK.

Netfix has not yet published its UK accounts, but as far as we are aware, the company structure has not changed. Our latest analysis, based on Netflix’s recent earnings reports, suggests that Netflix revenues from UK customers increased sharply to an estimated £1.08bn in 2019 – all billed to its Dutch subsidiary. This should have generated an estimated £68.5m in profit, giving rise to a tax liability of £13m.

Our analysis is based on the following data:

The Broadcasters Audience Research Board shows that Netflix had 11.5m subscribers in the UK in Q1 2019, 11.62m in Q2, and 11.77m for Q3 2019. We have taken the midway point of 11.62m as the average number of Netflix subscribers for 2019.

The latest financial data published by Netflix in January 2020 shows that the company made an average revenue per user of $10.33 per month in the Europe, Middle East and Africa region in 2019. This would suggest that Netflix made $1.44bn from UK subscribers in 2019. This is 13.5% of all revenue that Netflix makes outside of the United States.

The latest Netflix financial data states that the company’s international streaming operations made “Contribution Profit” of $1.6bn in 2019. This would suggest that the UK contribution profit would be $217m.

Contribution profit is gross profit after the deduction of marketing costs. On top of that Netflix has financing costs and other shared operational costs. On a consolidated basis, profit before tax is 41% of contribution profit. This would suggest that UK pre-tax profits are in the region of $89m, or £68.5m. Applying a 19% tax rate this should have generated a tax liability of £13m.

Whether Netflix ends up paying anything close to that remains to be seen. However, it does appear that the structure employed by Netflix has come to the attention of the UK tax authorities, HMRC, as the latest Netflix 10-K report published in late January 2020 states that their 2018 tax return is currently under examination by the UK tax authorities.

Response from Netflix

We reached out to Netflix to share our analysis with the company ahead of publication. A spokesperson for the company provided the following response:

“We believe that international taxation needs reform and we support the OECD’s proposal for companies to pay more tax in the countries where their operations help generate value.

In the meantime, we comply with the rules in every country where we operate. The TaxWatch report has a number of inaccuracies, including that Netflix has a Caribbean-based entity. This is no longer the case as we significantly simplified our tax structure last year.

Netflix continues to invest heavily in the UK – spending more than £400 million on local productions in 2019, which helped to create over 25,000 jobs and training placements.”

This research was featured in The Times, the Daily Mail, and The Independent among others.

Photo by freestocks.org on Unsplash

Rockstar takes the pot – 2019 accounts show huge increase in Grand Theft Auto tax claim

19th January 2020 by Alex Dunnagan

Rockstar North, the Edinburgh based company behind the wildly successful Grand Theft Auto series, has published its latest accounts, revealing a huge increase in claims for Video Games Tax Relief.

As reported in today’s Sunday Telegraph, analysis by TaxWatch shows that the claim was by far the largest for Video Games Tax Relief granted by HMRC in 2018/19, accounting for 37% of all claims made by the UK video games industry in that year.

The claim means that for the fourth year running the company has paid no UK Corporation Tax, despite the Rockstar group racking up more than $6bn sales of Grand Theft Auto V since it was released in 2014.

The accounts for 2019 show that the company claimed £37.6m in Video Games Tax Relief, taking its total to £80m since the scheme was introduced. Of the 1,110 claims made since VGTR was launched, Rockstar have accounted for a quarter of all the relief claimed from the government, whilst publishing only two games that qualify for the relief.

The claim is believed to relate to the production of the next edition of GTA, rumoured to be scheduled for release soon. Rockstar North is the lead developer for the series, although Rockstar has also registered Red Dead Redemption 2 as being ‘Culturally British’, the pre-requisite required to qualify for the relief. Studios are able to make interim claims for VGTR before a game is completed, and the huge claims being put in by Rockstar are likely related to the production costs of GTA VI. As VGTR is related to production spend, the large claim indicates the scale of Rockstar’s spending on games development.

When VGTR was introduced, the government estimated that the new relief would cost in the region of £35m a year, and support smaller games developers. The scheme is now costing in excess of £100m a year, with close to half of all relief being claimed by just four companies.

Figures published by HMRC on all Video Games Tax Credit claims show just how large Rockstar’s share of the pot is. In 2018-19 there were 345 VGTR claims for a total of £103m.¹ While these numbers may change, as companies have a period of one year to submit returns and another year to amend a claim, evidence from previous years suggest that the total claims are unlikely to change much from the published figures. The share of this pot going to Rockstar North, which was already significant, has increased from 18% in 2018 to 37% in 2019.

Of the 345 VGTR claims last year, 315 of them were for less than £1m, for a total of £30m. Rockstar North’s claim is worth more than the value of all of these 315 claims combined. There were 29 claims (excluding Rockstar) of over £1m, totalling £35.4m. And then there is Rockstar at £37.6m, which managed to claim more than 50% of the entire amount granted to games claiming more than £1m in relief. In fact, the stats tell us that Rockstar claimed at least five times the amount of its next biggest rival in 2019, making it by far the largest production in the UK that year.

We await to see whether any profit from this huge investment by the UK taxpayer makes its way back to the UK.

This research featured in Metro, The Sunday Telegraph, and was covered extensively in the video game press.

This article was amended on 20th January 2020 to reflect the fact that Rockstar had also gained certification of Red Dead Redemption 2 as being “culturally British”.

Photo by Jenni Chen, license CC BY

1 Data taken from ‘Video Games Table 4.4’, from the August 2019 HMRC Publication ‘Creative Industries Statistics’, available here; https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/826824/August_2019_Commentary_Creative_Industries_Statistics.pdf

Report: Gaming the System

26th July 2019 by admin

26th July 2019

How the makers of Grand Theft Auto managed to pay £0 UK corporation tax and claim millions in government subsidies whilst making $$$ billions in profit

Key Facts and Figures:

$5bn

Estimated operating profit of Rockstar games 2013-2019

£42m

Total Video Games Tax Credits claimed by Rockstar North Ltd, developer of Grand Theft Auto V, between 2015-2017 - 19% of all tax credits paid by government to the industry.

£0

Total corporation tax liability of Rockstar companies in the UK between 2009 and 2018

$800m – sales of Grand Theft Auto V in first 24 hours of release

$6bn – estimated total sales of Grand Theft Auto V since 2013

$3.4bn – total bonus pool available to top managers and staff at Rockstar Games 2009-2019

Key dates:

2008 – Rockstar North, a UK based company starts development of Grand Theft Auto V (GTA V)

2013 – GTA V released to the public

2015 – GTA V certified as “culturally British” by the British Film Institute, allowing Rockstar North to apply for Video Games Tax Credits from HMRC

Gaming the Tax System

A PDF version of this report can be downloaded here.

Summary and Introduction

Grand Theft Auto V is the most commercially successful product in the history of the entertainment industry, with total revenues estimated to be $6bn since the game’s release in 2013.

The game is published by Take-Two Interactive Inc. under their Rockstar brand. Take-Two is a US listed multinational company.

Grand Theft Auto I was first developed in the UK by DMA Design in the late 1990s. After DMA was bought by Take-Two, game development continued in the UK at a company called Rockstar North Limited based in Edinburgh.

Despite the huge success of the title, our analysis shows that Rockstar and Take-Two companies based in the UK have not paid any corporation tax over the last ten years. Rockstar North Ltd, which led the game’s development, has in fact claimed £42m in subsidies from the taxpayer over the last three years in the form of credits through the Video Games Tax Relief regime.

Video Games Tax Relief was introduced by the UK government in 2014 to provide targeted support for games that were “culturally British”, with a particular focus on support for small and medium sized businesses.

Our analysis shows that the amount claimed by Rockstar North is the equivalent of 19% of the total relief paid to the entire video games industry in the UK since the programme came into effect. This raises serious questions as to whether the relief is being properly targeted, at a time when the industry is lobbying for the relief to be expanded and made more generous.

This report also raises questions as to whether an appropriate amount of profit has been allocated to the UK companies involved in the game’s development. Seven active companies based in the UK, using the Take-Two and Rockstar names, declared a total profit before tax of £47.3m in the UK between 2013 and 2018. However, over the same period we estimated the operating profit of games published by Rockstar to be in the region of $5bn.

Despite the minimal allocation of profits to the UK, Take Two interactive placed a substantial amount of value on the work of Rockstar employees, including those based in the UK. These key employees were given the rights to substantial amounts of the profit generated by the company in relation to games released under the Rockstar label.

It is our opinion that a more appropriate allocation of profit between the US and UK would have resulted in substantially more profit being allocated to the UK. This would have meant that Rockstar North would not be eligible for a payable tax credit. Instead, Take-Two and the Rockstar companies should have had a substantial tax liability in the UK.

Video Games Tax Relief

Video Games Tax Relief was first announced in Alistair Darling’s budget in 2010, the last budget of the Labour administration. However, with an election very soon afterwards, it was never implemented, with plans for the relief being cancelled by the incoming Coalition government.

After lobbying from the video games industry, a more modest relief was announced in the 2012 budget.

Video Games Tax Relief works by reducing the taxable profit of a video game developer. Developers can deduct an extra 25% of qualifying expenditure from their taxable profit. If a game is loss-making then the developer can claim a cash credit from HMRC.

After it was confirmed that the UK government would be going ahead with the scheme, the European Commission announced that it would hold an investigation into the proposed relief to determine whether the subsidy was permissible under state aid rules.¹ The Commission was concerned that the measure represented an unnecessary intervention, seeing no need to subsidise an industry that was thriving and making profits.

The UK Government’s argument in support of the relief was that specific, targeted intervention was required to preserve the cultural character of the UK and European games industry. The government raised a concern that video games producers could make much more money creating games that were tailored towards the international market, because they could achieve huge economies of scale from targeting a larger community of gamers. As a result, producers were stripping out cultural references relevant to British and European gamers from the storylines of their games, and this was having an impact on British culture.

The Video Games Tax Credit would therefore be available only to games that were culturally British, under a test administered by the British Film Institute. The government argued that this targeting would mean that “The proposed tax relief should promote the production of video games with a cultural content as opposed to games that are purely for entertainment.”²

In order to qualify as being culturally British, games are scored against a number of criteria, including being set in the UK, having British lead characters, or being produced in the UK.

When introducing the relief, the government estimated that only around 25% of games produced in the UK would qualify, and that the major beneficiaries would be small games producers interested in the local market. The government expected only 10% of games that qualified for the relief would have a budget of more than £5m. A press release put out by the government at the time stated that 95% of video games development in the UK was performed by SMEs.³

The government estimated that the new relief would cost £35m a year, and committed to reviewing the relief after three years of operation to determine whether it had been effective.

There is no evidence that this review has taken place. If it had, the government would have seen that the programme is significantly over-budget, having cost £108m in 2017/18, and that a significant amount of the tax credit is being claimed by just one company.

Grand Theft Auto’s Tax Credits

A year after the scheme came into effect, Grand Theft Auto V was granted certification as “culturally British” by the British Film Institute. The certification has allowed the game’s developer, Rockstar North Ltd, to access substantial amounts of tax credits.

That Grand Theft Auto should receive any tax credits at all may seem bizarre to some. One of the criteria of the BFI Cultural Test for video games is how the game represents diversity. The guidance note for the cultural test states:

“Cultural diversity can directly influence the content and tone of a video game; its sensibility and authority. For example, much has been written on a lack of female video game developers, and the differing perspectives and sensibilities that women bring to video game productions.

Encouraging cultural diversity implies challenging preconceptions, assumptions and ways of working. It goes beyond simple equal opportunities and recognition of difference and emphasises the potential creative connections that can be forged across different perspectives through access, inclusion, and collaboration –and the direct impact of these on the video game as a cultural product….

Points will be awarded based on the following determinants of diversity:

a. subject/portrayal: exploring contemporary social and cultural issues of disability, ethnic diversity and social exclusion on screen; promoting and increasing visual, on-screen diversity; and

b. other cultural diversity factors which can be shown to have an impact on the final content.”

It is unlikely that the drafters of that guidance had in mind a game which allows the player to murder prostitutes when formulating the cultural test.

For most observers, the controversial game would probably fall under the category of a game produced purely for entertainment rather than a game with significant cultural content. The game was made famous by its free-wheeling game play which allows players to car-jack, carry out random killings and blow up things whilst progressing through the ranks of organised crime. None of the lead characters are British, and the 5^th instalment in the series is set in Los Santos, a fictional representation of Los Angeles. Previous editions had been set in New York, Florida and California. The only part of the game set in the UK was an expansion pack to the second edition of the franchise, GTA II.

Made in Britain

The game was however largely developed in the UK. The first two editions of the game, GTA and GTA 2, were developed by DMA Design Ltd, a UK based developer.

DMA was bought by Take-Two Interactive Inc, a US-based multinational, in 1999. The US company had already acted as the publisher of GTA 2 under their “Rockstar” label, which has been the publisher of all subsequent editions of the GTA franchise.⁴ Game development continued in the UK at Rockstar North Ltd, a design studio based in Edinburgh. This connection with the UK is apparently enough to secure the culturally British test for Grand Theft Auto V.

Having been certified as culturally British in 2015, Rockstar North starting receiving Video Games Tax Credits in the financial year ending March 2016. The amount it claimed was substantial. The annual accounts of Rockstar North Ltd show that over the last three years the company has claimed £42m in Video Games Tax Credits. This is equivalent to 19% of the £227m that the government has granted to the entire industry since the relief was introduced in 2014.⁵

In 2016 the company also recorded a large retrospective adjustment for tax paid in previous years. The effect of tax credits and previous year adjustments means that over 10 years the company recorded a net loss for tax purposes, paid nothing in corporation tax, and claimed £70m in credits from HMRC. The amount of credit claimed by Rockstar North from HMRC was almost 6 times its operating profit over the period.

Table 1: Key Financial Data Rockstar North Limited 2009-2018

(Year to March 31st)	2009	2011 (17 Months)	2012	2013	2014	2015	2016	2017	2018	Totals
Turnover	£14,853,498	£25,828,898	£18,054,810	£20,127,149	£32,252,221	£42,909,043	£53,446,092	£57,089,880	£79,158,894	£343,720,485
Cost of Sales	-£9,079,562	-£14,218,633	-£11,789,637	-£12,404,764	-£16,111,491	-£26,501,031	-£26,641,448	-£29,087,405	-£40,799,868	-£186,633,839
Gross Profit	£5,773,936	£11,610,265	£6,265,173	£7,722,385	£16,140,730	£16,408,012	£26,804,644	£28,002,475	£38,359,026	£157,086,646
Admin Expenses	-£8,288,372	-£11,368,142	-£7,423,997	-£6,413,329	-£13,986,232	-£13,600,894	-£23,308,165	-£24,257,130	-£30,116,236	-£138,762,497
Operating Profit	-£2,514,436	£5,415,849	-£12,681,786	£1,309,056	£2,154,498	£2,807,118	£3,496,479	£3,745,345	£8,242,790	£11,974,913
Operating Margin	-16.93%	20.97%	-70.24%	6.50%	6.68%	6.54%	6.54%	6.56%	10.41%	3.48%
Profit before Tax	-£2,507,040	£5,419,081	-£12,679,587	£1,136,416	£2,162,491	£2,819,685	£3,515,268	£3,763,815	£8,300,782	£11,930,911
Tax	£202,688	£135,510	£46,992	-£2,461,467	-£887,635	-£718,156	£33,416,310	£13,121,157	£26,915,315	£69,770,714
Profit for the year	-£2,304,352	£5,554,591	-£12,632,595	-£1,325,051	£1,274,856	£2,101,529	£36,931,578	£16,884,972	£35,216,097	£81,701,625
Video Games Tax Relief	£0	£0	£0	£0	£0	£0	£11,278,530	£11,918,339	£19,116,178	£42,313,047

Grand Theft Auto Profits

Although the statutory accounts of Rockstar North, the maker of Grand Theft Auto V, state that the company is hardly making any profit, the game is widely reported to be the most profitable media product in history. The game broke several world records for the speed of its sales, and generated $800,000,000 in revenue for Take-Two within the first 24 hours of its release. Within three days the game had hit $1bn in sales, making it the fastest selling entertainment product in history. Within one year, the game had hit $3bn in sales, making it the biggest selling game of all time.⁶ The game continues to sell, and in May 2019, Take-Two disclosed that they had sold over 110m copies.⁷

Alongside GTA V, the company developed an add-on GTA Online, which created a new virtual world where gamers could interact with other players over the internet. GTA Online generates revenue for Take-Two as players can buy virtual currency to purchase new items in the game.

In 2015, two years after the release of the game, 8 million people were still playing GTA every week, and the add-on had generated an additional $500m for the company.⁸ The huge sales of GTA V and the popularity of GTA Online has generated an estimated $6bn in sales for Take-Two over the current lifetime of the product.⁹

These sales have translated into vast profits for the company and its senior management. Between 2009, when development on GTA V is known to have started, and the 2014 financial year in which the game was released, Rockstar North had total costs of £110m. In 2013, the Scotsman reported that the game had a total development and marketing budget of £170m.¹⁰ Adding in distribution costs and other ongoing development costs, Take-Two should have generated gross profits in the region of $5bn from the game. This figure is corroborated by data on internal royalties paid by the company.

Under a profit sharing agreement signed with senior staff at Rockstar Games, three “Principals” and other unnamed Rockstar employees were entitled to a profit share worth 50% of the operating profit made on Rockstar titles.

Take-Two’s annual reports in the United States disclose a cost which it calls “internal royalties”. It describes these as allowing “selected employees to each participate in the success of software titles that they assist in developing.” Between 2009 and 2019 Take-Two paid out $3.4bn in “internal royalties”, 22% of the total revenues of the company over that period. Between the financial year ending in 2014 (the year Grand Theft Auto V was released) and 2019, internal royalties stood at $2.5bn.

The success of the Grand Theft Auto franchise would suggest that the vast majority, if not all of the cash being allocated to internal royalties by Take-Two is being used to fund the Rockstar royalty plan. That would also put the total operating profit (which also includes deductions for head office costs and contributions from other games) generated by Rockstar at $5bn over the last 5 years.

How is it possible that a game made in the UK, generating billions of dollars in profit for its parent companies and senior management, makes a loss for tax purposes in the UK and is able to claim tax back from the government?

Rockstar North is one cog in the Take-Two machine, but an important one. Given that the game is not set in the UK, and does not feature British characters, in order to meet the BFI’s culturally British test the game makers will have had to argue that a substantial amount of creative input for the game came from the UK, and would have signed a statutory declaration to this effect.¹¹

In return for creating this intellectual property, Rockstar North would presumably have had a contract with Take-Two to remunerate it for its work. The contract would appear to have been constructed so that Rockstar North receives not much more than the cost of its work. Between 2009 and 2018 the company made an average operating profit of just 3.5%; between 2013 and 2017 operating profit kept stable at around 6.5%, whilst sales of the product it created were beating all expectations.

Other Rockstar companies based in the UK show even less profit. Rockstar Lincoln Ltd, which was involved in testing the game, declared a total profit before tax of £1.2m between 2009 and 2018, and a total tax bill of £226k over the same period.

In order to work out the taxable profits of a business, revenue authorities around the world do not look at a multinational company as a whole, but treat each subsidiary as an independent entity. In the case of Rockstar North Ltd, the question they will be asking themselves is whether the contract Rockstar North had with its parent company was one that independent companies would negotiate in the real world.

On the facts that we have been able to determine, we believe the answer is no.

Profit share

Given the importance of the games produced by the Rockstar label to Take-Two’s business, Take-Two entered into a royalty agreement with certain key people in the Rockstar team as early as 2002.

Following the success of GTA 3 and GTA 4, the Rockstar principals, as they were called, felt they had the leverage to increase their profit share and renegotiated a new deal: the 2009 Royalty Plan. The Plan named three people as Rockstar Principals: Sam Hauser, Dan Hauser, and Leslie Benzies.¹² Sam and Dan Hauser created the original Grand Theft Auto. Sam Hauser is the President of Rockstar Games and Dan Hauser, his brother, is Vice President of Creativity.

Leslie Benzies is largely credited with the technical advances in game playing which led to the popularity of Grand Theft Auto exploding with the release of GTA V.¹³ At the time of the development of GTA V he was President of Rockstar North Limited.

Although the Hauser brothers are based in New York, it was part of Leslie Benzies’s contract that he was to be employed in Edinburgh, and any requirement for him to move from Edinburgh could be cited as cause for termination of the contract.¹⁴

The 2009 Royalty Plan, which in reality was not a royalty payment but a profit share agreement, gave the Rockstar Principals and unnamed qualifying Rockstar employees entitlement to a bonus pool of 50% of the operating profits of games produced under the Rockstar label. Under the plan, the principals were entitled to no more than 60% of the total pool, with no individual able to receive more than 25% of the pool.

When setting up the incentive schemes for the principals, lawyers agreed a side letter setting out the tax treatment of the payments the principals would receive.¹⁵ This letter makes clear that the remuneration would be paid as a service for employment, and that in the case of Leslie Benzies his employment was with Rockstar North Limited. The reason for this stipulation was likely to prevent the imposition of US employment taxes on his income, as part of the royalty plan involved assigning certain intellectual rights to a Delaware LLP which the three principals were partners of. However, despite this stipulation, the remuneration does not appear to be included in the Rockstar North accounts. It is not known whether and how much UK income tax has been paid by the principals on these profit shares.

The significance of all of these arrangements is that they demonstrate that had Rockstar been an independent company, then the management would clearly not have been satisfied with selling the rights to their work for the cost of production plus a small margin. In fact, the reality of the relationship between Rockstar and Take-Two was that the management of Rockstar demanded huge sums in compensation for their contribution. After the release of GTA V, Leslie Benzies left the company following a dispute with the other Rockstar Principals. However, the existence of a profit sharing agreement in 2009 which included Mr Benzies suggests that Take-Two placed a substantial amount of value on work carried out on its behalf in the UK.

All of this stands in stark contrast to the tiny profits allocated to Rockstar North and other Rockstar companies in their UK accounts, suggesting that profits allocated to the company should have been much higher than stated. It is impossible to say how much higher, although it is not unreasonable to believe that that profit should have been in the hundreds of millions if not billions. At this level, HMRC would not be paying tax credits to Rockstar North. Instead, the tax collected from Rockstar in the UK would likely be enough to pay for the entire Video Games Tax Credit Programme.

Conclusions and recommendations

Grand Theft Auto has been referred to by some as a “Great British Export”.¹⁶ However, a brief look at the accounts of the UK based developer of the game, with its slender profits, would not lead one to that conclusion. Rather than a picture of success, the accounts of the developers of the game, Rockstar North, show that the company has earned so little that they have been eligible to claim tax credits from the government.

The situation is absurd. The large amounts of subsidy that Rockstar North has been able to claim from the UK government demonstrates that the Video Games Tax Credit system is not working as intended. The government should hold an immediate review into its effectiveness.

Furthermore there are serious questions over how the company has been treated for tax purposes in the UK.

Take-Two appears to believe that it is reasonable that close to 100% of the profit should flow to their US based parent companies and senior management, whilst almost no profit flows back to the UK companies involved in either making or selling the game. We do not believe that this division of profits can be justified under the so-called “arm’s length” standard found in international tax law.

There is no evidence that HMRC have challenged this set-up or that Take-Two or any of the individuals named in this report has acted illegally. However, it is open for HMRC to challenge the allocation of profit under the transfer
pricing system and we urge them to investigate this case urgently.

Notes

1Documents relating to the European Commission investigation into Video Games Tax Relief are available from the European Commission website – http://ec.europa.eu/competition/elojade/isef/case_details.cfm?proc_code=3_SA_36139

2See European Commission Decision SA.36139 (13/C) (ex 13/N) – https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2014.323.01.0001.01.ENG

3HM Treasury, Video Games Companies to Begin Claiming Tax Relief, https://www.gov.uk/government/news/video-games-companies-to-begin-claiming-tax-relief

4A short history of the development of the game is set out in the statement of case of Leslie Benzies in Leslie Benzies vs Take-Two Interactive Software Inc., Supreme Court of the State of New York, Index No. 651920/2016

5HMRC, Creative Industry Statistics July 2018, Published April 2019

6See Statement of Case of Leslie Benzies in Benzies vs Take-Two Interactive Software

7Rockstar Intel, Take-Two Q4 Earnings Report, https://rockstarintel.com/take-two-q4-2019-earnings-report-red-dead-redemption-2-has-sold-over-24-million-copies-worldwide

8See Statement of Case of Leslie Benzies in Benzies vs Take-Two Interactive Software, paragraph 42

9Sky News, Grand Theft Auto V grosses more than any movie ever, available from: https://news.sky.com/story/grand-theft-auto-v-grosses-more-than-any-movie-ever-11326135

10The Scotsman, New GTA release tipped to rake in £1bn in sales, available from: https://www.scotsman.com/lifestyle/gadgets-gaming/new-gta-v-release-tipped-to-rake-in-1bn-in-sales-1-3081943

11The cultural test administered by the BFI awards points if the lead programmers and developers work in the UK or the European Economic Area, and if more than 50% of the design or development of the game is carried out in the EEA.

12A copy of the 2009 Royalty Agreement is available from the the Supreme Court of the State of New York on the docket of Leslie Benzies vs Take-Two Interactive.

13Connor Sheridan, One of the Fathers of Grand Theft Auto has left Rockstar, Gamesradar January 12 2016, https://www.gamesradar.com/uk/gta-leslie-benzies-leaves-rockstar/

14Paragraph 6 (d) 2012 Employment Contract of Leslie Benzies.

15Tax Side Letter between Take-Two Interactive, Another Game Company and the Rockstar Principals, available on the docket on the Leslie Benzies vs Take-Two Interactive Inc.

16Sophie Curtis, GTA 5: a Great British export, The Telegraph 18 September 2013, https://www.telegraph.co.uk/technology/video-games/10316267/GTA-5-a-Great-British-export.html

tax relief

Around £1bn per year lost to fraud and error in R&D tax relief claims

R&D – still changing after all these years

R&D reliefs predicted to cost over £9bn by 2026-27 – by far the largest corporation tax relief

Fraud and error in schemes total over £1.1bn in last three years

R&D ‘claims farms’ continue to hard sell opportunities to claim refunds on expenditure that often does not qualify

Impact of changes to help tackle problem R&D claims firms not felt for another two years

HMRC not resourced to tackle historical incorrect claims

Video Games Tax Relief costs five times as much as forecast

No Time To Pay Tax?

No Time To Pay Tax?

How EON Productions, the studio behind the James Bond films, has minimised UK tax for decades whilst receiving tens of millions of pounds in subsidy from the UK tax payer

Introduction

Dr No Tax – a history of tax avoidance at EON productions

How much profit is Bond really making?

Skyfall

SPECTRE

You Only Pay Twice – UK Film Tax Relief

On Her Majesty’s Service?

Netflix UK revenues hit an estimated £1bn, but will the company start paying any corporation tax?

Rockstar takes the pot – 2019 accounts show huge increase in Grand Theft Auto tax claim

Report: Gaming the System

How the makers of Grand Theft Auto managed to pay £0 UK corporation tax and claim millions in government subsidies whilst making $$$ billions in profit

Key Facts and Figures:

$5bn

Estimated operating profit of Rockstar games 2013-2019

£42m

Total Video Games Tax Credits claimed by Rockstar North Ltd, developer of Grand Theft Auto V, between 2015-2017 - 19% of all tax credits paid by government to the industry.

£0

Total corporation tax liability of Rockstar companies in the UK between 2009 and 2018

Key dates:

Gaming the Tax System

Summary and Introduction

Video Games Tax Relief

Grand Theft Auto’s Tax Credits

Made in Britain

Table 1: Key Financial Data Rockstar North Limited 2009-2018

Grand Theft Auto Profits

Profit share

Conclusions and recommendations

Notes