Although the impact of the pandemic on the UK’s creative sector has been uneven, with some tech-intensive sub-sectors (such as SVOD – streaming video on demand) now positively booming, the aggregate effect on the ‘creative industries,’ broadly defined, has been severe if not devastating, especially for the performing arts and the live entertainment industry. Employment in the music and theatre businesses may have contracted by more than 70% since March 2020, in spite of the positive and critical role played by the government’s £1.57 billion Cultural Recovery Fund.
Against this background two government consultations could potentially play a significant role in influencing long term outcomes for the creative sector. The first is a review by HM Treasury of the R&D tax credit R&D Tax Reliefs: consultation – GOV.UK (www.gov.uk) which runs until June. The second is a consultation by the Business Department (BEIS) on ‘subsidy control’ Subsidy control consultation – Designing a new approach for the UK – Department for Business, Energy and Industrial Strategy – Citizen Space which closed on 31st March. Both consultations raise important questions about government intervention in the ‘creative economy’, the former focusing on innovation, research and development, the latter on state aid (‘subsidy’) and competition policy. What is the role of the taxpayer in stimulating investment and how much support should be provided via the business tax system as distinct from direct or indirect public subsidies?
In Culture of Innovation, a ground-breaking report published by NESTA in 2010, Hasan Bakhshi and David Throsby examined the importance of ‘R&D’ in arts and cultural organisations Culture of Innovation | Nesta. Drawing on research carried out with the National Theatre and the Tate Gallery, the authors scrutinised the role of innovation under four headings: extending audience reach; art-form development; value creation; and business models. At that time, no arts organisation or commercial creative enterprise outside the film industry was eligible for tax relief for any business activity approximating to ‘innovation’ or ‘R&D’. This landscape was later changed when seven new creative sector tax reliefs – for video games, animation, theatre, high-end drama and childrens’ TV, orchestras and museums and galleries – were introduced over a three-year period following the Budget of March 2012 (see Creative Industry tax reliefs for Corporation Tax – GOV.UK (www.gov.uk). These tax credits have in each case been used to finance new work – for example touring new shows and curating new exhibitions. Even their one-time critics now regard them as an indispensable feature of the funding landscape.
What is significant here – this brings us to the first of the two government consultations – is that a separate regime of tax credits designed to support investment in industry-based research and development, introduced for SMEs in 2000 and extended to big companies in 2002, has been largely unavailable to the creative sector with important exceptions in the technology-intensive video games, animation and special effects (VFX) and design industries. This is because the UK government’s eligibility rules are more restrictive than the Organisation for Economic Co-operation and Development’s (OECD’s) guidelines on which they are based.
The OECD’s Frascati Manual defines research and experimental development (R&D) as “creative and systematic work undertaken in order to increase the stock of knowledge – including knowledge of humankind, culture and society….” (emphasis added), whereas the UK government in its guidelines defines R&D for tax purposes as taking place only “when a project seeks to achieve an advance in science or technology”. The UK guidelines speak of activities “which directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty….” (emphasis added). They are consequently deemed to exclude the cultural and creative industries (CCIs) from eligibility except at the high-tech margins (the VFX industry is the best example).
Creative industry lobbyists have long complained about these arrangements – partly on the basis that the OECD’s Frascati guidelines are clearly intended to include culture-based activity and partly that the CCIs, no less than pharmaceuticals and life sciences companies, also engage in what is loosely called ‘R&D’. But running this argument is far from straightforward. Creative research and experimentation is conceptually and commercially different from science-based R&D: creative projects (like plays, films and games) are essentially one-off prototypes which, unlike drugs or electric vehicles, are ‘hit’-based and subject to the swings and fortunes of the box-office and public taste. They are neither functional nor amenable to being licensed for pan-global, branded consumption. They also use different language, for example ‘workshopping’ in theatre and ‘script development’ in film and television. Nonetheless musicals, movies and other forms of creative ‘content’ are, or so it is argued by the Creative Industries Federation (CIF) and others, just as dependent on up-front investment as any medicine or consumer durable and should not be discriminated against by a fiscal regime designed to incentivise such investment.
This argument has failed on several occasions but is now being mobilised again prompted by the current Treasury consultation. For the latest articulation of the case see the papers produced by the Policy and Evidence Centre (PEC) here Policy-briefing_-RD-in-the-arts-humanities-and-social-sciences.pdf (pec.ac.uk) and by Prof. Andrew Chitty, the Arts & Humanities Research Council’s creative industries ‘champion’, here R&D Tax Credits – wider, bigger, better – CRAIC (lboro.ac.uk).
The second, altogether more abstract consultation on ‘subsidy control’ is a direct consequence of Brexit. Withdrawal from the European Union signifies withdrawal from the EU’s competition and state-aid regime which, for reasons both of domestic policy and international trade, must now be replaced with a home-grown substitute. This consultation deals in terms of high-level principles and is hard to pin down as regards sector-specific application or practical consequences.
The complex public-private financing ecology which sustains the CCIs in the UK has emerged from successive economic interventions over many decades, ranging from the inauguration of the BBC in 1922 through to the establishment of other public sector broadcasters (PSBs), like ITV and Channel 4 in the 1950s and 1980s, and the more recent creative sector tax credits referred to earlier. The fear is that this interlocking web is theoretically at risk from the introduction of any competition policy regime which fails to recognise the inter-dependence of these interventions, especially in the nations and regions where the role of the PSBs has been critical to sustaining the audio-visual core of creative business activity.
Why should we be concerned? The answer is that many of these interventions, including most obviously the very existence of the BBC, is dependent on the view taken by the government of the day of what constitutes ‘market failure’; and on the critical intersection between market failure analysis, industrial policy and wider cultural policy. This is implicitly acknowledged in question 9 of the BEIS consultation which asks whether the audio-visual sector should be included in the new subsidy control regime. (The only sensible answer on current information is “it depends”!).
Whilst there is no obvious reason to suppose that HM Treasury is about to initiate a bonfire of creative sector tax credits given their well-documented and continually trumpeted success in stimulating inward investment, a government which, to almost universal dismay, declined to negotiate continuing low-cost membership of the EU’s Creative Europe programme and has recently abandoned the industrial strategy launched in 2017 by former Secretary of State Greg Clark (see my earlier lecture here ‘Creative industries’ revisited: contestable narratives, the ‘sector deal’ and the Policy and Evidence Centre (gold.ac.uk), is bound to make us all nervous about its intentions until there is greater clarity about direction of travel.
Dr Martin Smith is a Visiting Fellow in ICCE