As the gaming industry continues to call for tax breaks in Britain, David Crookes looks at why the government would do well to listen.

Two years ago, Britain was the third largest producer of games in the world. Today, it is the fourth and a year from now it could well be the fifth. Gaming development in this country is slipping faster down the league than Newcastle United and yet, despite a cry for help, the UK government is doing little.

It's a situation that frustrates those who head up Britain's successful and thriving game development companies. They look at an industry raking in more than £1 billion each year and wonder why more isn't being done to protect it.

There is a major threat from Canada and France which hand their gaming industries hefty tax breaks. Indeed, the Canadian government pays out 37.5 per cent of salaries and offers various tax holidays among other incentives. This means a game which just about break even in the UK suddenly becomes hugely profitable if made in Canada.

A game will typically cost £10m to £20m to make in the UK. In France, there is 20 per cent tax break which can reduce costs by £1m or £2m and in the US state of Georgia, the authorities came up with a 20 per cent tax reduction scheme with a further 10 per cent knocked off for products displaying an animated Georgia promotional logo.

By not supporting the gaming industry in a similar way, we are beginning to see a brain drain from Britain to more lucrative markets abroad which can now afford to pay for the top talent. What frustrates British companies the most is that the film industry receives tax breaks in the UK and yet the gaming industry makes more money.

Take Grand Theft Auto IV. It may be controversial but it was a record breaker, selling more than 3.6 million copies on the day it was released, thus generating $310 million in revenue. It became Britain's fastest-selling game in a 24 hour period and went on to sell a total of six million copies in the first week.

Tomb Raider has been another phenomenon, making a digital star out of Lara Croft. Before the game was launched in 1996, publisher Eidos Interactive had recorded a pre-tax lost of nearly $2.6 million. Following its release, the company had made a profit of $14.5 million.

But it's not just about money – British developers are churning out some of the world's most innovative titles including LittleBigPlanet on the PlayStation 3 and the LEGO series of games that have proven incredibly popular at the hands of Cheshire-based TTGames.

How long this will continue is uncertain. A survey by The Independent Games Developers Association (TIGA) showed that 41 per cent of developers believed their growth would be held back in Britain by foreign government subsidies and 31 per cent said British taxes were causing the problem.

Research has also found that the UK is one of the most expensive places to create games in the world, with the lowest level of Government incentives or access to finance to encourage companies to locate or start up here. The UK’s games industry is competing on uneven playing fields and many developers believe the opportunities they can offer to up-and-coming talent in Britain will start to dwindle if the home-grown market cannot compete against other countries. Each year, students graduate from courses hoping to get jobs in Britain and, some argue, they may be forced to move abroad for work. That, in turn, could also make such courses less attractive.

All the industry is asking is that the government frees up some cash so that it can invest in fresh talent and continue to innovate. All are fearful that the success of the industry in Britain to date is about to be destroyed by the incentives offered to developers who decide to create games overseas.

So eager are countries such as Canada to have the best of the world's talent, they are even making it easier for those who work in games to get through the immigration procedures. Over the past two years, the number of development staff in Canada has grown by 33 per cent. In the UK the development community has grown by just eight per cent in the same period and there is a threat from South Korea too which is about to leapfrog the UK and claim fourth place.

The government needs to understand that the games industry is stable and growing, even during a recession, and that's why some governments are noticing the benefits of encouraging greater development. They know that by creating the right economic environment for developers, there will be spin-off benefits and a rise in employment which in turn means more tax being paid into the system in the long run.

Figures suggest that more than 1,600 new jobs could be created in the UK if games development in Britain was handed a tax break. And while the government has promised it will review the policy it has not done so to date which is why TIGA is so frustrated. Its CEO, Dr Richard Wilson, says he strongly believes in tax breaks for the UK industry, alongside more generous R&D credits and adequate funding for education at all levels. He believes these elements are essential if the UK is to remain competitive in one of the world’s most important creative industries. It's a sentiment that really can't be argued against.

David Crookes is a videogame journalist and the curator of Videogame Nation, an exhibition which aims to showcase the best of British videogame develop over more than 30 years. Running until September 20 at Manchester's Urbis, it highlights the creative work carried out by thousands of employees in the industry and profiles key names such as David Braben (Elite), Matthew Smith (Manic Miner) and The Oliver Twins (Dizzy).