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To stem brain drain, U.K. gaming industry levels up

FORTUNE — A 10-year campaign to achieve tax breaks for videogame development in the U.K. is victorious, with the country’s creative industry hoping it will reverse a “brain drain” of talent to North America.

The move — now ratified into law by the European Commission — puts the games industry on par with film and TV production in Britain, which already enjoy relief, enabling them to attract big overseas budgets.

Andy Payne, chairman of the Association for UK Interactive Entertainment and CEO of indie publisher Mastertronic, has been one of the people involved in the campaign.

“Back in the 1980s and ’90s, the U.K. games industry was always a hotbed of talent,” he says, “but as the consoles rose to market dominance in the late ’90s and early ’00s and production budgets rose, other countries began to identify and then target games developers as a source of high value jobs and economic growth through proactive tax incentives.”

The principal protagonist was Canada, Payne says, which “offered generous tax incentives” that varied by state. “For the last 10 years, the U.K. has seen a steady drain of talent to the country and many great development studios here closed,” he says. “I hope this will now be reversed.”

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The new production tax relief for gaming allows development studios to potentially claim back up to 25% of qualifying costs. Detailed guidance on what is permissible is still being ironed out.

Game titles must meet certain rules to be included in the rebate. These include criteria such as the amount of development that occurred in Britain, how much of the action is set in the U.K. or countries within the European Economic Area, and whether the game contributes to the “promotion, development, or enhancement of British culture.”

According to Nick Gibson, founder of Games Investor Consulting, the credits now allow the U.K. a fairer fight for third place in the top three gaming production hubs in the world, coming after the U.S. — where relief varies by state — and Japan.

Rivals for the U.K.’s position include China and South Korea, as well as Canada. Up-and-coming nations such as Finland and Holland have also seen their governments back the gaming industry with tax incentives.

Richard Wilson, CEO of the trade group The Independent Game Developers’ Association, says the lack of similar incentives in the U.K. has led to a declining industry. Its own figures suggest employment in the U.K. sector fell by more than 10% between 2008 and 2011 with investment dropping by £48 million, or about $81 million.

“The approval and implementation of Games Tax Relief is the single biggest policy measure in the history of the U.K. videogame industry,” Wilson says. “It could not only help the U.K. become a top three games making nation once again, but allow our sector to reach new creative and artistic heights.”

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TIGA predicts the credits will cost £96 million (about $162 million) over five years. But the group says their benefits will far outweigh this and will include the creation and protection of 4,661 direct and indirect jobs, encouraging approximately £188 million (about $317 million) additional investment expenditure by U.K. studios and generating £172 million (about $290 million) in new and protected tax receipts to HM Treasury.

“The U.K. has always been one of the best places in the world to make games — we combine technical proficiency with British creativity, a unique blend,” says Ed Vaizey, Creative Industries Minister in the U.K. government. “We believe in this industry, which is why we have introduced some of the most generous tax breaks in the world. We believe videogames is a key industry of the future, and we want Britain to be one of its biggest production hubs.

“Videogames tax relief will make a huge difference — boosting our games industry’s growth, creating new jobs, and helping ensure a bright future for our talented and creative games developers.”

Miles Jacobson, studio director at Sports Interactive, the publisher of the worldwide hit game Football Manager, believes that global companies are more likely to invest in the U.K. now that the environment is level with the financial pull of rival countries.

“Smaller developers are more likely to take risks as they know they can get a proportion of their production costs back,” he says, “and, for a studio like ours that is already profitable, it gives us a chance to re-invest the credits in hiring more people to join the team, leading to better games for those who buy them.”

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Luke Dicken, founder of Robot Overlord Games, sees one distinct advantage. “The way the system is structured, there’s also an amount of insurance against complete failure,” he says. “If the game flops we know that there is some cushion available as a result of the tax credits available.”

The news comes as more than 250 U.K. developers have joined together to push the industry overseas through a campaign website at

Jo Twist, chief executive of UKIE, has been touring the country to educate developers on what the plans mean for them. “We are the most creative nation in the world and the birthplace of the games industry,” he says.

Indeed, the U.K. has a rich heritage of games development, and much of the creation for the award-winning and mega popular Grand Theft Auto series took place in Scotland at Rockstar North.

“Being based in the U.K. has led to a distinct commercial disadvantage, especially when in direct competition with North American and Asian studios,” says Paul Farley, CEO at Scotland-based Tag Games. “This finally puts us in a position where we can benefit from similar, or in some cases better, tax incentives. Not only can we now price development services more aggressively, but it puts us in a much better position to raise equity and project-based finance.”

Dave Sapien, developer at the Scottish studio Me & The Giants, agrees. “This means staying in Scotland rather than moving to Canada,” he said. “The new tax breaks appear to come close to the cost-benefit of us moving our studio overseas.”

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The call for gaming tax incentives gained prominence when it was included in a 2011 report looking at encouraging the next generation of creativity in the U.K. The report was co-authored by Ian Livingstone, former president of Eidos Interactive, maker of the Tomb Raider franchise, and also called for schoolchildren to be taught computer coding. The suggestion will be adopted into curricula beginning in September.

“With tax breaks supporting a healthy community of U.K. studios, we can help ensure that these new generations of developers don’t have to look overseas for their big break,” says James Batchelor, editor of industry magazine Develop. “The industry is currently enjoying an age of indies and startups, with talented individuals and teams attempting new things with games development. Tax credits means any risks they take won’t be as devastating as they could have been a few years ago, and gives them the resource to build on any successes they do have.”

“And,” Batchelor added, “who’s to say it won’t tempt homesick expats to abandon Canada in favor of starting up a studio back home?”