The European Commission has opened an in-depth state aid investigation into UK plans to offer tax relief to video games developers who meet certain cultural criteria.

Under the proposals announced in Budget 2012, the government was set to introduce a 25% tax relief on a maximum of 80% of the production budget of a qualifying video game for expenditure on goods and services used or consumed in the UK.

However, the Commission says it does not believe there is an obvious market failure in this sector and notes that 'such games are produced even without state aid'. As a result, the Commission doubts that the aid is necessary.

Commission vice-president in charge of competition policy Joaquin Almunia said: 'The market for developing video games is dynamic and commercially promising. It is not clear whether the taxpayer should be subsidising this activity. Such subsidies could even distort competition.'

EU concerns over the tax relief came as 'disappointing news' to CCH tax writer, Stephen Relf. He said: 'The new relief would provide much needed support for video games developers in the UK, safeguarding jobs and encouraging new investment. The Commission's decision means a period of uncertainty for UK businesses. Hopefully, the Commission will recognise the importance of the new relief and state aid approval will follow in due course, as it has for similar reliefs in the UK and other countries.'

The Commission's concerns centre on whether the aid is necessary to stimulate competition; whether limiting expenditure for the tax relief to goods or services 'used or consumed' in the UK is discriminatory; the possibility that offering this type of aid could fuel a subsidy race between member states; and the difficulty of ensuring that the aid only goes to games with the agreed cultural content without producing distortions in the market.

Interested parties have until 15 May 2013 to register their comments. Industry bodies including the Association for UK Interactive Entertainment (UKIE) and the Independent Game Developers Association (TIGA) are co-ordinating responses and evidence from UK developers and suppliers.

Rachel Austin, Deloitte tax director, said: 'It is not unusual for new tax reliefs to be subject to detailed state aid investigations. The existing UK film tax relief was investigated before its introduction in 2007 and the French video games tax relief was the subject of a year-long investigation prior to receiving approval. We are hopeful that the UK video games relief will receive approval in due course, providing a much needed stimulus to the UK video games industry. If approved, it would allow UK companies to compete on a level playing field against other countries that already offer incentives.'