Claiming Video Games Development Relief

The video game industry has grown into a multi-billion dollar enterprise and the UK has been at the head of this digital entertainment revolution. As we've covered the tax aspects of the metaverse and Esports in earlier posts, it seems relevant to discuss claiming Video Games Development Relief ('VGDR') in conjunction with these sectors.  

Claiming Video Games Development Relief

To promote innovation and economic growth in the sector, the UK government introduced Video Games Development Relief as part of its broader initiative on tax incentives. However this is subject to changes that were introduced in the Spring Budget which we'll discuss later on in this article. 

To promote innovation and economic growth in the sector, the UK government introduced Video Games Development Relief as part of its broader initiative on tax incentives. However this is subject to changes introduced in the Spring Budget which we'll discuss below. 

Claiming Video Games Development Relief offers significant financial benefits to UK-based video game developers - especially in the start-up phase. However to access these incentives, companies must meet certain conditions and guidelines. 

What is a video game?

In the context of Claiming Video Games Development Relief,  a video game, is an electronic game (software). It also includes the development of a game's soundtracks. It is an electronic game that is played via a video device, for example a TV, PC monitor, smartphone, tablet or other portable game device. 

The video game is essentially the software and other electronically stored content and information. This includes the audio content, comprising of sound effects and soundtrack, plus any filmed or animated sequences for narrative purposes or options to allow adaptations so the game suits the specific preferences of the player.

However for the purposes of the relief, The game does not include the device and equipment hardware that are required to play the game. Where a video game is designed to be played on a specific console such as an 'X-box', or 'Playstation' or handheld device, the development of the hardware is not regarded as part of the development of the game. 

A game must have sufficient capability for a player to directly control actions and events in some way. There must be an uncertain outcome for the product to be a game, where the player’s actions have a meaningful result in the outcome.

It's also important to mention that games produced solely for advertising, promotion or gambling do not qualify for the relief. However games that contain advertising are not necessarily excluded, nor are games that include an element of gambling, unless there is a facility to pay out actual cash.

Conditions for claiming the relief

Now we have what is and isn't a video game for the purposes of claiming Video Games Development Relief, like the majority (if not all) tax reliefs we need to consider what conditions are attached to claiming the relief.

Cultural test

A video game must pass a 'cultural test’ or qualify through an internationally agreed co-production treaty certifying that the production is a 'British film', 'British programme' or 'British video game'. In all cases, formal certification is required to qualify.

Certification and qualification are administered by the British Film Institute (BFI) on behalf of the Department for Culture Media and Sport.

The BFI issues an interim certificate for uncompleted work or a final certificate where production has finished. If an interim certificate is submitted, then a final certificate must be applied for on completion. If a final certificate is not received then any interim relief which has already been paid will have to be repaid.

Qualifying expenditure

Expenditure must be regarded as 'core expenditure' in relating to the video game, in order to qualify this includes the following expenditure on designing, producing and testing the video game. However it does not include the following:

  • Designing the initial concept of the game.
  • Debugging a completed game
  • Carrying out maintenance on a completed game
  • Related hardware costs once a game is completed and ready for supply to the public. Examples of such expenditure are entertaining, advertising and marketing.
  • Accountancy fees, bank interest and charges and insurance are not counted as core expenditure.

It is important to note that completed games do not qualify for the relief. Additionally, no relief can be claim for any expenditure that has previously formed part of a previous  R&D tax claim

Who qualifies?

The relief is only available to companies not partnerships or sole traders. A company paying UK Corporation Tax is a qualifies if it produces the video game.  This is known as Video Games Development Company or VGDC for short.

A VGDC is responsible for designing, producing and testing the video game.  It is actively engaged in planning and decision-making during the design, production and testing of the video game. Additionally a VGDC is responsible for negotiating, contracting and paying for rights, goods and services relating to the video game.

The activities of a VGDC can be subcontracted to third parties, however there is a limit to the qualifying payments which can be made to subcontractors although it's unlikely  subcontractors will qualify as VGDCs in their own right.

It's worth mentioning that each video game is treated as a separate trade. There can also only be one VGDC per game . So for example, if two companies are developing a single game, only the company most directly engaged in the qualifying activities can claim the relief.

How to make a claim

A claim is made on a corporation tax return though can only be made where at least 25% of the core expenditure on the game is incurred on goods and services provided from within the EEA. You'll also need to provide a copy of the BFI certificate confirming it passes the 'cultural test' referred to above.

You can then claim Video Games Tax Relief  on your company's enhanced expenditure. The enhanced expenditure is the lower of 80% of the total core expenditure or the actual EEA core expenditure incurred.

The amount of Video Games Tax Credit repayable in exchange for surrendering your company's losses is 25% of the lower of the company's losses for the relevant accounting period or the enhanced expenditure for that period. How this is calculated is illustrated in the example below:

An example

Encom Ltd incurs development costs on a new game of £250k. Including in this total is the sum of £100k spent in the EEA. It has no income in this accounting period.

The expenditure qualifying for enhancement is £100k - the lower of 80% of £250k and £100k.

In this this accounting period, Encom Ltd's allowable deduction for Corporation Tax is £350k -  in other words the actual expenditure of £250k, plus the enhanced expenditure of £100K.

In this this accounting period, Encom Ltd's allowable deduction for Corporation Tax is £350k -  in other words the actual expenditure of £250k, plus the enhanced expenditure of £100K.

Encom Ltd can either carry forward this loss to the next accounting period or may surrender it for cash.

Encom Ltd trading losses which it can surrender for a cash credit from HMRC are the lower of its available loss, that is £350K, or its enhanced expenditure, which is £100K.

The video games tax credit Encom Ltd receives is therefore £25K (£100K at 25%). The balance of trading losses amounting to £250K (£350K less £100K) will be carried forward and set off against trading profits arising in a subsequent accounting period. 

When making a claim you should provide:

  • A British cultural certificate from the British Film Institute (BFI). If the game is still in development, you can provide an interim certificate and send the final certificate when the game is complete.
  • Statements of the amount of core expenditure, split by EEA and non-EEA expenditure.
  • A categorised breakdown of expenditure.

You can relief on an interim basis, provided the required conditions have been met. A video game may or may not have a strict budget, however where one is available it should be clear whether criteria are likely  to be met.

Should any of the conditions not actually be met once the video game has been completed, then the position will be adjusted to reflect the outcome.

Where a payable tax credit has been claimed this will be repayable to HMRC. Interest will be due but provided no careless or deliberate error has been made, no penalty should be charged by HMRC.

Latest developments

In much the same way that the rules have been changed for R&D tax claims HMRC will require an online information form to be submitted as part of the claim from 1 April 2024. This form will be mandatory for all claims.

New tax legislation will have effect from 1 January 2024 whereby a new Audio-Visual Expenditure credit (payable at a rate of 39%) will replace VGDR. From 1 April 2025, all new productions must claim the credit plus from 1 April 2027, all existing productions must claim the credit by which stage the current VGDR will have been phased out.

For more useful information, check out our Ebooks here.

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