Game on!
Update - July 2014
The UK’s long-awaited Video Games Tax
Relief received European Commission state
aid approval on 27 March 2014, meaning that
the full introduction of a tax relief which was
announced in the 2012 Budget is within sight
(likely to be later this month). Neil McKnight, a
Senior Associate in the Tax and Incentives Group
at Taylor Wessing, provides an overview of the
tax relief.
The UK’s video games tax relief provides
welcome support to UK video game developers,
giving qualifying video game development
companies the opportunity to either reduce
their UK corporation tax bill or, perhaps more
importantly, receive a cash tax credit from the
Government. Originally targeted for introduction
on 1 April 2013, delays to the relief – caused by
delays in European state aid approval in part due
to fears that the relief may promote a subsidy
race between Member States - have been much
publicised, causing many to question whether the
relief would ever be introduced.
However, and with a few last minute tweaks
(most notably the extension of the tax relief to
expenditure incurred in other European Economic
Area countries), the tax relief will soon be
introduced, and will be available to UK companies
incurring expenditure on the development of
“culturally British” games which are intended
for commercial release. The tax relief will be
backdated to development expenditure incurred
by such companies on or after 1 April 2014 –
disappointingly not 1 April 2013 as was originally
intended.
What kind of game will qualify?
One of the most important questions is what is
a video game? It is clear that the Government
has recognised that the video games market
is constantly changing and evolving, so it
has decided not to try and define the term
restrictively. Instead, ‘video game’ has been
given its natural meaning which means that the
tax relief should keep up with new game formats
as they come to market.
However, certain types of game cannot qualify
for tax relief. Games which are produced for
advertising or marketing purposes (for example,
apps tied to new product launches), real money
(gambling) games or apps, and those which
contain pornographic or “offensive” material
are specifically excluded and, as the tax relief
is intended to support developers bringing new
games to market, it will not be available if the
game was not, from the outset, developed with
the intention that it be exploited commercially
and supplied to the general public.
“Culturally British” test
The “culturally British” test is perhaps the
most complicated aspect of the tax relief,
as the “Britishness” (or, following the recent
changes, the “Europeanness”) of games is to be
determined by reference to a points test (the
game must score 16 points out of a possible 31)
administered by the British Film Institute (“BFI”)
based on the well-established test used for the
UK’s successful Film Tax Relief.
Although the test is yet to be finalised, the draft
regulations which set out details of the test have
been available for some time and the BFI has
recently released guidance on how the test will
work in practice.
The majority of these points will be awarded if
the game is set in the EEA (including the UK), if
it depicts characters who are EEA nationals, or if
it is produced in English. Points are also awarded
if the game is developed by EEA nationals in the
EEA. The Department for Culture, Media and
Sport is responsible for certifying that the game
scores enough points and it will not be possible to
claim the tax relief without obtaining a certificate
to this effect.
The BFI has produced a summary of how
the points will be allocated under the cultural
test, which may be found on their website:
http://www.bfi.org.uk/film-industry/britishcertification-tax-relief/cultural-test-video-games/
summary-points-cultural-test-video-games.
How will the tax relief work?
Recognising revenues
As a starting point the tax relief is only available
to companies who pay UK corporation tax
(which means that the company must either be
managed and controlled in the UK, or it must
have a branch or permanent establishment in
the UK). To qualify, at least 25% of the “core”
expenditure on the game – that is expenditure
on the designing, production, and testing
of the game – must be incurred in the UK
or in another EEA country. Additionally, the
development company must be established
before any development activity begins (it is not,
for example, possible to transfer a development
project into a new UK company in order to claim
the tax relief).
For video game developers wishing to claim tax
relief the normal rules which determine how, and
when, revenues are recognised and how profits
are calculated are modified slightly. Broadly,
this means that income should be recognised
as expenditure is incurred even if the revenue
has not actually been received. This means
that developers will be required to estimate the
revenues to be generated by the game and,
at the end of each accounting period, treat a
proportion of that estimated revenue as earned
in that period. That proportion is calculated by
reference to the proportion of the development
costs incurred in the accounting period and which
are represented in the work that has already
been done on the game. This does not, however,
mean that developers are required to recognise
speculative revenues - so, for example, if at
any early stage of development the developer
contracts to licence the game it would be
required to recognise the revenues under that
licence but it would not be required to recognise
sales forecasts.
The tax relief is given as an additional UK
corporation tax deduction in respect of the
direct costs incurred by the developer in the
design, production and testing of the new game.
Although the additional deduction could amount
to a further 100% of the expenditure actually
incurred in the UK or another EEA state (so for
every £1 of UK or EEA expenditure incurred, up
to £2 of tax relief may be available), in practice
this additional deduction will be subject to an
overall cap of 80% of the total expenditure
incurred by the developer on the video game.
The tax relief should be available for primary
expenditure on video game development such
as salaries of coders, designers, software
engineers, business overheads relating directly to
development activity and the costs of creating
a soundtrack for the game. Tax relief may also
be claimed on sub-contracted development
activities, although this is subject to a £1million
expenditure cap.
The tax relief will not, however, extend to
expenditure incurred on devising the initial
concept of the game, nor to debugging, updating
and other costs once the game has been
released (including ongoing maintenance costs
such as, for example, server maintenance costs
for cloud-based games).
In later periods credit is given for revenue
already treated as earned to ensure that the
same revenue is not taxed more than once. The
estimate should be revised at the end of each
accounting period to take into account any
revenue actually earned in that period.
Procedure for claiming the tax relief
Claims for tax relief should be made in the
company’s “CT600” corporation tax return, in
respect of qualifying expenditure incurred after 1
April 2014.
Before claiming the tax relief the developer must
have received certification from the BFI that
the game meets the cultural test – which will be
given either on an interim basis if the video game
is still in production, or on a final basis if the game
has been completed. Although the BFI is unable
to issue certificates until the final legislation is
enacted it is accepting draft applications and will
provide written comfort that certification will be
given (assuming the relevant conditions are met).
Summary of the tax relief
„„
„„
„„
„„
„„
Tax relief will be available to video games
development companies and will be given
by increasing the available tax deduction for
expenditure directly incurred in the design,
production and testing of the new game.
Total tax relief will be up to 180% of the
expenditure incurred.
Loss-making video game development
companies will be able to surrender losses to
HMRC in exchange for a cash tax credit equal
to 25% of the surrendered loss.
Expenditure incurred in other EEA jurisdictions,
as well as UK expenditure, will be eligible for
tax relief, although sub-contracted expenditure
will be capped at £1million.
To qualify for tax relief, video games must pass
a “culturally British” test.
Key Contacts
Games Lawyers
Graham Hann
Games
Partner, London
+44 (0)20 7300 4839
[email protected]
Neil Hawley
Games
Associate, London
+44 (0)20 7300 4763
[email protected]
Tax Lawyers
Robert Young
Tax
Partner, London
+44 (0)20 7300 4201
[email protected]
Neil McKnight
Tax
Senior Associate, London
+44 (0)20 7300 4125
[email protected]
About Us
Taylor Wessing is a full-service international law
firm, working with clients in the world’s most
dynamic industries. We take a single-minded
approach to advising our clients, helping them
succeed by thinking innovatively about their
business issues.
Our focus on the industries of tomorrow has
enabled us to develop market-leading expertise in:
>> Technology, Media and Communications
>> Life Sciences
>> Private Wealth
>> Energy
At Taylor Wessing we are proud of our reputation
as a forward-thinking firm.
We support clients wherever they want to do
business. Our 24 offices around the world are not
token presences - they blend the best of local
commercial, industry and cultural knowledge with
international experience to provide proactive,
integrated solution for our clients.
Europe > Middle East > Asia
www.taylorwessing.com
© Taylor Wessing LLP 2014
This publication is intended for general public guidance and to highlight issues. It is not intended to apply to specific circumstances or to constitute legal advice. Taylor Wessing’s international offices operate as one firm but
are established as distinct legal entities. For further information about our offices and the regulatory regimes that apply to them, please refer to: www.taylorwessing.com/regulatory.html
NB_001393_07.14