Video Games
Development Tax Relief
July 2014
INTRODUCTION
Video Games Development Tax Relief is one of
five Creative Industry Tax Reliefs intended by the
Government to offer tax incentives to companies in
certain creative sectors.
The relief works by offering companies a tax credit of
up to 25% of their games development expenditure,
subject to meeting certain conditions, including
a cultural test which ensures only games with
sufficient cultural links to the UK qualify for relief.
The other Creative Industry Tax Reliefs are Film
Tax Relief, which was the first to be introduced in
2007, Theatre Tax Relief, which is intended to be
introduced later in 2014, Animation Tax Relief and
High-end Television Tax Relief.
The scheme applies to expenditure incurred on
or after 1 April 2014. The Government intended to
introduce the relief on 1 April 2013, but this was
delayed until State Aid approval was granted by the
European Commission.
This ‘White Paper’ intends to set out some general
guidance on Video Games Development Tax Relief,
to show how its introduction might affect companies
in the gaming industry. This note is intended to
provide general guidance and, should you require
detailed analysis of a particular circumstance, you
should seek specific advice from an Accountant or
Chartered Tax Adviser.
WHO CAN CLAIM?
Only a company within the charge to UK corporation
tax may claim the relief, so sole traders, partnerships
and LLPs will not qualify. The company seeking to
claim the relief, called the ‘video game development
company’ (VGDC) must be actively involved in
planning and decision making during the design,
production and testing process, and must directly
negotiate, contract and pay for rights, goods and
services.
WHAT VIDEO
GAMES QUALIFY?
There is no statutory definition of a video game, so
the term ‘video game’ has its plain English meaning.
The lack of a statutory definition is deliberate
and is intended to ensure any unforeseen future
developments in the gaming industry do not fall
outside the relief. Games primarily designed for
advertising or promotional purposes, or for gambling,
are specifically excluded, although the requirement
that the game’s ‘primary purpose’ be advertising
appears to leave scope for limited in-game
advertising or product placement
THERE ARE THREE CONDITIONS WHICH
MUST BE SATISFIED FOR A GAME TO
QUALIFY:
1. It must be intended for supply to the general
public. Intention is determined when
development begins, so a subsequent decision
to abandon the commercial development of the
game will not prevent its qualifying for relief.
2. It must be culturally British (which is explained
below); and
3. At least 25% of the core expenditure must be
EEA expenditure.
Core expenditure is defined as expenditure on
designing, producing and testing the game. However,
expenditure on the initial concept for the game,
on debugging a completed game or carrying out
maintenance on a completed game is not core
expenditure. EEA expenditure means expenditure
incurred on goods and services used or consumed
within the UK or another EEA country (the European
Economic Area or EEA broadly means the European
Union, plus Norway, Iceland and Liechtenstein).
If more than one company meets these conditions,
then the company which is most directly engaged
is treated as the VGDC. Two or more companies
which might otherwise have potentially competing
claims to this status may agree that only one of
them is the VGDC.
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THE CULTURAL
TEST
In common with the other Creative Industry Tax
Reliefs, Video Games Development Tax Relief
is only available for ‘culturally British’ games.
Because all the Creative Industry Tax Reliefs
are modelled on Film Tax Relief, this part of the
relief is administered by the BFI, who will certify
that a game meets the cultural criteria. A points
system operates, with 16 out of a maximum
31 points needed to secure certification.
POINTS MAY BE AWARDED
AS FOLLOWS:
Cultural content (16 points)
• Where is the game’s story set?
• Where do the game’s central characters
come from?
• Where does the story come from?
• Is the game’s dialogue in English, or in a
recognised minority language of the UK?
Cultural contribution (4 points)
• How does the game demonstrate British
creativity, heritage or cultural diversity?
Cultural hub (3 points)
• What proportion of the design, programming
and music production work is done in the UK
or another EEA country?
Cultural practitioners (8 points)
• How many of the game’s developers,
programmers and key personnel are citizens
or residents of the UK or another EEA
country?
HOW MUCH WILL
THE CLAIM BE
WORTH?
The development of each game is treated for these
purposes as a separate trade. The trade is deemed
to commence when game development begins, or
when income begins to be received, whichever is
the earlier. Profits for the first year of trading are
a proportion of the total income expected to be
generated by the game, less costs incurred to date in
its development.
The value of the claim for Video Games Development
Tax Relief comes from a further deduction allowed
for some of the costs. The deduction is the lower of:
• The core expenditure which is also EEA
expenditure; or
• 80% of core expenditure
If there is a loss after this enhanced deduction
then this loss may be surrendered to HM Revenue
& Customs in exchange for a tax credit. The tax
credit, which is payable to the company, is 25% of
the surrenderable loss. The surrenderable loss is the
lower of:
• The actual loss, as calculated above, after the
enhanced deduction; or
• The core expenditure
The several steps of the claim are best illustrated
with an example. A VGDC has income from
developing its game of £500,000, and costs of
£600,000. All of these costs are core expenditure
and EEA expenditure. The claim will look like this:
£’000
Total income
500
Core expenditure (all EEA expenditure)
600
Loss before Video Games Tax Relief claim
100
Additional deduction: lower of 1) EEA expenditure and 2) 80% of core expenditure
480
Loss after Video Games Tax Relief claim
580
Payable tax credit (25% of surrenderable loss)
120
Please note this calculation is for illustration purposes only.
The surrenderable loss in this example is the lower
of the (1) available loss of £580,000 and (2) the
additional deduction of £480,000. In this case the
VGDC can surrender £480,000 for a payable tax
credit of 25%, giving a payment of £120,000
(i.e. equal to 20% of the core expenditure).
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VIDEO GAMES DEVELOPMENT TAX RELIEF EXPLAINED
CORE
EXPENDITURE
%
- Design, Production and testing
- Not debugging, maintenance
or initial concept
EEA
EXPENDITURE
- Goods or services ‘used’
or ‘consumed’ within EEA
% of core expenditure
within EEA
<25%
No Claim for Video
Games Tax Relief
>80%
25% - 80%
Tax credit = 20% of
core expenditure
Tax credit = 25% of
EEA expenditure
HOW ABOUT R&D TAX CREDITS?
Of course, a VGDC may also undertake R&D activities which may qualify for R&D tax credits. No expenditure
can be claimed under both R&D Tax Credits and Video Game Development Tax Relief, so it is important to
make the most appropriate claim for each item of expenditure. It is also important that the VGDC understands
what expenditure qualifies for relief under each regime and how to optimise their claims. The specialist team
of Chartered Tax Advisers at ForrestBrown are not only able to advise on both reliefs, but also on how they
interact, so that VGDC’s can make the most of their tax relief claims.
Please contact us for
further information.
SIMO N
ITH
LISA-MA RI
E
H
B
SM
RO
WN
0117 9269022
M
PHIL S
IT
Please Note: We have taken care to ensure the accuracy of this publication, which is based on material in the public domain at the time of issue. However, the publication is written in general terms for information purposes only and in no way constitutes specific advice. You are strongly recommended to seek specific advice before taking any action in relation to the matters referred to in this publication. No responsibility can be taken
for any errors contained in the publication or for any loss arising from action taken or refrained from on the basis of this publication or its contents.
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