Creative sector tax reliefs
Video games
Types of qualifying expenditure
The following types of expenditure will qualify for the relief:
Background
Animation tax relief and high-end television tax relief were introduced
in April 2013. Video games tax relief has now been given approval by
the European commission.
• Core expenditure – expenditure on designing, producing and
developing the video game. However, it does not include
expenditure incurred in designing the initial concept for the video
game or any expenditure incurred in debugging or carrying out
maintenance in connection with a completed video game. At least
25% of the core expenditure on the video game incurred by the
company must be UK expenditure;
• UK expenditure – expenditure on goods and services in
relation to the video game that are used or consumed in the UK.
Apportionment will be required on a “just and reasonable” basis
between UK and non-UK expenditure.
Video games tax relief comes into effect for accounting periods
beginning on or after 1 April 2014.
Main features
• The relief will apply to companies registered in the UK – not LLPs
or partnerships;
• The new relief will operate in a similar manner to the existing film
tax relief;
• It has been proposed that there will be an additional
deduction for qualifying “core expenditure”. This amount would be
deducted from the income from the relevant activity. Any resultant
loss would be capable of surrender for a payable tax credit;
• Companies must satisfy a cultural (“Britishness”) test in order to
qualify for the relief.
Relief for video games
To qualify for relief, the video game must be intended for supply to the
general public when the video game development activities begin.
Video games take their ordinary meaning, without specific definition
in the legislation.
However, a video game does not include:
• Anything produced for advertising purposes; or
• Anything produced for the purposes of gambling.
The Government has decided not to introduce a minimum spending
threshold like the £1 million threshold for television programmes.
Criteria for video games to qualify
To be a video game development company, a company must:
• Be responsible for designing, producing and testing the video game;
• Directly negotiate, contract and pay for rights, goods and services
in relation to the video game.
Currently, there is no relief available for speculative expenditure,
where game projects are cancelled by publishers and not completed.
Culturally British test
HMRC have set out a cultural test that a company must pass and
a certificate that a company must obtain in order to qualify for the
video games tax relief.
The cultural test adopts a points system, with a company having to
obtain a certain minimum number of points to pass the test. Points
are awarded depending on the extent to which certain factors are
carried out in the UK.
The factors differ according to the types of activity undertaken.
Examples of the factors are:
• The percentage of the video game that is set in the UK or another
EEA state;
• The number of characters depicted in the video game that are
from the UK or another EEA state;
• Whether the video game depicts a British story or a story relating
to an EEA state;
• The percentage of the original dialogue recorded in English or a
recognised regional language;
• The level of contribution of the video game to the promotion of
British culture;
• Whether certain personnel (being the project leader, at least one
scriptwriter, the lead composer, one of the lead actors, the lead
programmer and the lead designer) are citizens of, or ordinarily
resident, in an EEA state.
Creative sector tax reliefs
Taxation of video game development companies
Games qualifying for video games tax relief are to be treated as
separate trades.
The company is treated as beginning to carry on this trade when the
design of the video game begins or, if earlier, when it receives any
income from the video game.
In its first period of account, the company must record the proportion
of the estimated total income from the video game treated as earned
at the end of that period less the costs incurred to date.
In later periods of account, the company must record the new total
income and costs incurred since the previous period.
Additional deduction
If relief is available to the video game company it may make an
additional deduction in calculating the profit or loss of the separate
video game trade.
For the first period of account, the amount of additional deduction is
80% of the lower of:
• Qualifying UK expenditure;
• 80% of total amount of qualifying expenditure.
For subsequent periods of account, the additional deduction is the
difference between the amount calculated by the formula above and
the amount of additional deductions given for previous periods.
When carrying out the calculations, costs are ignored for a period of
account if they remain unpaid four months after the end of the period.
Tax relief through credit
If a company is eligible for relief, where it has a surrenderable loss, it
may claim a credit for an accounting period.
The surrenderable loss will be the lesser of:
The surrenderable loss is the lesser of:
• The post-tax relief trading loss of £356K; and
• The enhanceable expenditure of £320K.
The video games production company can surrender any amount up
to £320K of losses. The amount of credit due is based on a payable
credit rate of 25% multiplied by the loss surrendered (assuming the
maximum of £320K is surrendered) is 25% x £320K = £80K.
Limitations on relief
Relief is not available to the extent that the company has obtained
research and development relief in relation to that expenditure.
How can Kingston Smith assist me?
This document, together with our publications on the film tax relief
and high-end television and animation tax reliefs, provide only a brief
summary of the issues surrounding creative sector tax reliefs.
We would be pleased to discuss your particular circumstances and
advise on whether your company would be eligible for tax relief.
Please get in touch.
Contact us
Kingston Smith W1
141 Wardour Street
London
W1F 0UT
T 020 7304 4646
Richard Heap, Partner
T 020 7306 5653
[email protected]
www.kingstonsmith.co.uk
• Its available loss for the period in the separate video game trade; and
• The available qualifying expenditure for the period.
A company may surrender all or part of its surrenderable loss in an
accounting period in return for a credit of 25% of the loss surrendered.
If a company makes a claim, HMRC will pay the amount of the credit
(payment of which is not taxable as income). Alternatively, the credit
may be used to reduce the company’s corporation tax liability.
Example – video games tax relief
Below is an example to illustrate how a tax credit could be calculated
for a video games production company.
Total income
£400K
Total expenditure
£(500K)
Pre-film tax relief profit/(loss)
Enhanceable expenditure (qualifying expenditure of
£400K x 80%)
A company produces a video game which is commissioned. Income
received from the commissioning publisher totals £400K. The total
expenditure incurred is £500K of which £400K is core expenditure
on the commissioned game.
£(100K)
£320K
TIGA - The Independent Game Developers’ Association Limited
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London EC2Y 5EB
www.tiga.org
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To join TIGA, please contact [email protected].
Additional deduction on enhanceable expenditure
(80% rate of enhancement x £320K)
£(256K)
Post-tax relief profit/(loss)
£(356K)