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Gaming and claiming: Video Games Tax Relief

19 June 2018

 

Although HMRC has been accused of being somewhat behind the times when it comes to technology, it has been giving some generous tax reliefs to those working in the tech and digital sector for many years. The most well-known of these is Research & Development (R&D) relief: we have more information here.

But there are also some less well-known reliefs available to specific creative industries. Among these is Video Games Tax Relief (VGTR) which can result in a UK tax credit of up to 20% of the expenditure on video game development.

How do I qualify?

VGTR has been available for expenditure incurred since 1 April 2014. If your company is developing a video game, here are the conditions you need to meet to qualify for the relief:

  • Your company must be a video game development company i.e. it must be developing the game and not simply providing finance
  • The game must be British (and certified as such by the British Film Institute)
  • The game must be intended for supply to consumers
  • At least 25% of the core expenditure (as explained below) must be incurred on goods or services within the European Economic Area (EEA)

By meeting these conditions, your company can claim an additional deduction in its corporation tax computation equal to the EEA core expenditure but limited to 80% of the total core expenditure on the game. Additionally, loss-making companies can surrender this amount (or their losses if lower) for a 25% tax credit.

What is “core expenditure”?

The core expenditure on which the relief is calculated is the spending on:

  • Designing the game
  • Producing the game – including costs of acquiring book, music or film rights
  • Testing the game

It does not include costs relating to:

  • Original concept design
  • Debugging
  • Post-release maintenance
  • Advertising

In HMRC’s view, any costs incurred before deciding to proceed with game development will generally not meet the criteria of core expenditure. However, if any elements conceived in this part of the process go on to become key parts of the production then some of the costs may qualify.

How about R&D?

If you are developing new technology or techniques as part of your new video game, some of the expenditure involved in the game’s development may also qualify for R&D tax reliefs. However, there are restrictions on the availability of VGTR if R&D relief is claimed:

  • If your company is eligible for the R&D scheme for small or medium sized enterprises (SMEs), it must choose between R&D relief and VGTR – it can only claim one but the decision as to which one to claim is yours
  • If your company is entitled to the R&D Expenditure Credit (RDEC: it replaced the large company scheme in April 2016), it cannot claim VGTR on the same expenditure. This is the case even if it does not actually claim the RDEC. If the company has additional expenditure which qualifies for VGTR but does not qualify for the RDEC then it can claim VGTR on those costs (subject to the usual rules)

There is a further restriction on the amount of VGTR that can be claimed: the total amount of “state aid” received in respect of a game must not exceed 50% of the total costs of the game (please note that this test applies to the total expenditure, not the core expenditure). R&D relief under the SME scheme is state aid but the RDEC is not. Even so, you should consider any other grants or reliefs which your company has claimed in relation to the game.

Just as R&D relief is available on “failed” projects, VGTR is not prohibited by the abandonment of a game’s development. Relief will still be available on the qualifying costs incurred before the production.

How do I claim?

VGTR is claimed in your company’s corporation tax return for the period in which the expenditure was incurred. The tax return must be accompanied by:

  • The certificate from the British Film Institute stating that the game is British
  • The game’s title
  • Total core expenditure
  • Total EEA expenditure

For more information, please get in touch with your usual BKL contact or use our enquiry form.