Special Weapon Activated – Video Games Developer Funding Health Levels Replenished by UK Tax Reliefs
Video game developers in the United Kingdom can now level up on their tax relief as the Video Game Expenditure Credit (VGEC) scheme introduced in 2024 starts to ramp up.
In a simplification of the incumbent Video Games Tax Relief (VGTR) scheme which was introduced into the UK tax regime in 2014, the newer scheme is available for expenditure on games incurred from the start of 2024, and is mandatory for any game for which production started after 1 April 2025.
As things stand, companies can claim VGTR on video games which are intended to be supplied, where at least 25% of core expenditure is incurred in the EEA and the game passes a “British Cultural Test”. The current rate of relief available for such games varies depending on the company’s profit and loss position; the vast majority of games will make a loss during development unless they are required to match income with expenditure where there is a longer-term contract (in line with SSAP9 accounting principles), whereby they will be able to claim an effective video games tax credit of 20% (25% rate applied to a maximum of 80% of core expenditure).
The overall tax consequences, however, are complicated by the fact that the scheme requires every individual game (that the company is claiming VGTR for) to be split out as a separate trade. This is further complicated by the loss relief rules, which state that losses incurred in relation to a game cannot be offset against profits in other trades whilst the game is “in progress”, i.e., has not yet been released to the public. This does not pose a problem for games that are completed within a single financial period, but this tends to be an unrealistic scenario for the vast majority of game developers.
The issue with this principle is that by splitting the (loss-making) game into a separate trade, the main trade’s profit will increase and thus create a larger tax liability. If the game does not complete for release during the period, its losses cannot be offset against these additional profits, and thus the credit payable for the game is almost completely negated by the additional tax payable. In the period of completion, these losses can then be used against the main trade, but it creates a timing issue with receiving the credit during the production of the game when, arguably, it is most needed.
The new VGEC scheme is a lot simpler in terms of its value and administration. The mechanism of this is similar to that of the new R&D merged scheme whereby the value of the credit is pretty much unaffected by the company’s tax position. The new credit rate is 34%; even when taxed at the current main rate of 25%, the net credit will be 25.5% across the board for all eligible games, and there is no messing around with losses which means that the credits available to companies should be available immediately and on a timely basis.
As mentioned above, games which commenced with the production phase on or after 1 April 2025 must use the new scheme; games which start before this date can continue to use the existing scheme until April 2027, but there are very few instances where this would be beneficial to claimants in any case (broadly, companies which spend money on core expenditure outside the UK but within the EEA per the next paragraph).
Some other favourable changes include the threshold for the minimum core expenditure reducing from 25% within the EEA (including the UK) down to 10% but in the UK only. There also used to be a cap on claimable subcontracted expenditure amounting to £1 million per game, which will not apply under the new scheme.
If you suspect that you may be able to benefit from claiming under the new VGEC scheme, please contact us at hello@yes.tax.
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