Video Games Tax Relief
Can individuals claim VGTR as well as companies?
As VGTR is a corporation tax relief it is only available to entities subject to corporation tax. This means that individuals, partnerships and LLPs are not eligible (although corporate partners of a partnership or LLP may be eligible).
Who is eligible to claim VGTR?
Only one company can claim VGTR per game. This is usually deemed to be the company that is the most directly engaged, and not necessarily the developer or IP holder. HMRC will determine the most involved company based on:
- Who is responsible for designing, producing and testing the video game
- Who is actively engaged in planning and decision-making during the design, production and testing of the video game
- Who directly negotiates, contracts and pays for rights, goods and services relating to the video game
A company can elect not to be a “Video Games Development Company” (VGDC) and thus give precedence to another company to make a claim. This would, however, preclude the company making the election from claiming VGTR on any game from the date of election.
Does the game have to be designed for a games console or PC?
For VGTR purposes a video game is defined as an electronic game that is played through a video device. This definition extends to the use of mobile phones, tablets and other handheld portable machines. To be classed as a game there must be sufficient capability for a player to directly control actions and events in some way, and there must be an uncertain outcome whereby the player’s actions have a meaningful result in the outcome.
Are there any types of games which are not eligible for relief?
The main types of games that will not qualify for relief are those purely or mainly developed for advertising and/or marketing purposes and those that have been developed for the purpose of gambling.
It is permitted for elements of advertising to be included in a game; for example mobile apps typically offer free versions of games which carry adverts as well as a purchasable version without adverts. However, a game which has the primary intention of promoting a product or service with limited player interaction is likely to be deemed a promotional development.
Gambling is generally deemed to involve games with a monetary risk, whether played individually or as a multiplayer game. If prizes include a monetary value then it is likely to be a gambling game. If the prizes have no actual monetary value then VGTR may be claimable.
What happens if the game is abandoned or not eventually released?
The legislation states that the game has to be developed with the intention of being supplied to the general public on completion from the outset if it is to qualify for VGTR. If this intention changes for some reason the game can still qualify for relief as long as the intention was still genuine at the stage of the game commencing production.
How do I go about certifying a game as British?
A game can be certified as British by making an application through the British Film Institute (BFI) which is certified by the Secretary of State for the Department of Culture, Media & Sport (DCMS). If the certification is being applied for during the game’s construction then an interim certificate needs to be applied for in the first instance. The intention of the application is to demonstrate to the DCMS that the film satisfies a number of tests which enhance and promote British culture within the four broad sections of cultural content, cultural contribution, cultural hubs and cultural practitioners. The game will be scored on these areas with 16 points out of 31 required to pass the test.
As well as being certified as British the application also needs to allude to the fact that core expenditure on the game in the EEA is likely to exceed 25% of total expenditure, and that the game is intended to be supplied to the general public.
If the above criteria are satisfied then an Interim Certificate will be granted.
At what stage am I able to make a claim for VGTR?
No claim for VGTR can be made until an interim certificate has been issued; once this has been issued a claim can be made at the design stage (i.e. when core expenditure starts being incurred), provided this is within the time limits allowed for making a claim (one year from the filing date of the relevant accounting period).
Once I have an interim certificate certifying the game as British can I claim VGTR indefinitely?
VGTR can be claimed from the start to the end of a game’s development period. This usually ends once the game is released to the general public. The three main stages of a video game’s core development are design, production and testing prior to release. Post release maintenance and bug fixing are not qualifying activities for VGTR purposes.
As well as this the VGDC has to apply for a final certificate within six months of the game being released to avoid HMRC voiding the relief claimed on the game. Steps should be taken as far as possible to ensure that the game continues to comply with the legislative requirements for claiming VGTR, particularly where considerable amounts of relief have already been claimed!
What is the deadline for making a claim?
As with most corporation tax reliefs, the deadline for claiming VGTR is the one year anniversary of the filing date for the company. In layman’s terms this is generally two years from the year end date of the period in question. Given that most accounting periods are 12 months long this means that expenditure incurred up to three years previously should be considered when looking to make a claim.
What is EEA core expenditure?
There are two elements to this definition – the EEA (European Economic Area) broadly covers the European Union, Iceland, Liechtenstein, Norway and (of course) the United Kingdom. Any expenditure originating in any of these countries/unions satisfies the EEA part of the definition.
The core part of the expenditure defines expenditure for which VGTR is available as an additional enhancement. This generally relates to staff salaries spent on specific activities (design, production and testing) but also subcontracted staff (up to £1m per game), celebrity and image rights and a fair apportionment of the majority of overheads allocated by the company to the game. Of this element at least 25% must be incurred in the EEA for the game to be eligible for VGTR.
How much of what I spent will I be able to reclaim as tax relief?
The answer to this question depends on some extent as to whether the game is profitable or loss making. In the majority of cases a loss will be made as the game is in production and therefore pre-revenue. However if a company has managed to secure a contract with a larger developer (or other organisation) then income has to be recognised in line with expenditure incurred in accordance with UK Generally Accepted Accounting Practices (or UK GAAP to us accountant types!)
In all cases the maximum “enhancement” available is 80% of core expenditure, which is allowed if at least 80% of core expenditure has been incurred in the EEA. If EEA core expenditure is between 25% and 80% of total core expenditure then the EEA core expenditure is available as additional relief.
Relief is then available at the prevailing rate of tax, currently 19% in the United Kingdom. Any losses created by the enhancement can be surrendered at a rate of 25% as a payable credit to the company.
If for example a company spends £100,000 on EEA core expenditure (and nothing outside the EEA) then £80,000 would be available as an enhancement. This would potentially save a profitable game £15,200 in corporation tax relief, or in the case of a loss making company generate a repayment of £20,000. Quite a substantial amount for a pre-revenue game!
If circumstance change regarding the game’s eligibility for relief am I at risk of having to repay any corporation tax to HMRC?
In some circumstances, yes! If a game has incurred EEA core expenditure exceeding 25% at the time of an interim claim being made but this does not continue to be the case by the time the final certificate is applied for then any relief claimed becomes invalid and may be repayable to HMRC with interest. This would also be the case where a game failed the British test upon final certification. This could be the case, for example, where certain characteristics of the game change which prevent the game for scoring sufficient points to pass the DCMS test. A company may also be at risk where it fails to apply for a final certificate upon completion.
In the case where a game is initially intended for supply but is not eventually released, HMRC will generally honour any relief claimed to date as long as the intention was genuine up until at least the point where production of the game commenced.
Do I need to separate out all of my games as individual trades for corporation tax purposes?
Any game where VGTR is being claimed will need to be split out as a separate trade; however all other games can continue to be recognised as general trade. This can complicate the tax computation and return substantially - but don’t worry – we are here to help!
What happens if I make a taxable loss?
Companies making a taxable loss for a video game in a period can potentially surrender this loss for a credit at a rate of 25%. This compares favourably to the current corporation tax rate of 19% and provides a welcome cash flow boost during periods of potentially heavy development.
Instead of claiming a tax credit can I offset my losses from one video game against profits from another?
The rules governing losses made by VGTR claimants are very complicated. Where a game holds an interim certificate but not a final certificate the losses made by the company are restricted to carrying forward to offset against future profits of that trade. The losses cannot be offset against other trades or income sources and cannot be carried back.
In the period of completion (i.e. the accounting period in which the game receives a final certificate) the losses accumulated during the interim period all vest in the period of completion and can be offset in the same way as normal tax losses.
Can VGTR be claimed in conjunction with R&D tax relief?
Both VGTR and R&D tax relief are recognised state aids, so only one of these can be claimed per game. It is possible for VGTR to be claimed on certain games and R&D tax relief to be claimed on other games or projects. However, there should be no overlap of claims on any expenditure or games/projects.
Does VGTR take precedence over R&D if both apply?
If a company is entitled to claim RDEC then this must take precedence for a game or project irrespective of whether or not VGTR would apply. Where a company has a choice between VGTR and R&D tax relief under the SME scheme, a choice can be made here, but this must be continually applied for the life/duration of the game/project.