Video Games Tax Relief or R&D Tax Credits - Which can I claim?

Video Games Tax Relief ('VGTR') is one of the range of Creative Industry Tax Reliefs available to UK companies, but it remains less well known than many of its counterparts, including most notably, the R&D tax credit.

This could be due to the fact that the VGTR was not introduced until 2014 - giving the R&D tax relief a 14 year head-start!

As a result, many video games development companies might simply apply for the R&D tax relief, unaware that there is an alternative that might be better suited to them.

What benefits does the Video Games Tax Relief provide?

The VGTR for a video game provides either:

• a reduction in corporation paid (or payable) if profitable OR

• a cash payment from HMRC, if loss-making.

The VGTR works by providing an additional deduction for corporation tax purposes on qualifying expenditure at a rate of 80% of the total core expenditure.

If, after applying the enhanced VGTR deduction there is a loss for tax purposes, then the loss can be surrendered for a tax credit at a rate of 25%.

Video Games Tax Rellief (VGTR): Worked Example Calculation

Say a video games development company incurs £500,000 of core costs on the development of a new game (all incurred in the EEA) in an accounting period.

This means that it could claim an enhanced deduction for tax purposes on 80% of the total core expenditure being £400,000 (80% * £500,000 = £400,000).

So if the company had taxable profits in an accounting period, after applying this VGTR adjustment, it would generate corporation tax savings of £76,000 (at 19%) or £100,000 if the full loss was surrenderable for a payable tax credit.

This provides an effective rate of cash tax saving of 15.2% for profitable companies or 20% for loss-making companies.

Put another way, video games development companies can recover 15p in every £1 for qualifying core expenditure on a new video game if profitable and up to 20p in every £1 if loss-making.

Who can claim Video Games Tax Relief ('VGTR')?

The Video Games Tax Relief is a corporation tax relief which means that it is available to a UK company that is developing one or more video games.

The claim is made via a company's corporation tax return ('CT600').

It is worth noting that it doesn't matter if the VGDC is owned or controlled by an overseas entity e.g. a subsidiary of a parent company in any other jurisdiction. This is further highlighted by the fact that eligible core expenditure is considered EEA-wide and not just in the UK.

It is important to note that each video game tax relief claim will create a separate trade in the video games development company in which income and expenses (and trading profits or tax losses) are streamed.

There can also only be one VGDC per video game.

Who is ineligible from claiming Video Games Tax Relief ('VGTR')?

As VGTR is a corporation tax relief, any entity that is not subject to corporation tax relief is unable to claim it. So, for example, businesses run as sole traders, partnerships or Limited Liability Partnerships ('LLP's') would be ineligible.

Game development essentially needs to be run through a limited UK company to qualify.

What is a qualifying video game for VGTR?

There is no specific definition of qualifying games for VGTR purposes so it is taken to have its ordinary meaning of an electronic game.

So it is interpreted as being, broadly, a game of uncertainty and chance where the player directly controls the actions and events. Plus where the player's actions have a meaningful impact on the direction and outcome of the game.

It is a game that is intended to be played via a video games console, mobile phones, tablets, PC computers, television, monitor or other handheld portable device.

The relief does not cover hardware such as the video device or equipment - it is solely focused on the underlying software and audio.

What video games are excluded from eligibility for the VGTR?

There is no video games tax relief for games produced solely for the purposes of advertising, promotion or gambling.

Crucially, it is permissible for games to include advertising or gambling provided, in the case of the latter, that there is no facility to pay out actual cash.

Are there any specific requirements for a game to be eligible for VGTR?

Yes, the video game must be:

• intended for supply to the general public

• certified as a British video game; and

• at least 25% of the core expenditure must be EEA expenditure

How do you certify that a video game is British for VGTR?

The British Film Institute (BFI) is responsible for assessing whether a video game passes the test of cultural contribution to be classified as British for VGTR purposes.

There is an online application form that needs to be completed and filed with the BFI for each video game.

A company can apply for 'interim certification' if the video game is still under development (or has not been started). A final certificate is required in all cases, once the game has been completed and made available to the public.

The BFI applies a points test to certify whether a video game passes the relevant cultural test (per The Cultural Test (Video Games) Regulation 2014). It must secure 16 points out of a possible 31 points to pass.

The cultural test covers four key areas:

• A: Is the video game made in the UK or another EEA State?

• B: Does the game feature the UK or another EEA State?

• C: Does the game promote the UK or another EEA State?

• D: Are the production personnel ordinarily resident in the UK or another EEA State?

Most video games can secure the required 16 points within Section A and B; however, an Accountants' report is required if an application for a final certificate relies upon points in Section C and/or Section D.

The Accountant Report must be prepared by a person who is eligible for appointment as a company auditor under Section 1212 of the Companies Act 2006.

This video from the team that carry out the video games classification for BFI is well worth a watch:

What costs qualify?

A company can claim video games tax relief on its 'core expenditure'.

This comprises expenditure on designing, producing and testing the video game.

A minimum of 25% of the Total Core Expenditure must comprise expenditure on goods and services used or consumed in the European Economic Area ('EEA').

What costs are ineligible?

Exclusions from VGTR include:

1. expenditure on initial concept design

2. expenditure on debugging or maintenance work on a completed game

3. advertising and marketing, finance costs, entertaining and audit costs.

Is there a minimum spend amount for VGTR?

No, there is no minimum expenditure threshold which means that VGDC's that are developing low budget games can also qualify for the VGTR.

R&D tax credits v VGTR: Which tax relief should companies claim?

First things first, a company must be able to demonstrate that aspects of its project work involved the pursuit of technological advancements in the video games development sector and that this advance involved technical uncertainties (that were not readily deducible by a competent video games developer) to claim R&D tax relief.

Applying this two-pronged test might result in the R&D tax relief being a non-starter from the off.

After all, I have little doubt that some of the best and most successful games will be built using tried and tested techniques and technologies. So in this case, the R&D tax relief might not be in point.

There are, however, no such tests of 'technical advancement' or reqs for evidence of 'tech uncertainties' within the VGTR. This makes the VGTR much more straightforward in this respect.

What if there is qualifying R&D in the development of the video game?

Now things get a little more complicated - we need to distinguish between the two R&D tax reliefs:

1. SME R&D tax relief
2. Research and Development Expenditure Credit (RDEC)

Both the SME R&D tax relief and the VGTR are 'Notified State Aid'. As you may be aware, you can't mix and match State Aid on the same project - it is one or the other.

So a company must choose which relief it is going to claim: SME R&D tax relief or the VGTR. There can be no overlap or double-claiming on eligible costs.

If a company is eligible for the RDEC (mainly large companies or SMEs in receipt of subsidised grant income used on the project), then the RDEC takes precedence.

So if there is qualifying R&D involved in the project work then the company must claim the RDEC relief in priority over the VGTR.

As with most financial decisions, it is often best to crunch the numbers first to work out which tax relief might deliver the best result for the company. We're here to help companies like you in the creative industries.

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