The UK’s game development sector generates annual tax revenues of £1.2 billion for the Treasury and contributes £2.9 billion to UK GDP annually. It therefore plays a vital part in the entertainment industry and incentives given by the Government have a direct impact on investment in the UK.
The Government is keen to keep this momentum up and has announced various changes to the operation of Video Games Tax Relief.
Did you know?
Video games are increasingly embedded in UK culture and society. Games are one of the UK’s most valuable entertainment media.
According to ERA Figures, games remain the largest of entertainment’s three core sectors, accounting for 42.1% of total entertainment revenues in 2022. Sales grew by 2.3% to £4,664.4m compared with 2021. Games are played in 7 out of 10 households.
Replacing the Video Games Tax Relief
Video Games Tax Relief (VGTR) currently allows British games developers to claim a 20% tax credit against the expenditure they incur on developing new video games. Under the current scheme, relief is given by way of an additional deduction from profits or surrendering a loss for a tax credit.
The Government have announced that this is to be replaced by a new refundable expenditure credit known as Video Games Expenditure Credit (VGEC).
The calculation of the new credit is modelled on the Research and Development Expenditure Credit (RDEC) and will be a taxable “above the line” credit. However, VGEC will not include Step 3, the PAYE or National Insurance contributions cap.
There are two main reasons behind the change to VGEC. The first is to comply with international tax reforms, namely the implementation of global tax policy, Pillar Two.
Secondly, VGEC will only apply to expenditure on goods 'used and consumed' in the UK, unlike VGTR which included the European Economic Area (EEA). This is in line with the Government’s ambitions for R&D and the creative sector tax reliefs in order to boost skills domestically and drive UK innovation.
What is the new Video Games Expenditure Credit?
VGEC will have a headline rate of 34%. However, as it is an 'above the line' credit, it is subject to the current rate of corporation tax (25%). Therefore, the effective rate is likely to be closer to 25.5% - just a modest increase from VGTR.
VGEC will come into force from 1 April 2025. From that date, all new games must claim VGEC rather than VGTR. Any games already in development before 1 April 2025 can continue to claim VGTR (with EEA qualifying expenditure) until April 2027. Companies can elect to claim VGEC from 1 January 2024 for specific projects, but simultaneously claim VGTR for other projects in development until April 2027.
The qualifying criteria and other rules for the current VGTR will mostly be carried across into VGEC unchanged, including the 80% cap on qualifying expenditure. Qualifying expenditure will still be calculated on a cumulative basis.
VGEC will, however, scrap the £1m subcontracting limit, which will be welcome news in the industry. Although, it will impose further eligibility requirements, with a minimum of 10% expenditure to be 'used or consumed' in the UK. This is likely to impact smaller studios that have adopted a remote working model, where they have overseas employees carrying out the majority of the design, development and production of video games. They may lose out substantially because of the switch to expenditure credit as the claim will be limited to UK expenditure.
What do video games companies need to consider?
These changes may seem like a long way off, but it is essential to start planning for the introduction of VGEC as soon as possible. The changes may impact on commercial decisions, such as where development companies site their staff and whether they want to be early adopters of the VGEC in order to benefit from higher tax credit rates.
Whether the introduction of VGEC is a good thing for the industry remains to be seen. In any case, development companies will need to seek professional advice and we can certainly help with that.
The next step
For any further information on the above, please contact Nikhil Oza on n.oza@uhy-uk.com, or your usual UHY adviser.
