Last year, Trade body UKIE found that the value of the UK’s video games industry grew to a record high of £7.16bn in 2021 and according to IBISWorld, continued growth is forecasted in 2023.
If we look back almost a decade ago, it’s evident that the potential of the UK video game market was recognised by the government when in 2014, it introduced the Video Game Tax Relief (VGTR) scheme. This relief was created with the objective of helping UK-based gaming companies continue to innovate, grow and create new video games, which due to the nature of the industry, will also be exported globally. VGTR will have been instrumental in supporting British gaming companies financially over the past decade, so in this blog we’re going to explain how it works and how it’s helped these companies power up and unlock growth potential…
How does it work?
To be eligible, there are a lot of criteria that the gaming company and the game must meet, such as conditions around the business structure, being certified as “British” by the British Film Institute’s (BFI) Cultural Test and more (full details found within HMRC’s manual).
However, assuming the company and video game are eligible, VGTR can then provide tax relief either in the form of a reduction of taxable profits (for profitable companies) or a repayment (for loss-making companies, where the tax credit is effectively 25% of the loss surrendered). This reduction/loss is calculated as the lower of:
- 80% of the total core expenditure
- The actual EEA core expenditure
What is classed as ‘core expenditure’?
In short, the ‘core expenditure’ referred to above consists of expenditure relating to designing, producing and testing the video game. However, for the purposes of determining what costs fall into the ‘core expenditure’ criteria, it’s also important to identify what stage of development the expenditure falls into. For example, core expenditure excludes any ‘original concept design’ costs. HMRC’s manual refers to as the ‘broad outline for the game, including themes, gameplay style, and overall plot (where appropriate).
At the opposite end of the development cycle, it’s also important to note there are specific rules around post-release expenditure. Game developers will be well-versed in rigorous testing prior to a game launch, but even still, it’s commonplace that there will be post-release debugging and maintenance required. Unfortunately, these costs wouldn’t make up part of the core expenditure for VGTR. Furthermore, as the relief applies to the development of the game, expenditure on advertising would not form part of the core expenditure either.
Companies that do qualify can make a claim as part of their company’s Corporation Tax return (CT600) which is filed with HMRC. The company will need to include details of the costs, the relief they’re claiming alongside evidence such as the cultural content of the game. A separate profit and loss is required for each video game as each needs to be reported to HMRC as a separate trade.
What next?
If this blog was a game, it should merely be treated as the very first level, as it’s only intended to provide a high-level overview of VGTR. There are many more technical points and caveats covered within HMRC’s manual such as apportionment methods, image rights and much more. Therefore, expert advice should always be sought pertaining to your specific circumstances. In UHY (East)’s Tech & High Growth team, alongside our tax partners, we can support our clients with submitting these claims.
Please get in touch if you would like to discuss further, either with your usual advisor or please contact James Foster at j.foster@uhy-uk.com.
