Game On!
Video game developers in the United Kingdom will soon be able to advance to another level of tax relief as an incentive to develop games which enhance and promote British culture.
In March the government announced plans to “1 up” from the current system of enhanced expenditure to an expenditure credit system which gives more certainty to gaming companies as to the amount of relief that a game may attract.
As things stand, companies can claim “VGTR” (video games tax relief) on video games which are intended to be supplied, where at least 25% of core expenditure is incurred in the UK 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” (video games expenditure credit) scheme is being introduced in January 2024. The mechanism of this is similar to that of the “RDEC” large company research and development tax credit scheme whereby the value of the credit is fixed irrespective of the company’s tax position. The proposed 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.
Games which commenced development 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.
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