Our tax experts provide an overview and a summary of the recent changes to tax relief on video games development.
Tax relief for video games development was introduced in 2013. This relief applies to companies which are subject to the UK corporation tax regime.
There have recently been several changes in the reliefs available, and a summary of the current position is as follows:
- Video Games Tax Relief (VGTR) is the existing scheme, which is being replaced by Video Games Expenditure Credit (VGEC). However, VGTR can still be claimed up until 31 March 2027 for games which were started (and incurring expenditure) prior to 1 April 2025. The scheme is closed from 1 April 2027.
- VGEC is the new scheme, which applies to relevant expenditure from 1 January 2024 onwards (but VGTR can still be claimed for some games, as explained above).
- For any VGTR or VGEC claims filed with HMRC from 1 April 2024 onwards, an additional information form (AIF) has to be filed with HMRC beforehand, giving extra information in respect of the game(s) and the claim.
The reliefs were previously dealt with under HMRC’s Video Games Development rules and now form part of its wider Creative Industries Expenditure Credit regime.
Qualification for relief
In order to qualify for VGTR or VGEC, the game has to be a British video game. There are specific criteria which need to be met, which involves applications being made to the Department for Digital, Culture, Media and Sport (DDCMS) and the issue of certificates to confirm that the game meets the Cultural Test criteria and is certified as a British Video Game. An ‘interim’ certificate is issued before the game is complete and a ‘final’ certificate is issued after completion. The Video Games Development Company (VGDC) has to be directly responsible for designing, producing and testing the game and, for any relevant game, the tax relief can be claimed by only one VGDC, the development company.
When can VGTR and VGEC be claimed?
- VGDCs can claim VGTR or VGEC if the following all apply:
- The company is developing a British video game, which is certified as British (as above).
- The game is intended for supply to the general public (but not for advertising, promotional or gambling purposes).
- For VGTR, at least 25% of ‘core expenditure’ (ie expenditure for designing, producing and testing the game) is incurred on goods or services provided from within the EEA (European Economic Area) or UK.
- For VGEC, at least 10% of the core costs relate to activities in the UK.
- The claim has to be made (and amended if required) within two years after the end of the period of account to which the claim relates. (For VGTR periods beginning before 1 April 2024, any amendment has to be made within one year after the tax return was filed).
How does the relief operate?
- For tax purposes, the development of each video game is a separate trade with its own start and end date. (The trade continues beyond the end of development to include the time-period during which the product is being sold).
- Qualifying expenditure (which applies during the development period only) is the lower of:
- 80% of total core costs
- 100% of the EEA/UK core costs (VGTR) or UK core costs (VGEC)
- Under VGTR there is a £1 million limit on subcontractor costs over the time-span of the development, with any balance of payments beyond that amount being treated as non-core.
- Under VGEC, expenditure incurred on transactions with connected parties is excluded up to the amount of the connected party profit (ie only the connected party’s base cost is allowed), unless the transaction is priced as if it were at arm’s length. In addition, any amounts treated as UK expenditure have to be ‘expenditure on goods and services that are used or consumed in the UK’. The cost of services performed overseas does not generally qualify as UK expenditure but for some ‘indirect services’ the situation is more complicated.
- An analysis of the core expenditure, split as above between the relevant geographical areas, needs to be supplied to HMRC, along with a breakdown of expenditure by category. The British cultural certificate (interim or final) also needs to be supplied. In addition, for VGEC, details of connected party transactions are required.
- VGTR relief is calculated on a cumulative basis, having regard to relevant income, expenditure and amounts claimed in other periods, consideration of future expected income and expenditure etc.
- For VGTR, the qualifying expenditure (the ‘enhancement’ element) is treated as a deduction in the corporation tax computation. After this, if a tax loss arises, some or all of this loss (up to the amount of the enhancement) can be surrendered for a payable Video Game Tax Credit (VGTC) at the rate of 25%.
- For VGEC, the qualifying expenditure is used instead as the basis of an expenditure credit, which is calculated at the rate of 34% of qualifying expenditure and forms part of the company’s taxable income. The expenditure credit can be used to settle the company’s corporation tax liability and then pay off other tax liabilities or surrender to group companies, with the balance available to be paid out to the company as a payable tax credit.
- There are restrictions on the utilisation of VGTR losses. During the development stage, they cannot be offset against other income or carried back. Once development has been completed, ‘losses not attributable to VGTR’ can be offset against total taxable profits of the VGDC in the current or previous period or can be surrendered to other group companies, but any remaining ‘losses attributable to VGTR’ (losses arising from the enhancement element) may be used only against future profits of the same trade. Once the trade has ceased, the company may be able to claim terminal losses, using specific VGTR rules which are different from normal terminal loss relief. As noted above, the ‘cessation’ of the trade is not the same as the ‘completion’ of the game, as the trade continues beyond the development phase to include post-completion income and expenditure.
- Similarly, as stated above, there are also restrictions on the use of tax credits arising under the VGEC scheme. In addition, the AIF requires information on VGEC discharges and surrender.
- In the company’s financial statements, tax repayments arising under VGTR should be included in the ‘below the line’ tax-charge/tax-credit in the P&L account. Conversely, payable tax credits under VGEC are included as an entry in ‘profit before tax’ (but that element is excluded from taxable profit, as the full expenditure credit is already included within taxable income, as noted above).
This is an overview of the main tax rules relating to the development of video games but there are also numerous additional complexities involved, so it’s important to seek specialist advice on how the rules apply to your specific circumstances.
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