The Covid-19 pandemic has fuelled a boom in the UK’s video game industry. A report by The Association for UK Interactive Entertainment (“UKIE”) published in March 2021 valued the industry at a record £7 billion in 2020, making it the largest in Europe[1].
To help the UK gaming industry compete in the global marketplace, the UK government introduced Video Games Tax Relief (“VGTR“) in April 2014 to incentivise video game development companies (“VGDCs“) to produce games in the UK. Since VGTR’s introduction, £444 million of tax relief has been paid out in relation to the production of 1,375 video games, the development of which has, according to HMRC, contributed £3.7 billion of spending to the UK economy[2].
What is Video Games Tax Relief?
VGTR is one of the UK’s eight creative industry tax reliefs, which an eligible VGDC can claim to reduce its UK corporation tax liability. By claiming VGTR, a VGDC can make an additional deduction for qualifying expenditure when calculating the profit or loss it makes from the creation of an eligible video game. If the video game makes a profit, the additional deduction helps to reduce the VGDC’s taxable profits on which UK corporation tax is paid. If the video game makes a loss, or if the additional deduction causes the video game to become loss-making, the VGDC can surrender the loss to HMRC for a payable tax credit at a rate of 25% of the qualifying expenditure.
The additional deduction for qualifying expenditure is expenditure incurred by the VGDC in creating the video game that is the lower of:
i.) 80% of the total core expenditure; or
ii.) the amount of core expenditure on goods or services that are provided from the UK or from the European Economic Area (“EEA“).
Core expenditure is defined as expenditure incurred during the creation of the video game, such as spend on design, development or testing. It does not include expenditure on designing the game’s initial concept, nor does it include expenditure incurred when debugging or carrying out maintenance on a completed video game. In addition, marketing, financing, print and advertising costs are all non-core expenditure and are not eligible for inclusion towards VGTR.
Regulations came into effect on 31 December 2020 when the UK left the European Union expanding all references to the “EEA” to the “EEA and UK”, but no further changes are currently proposed to reflect the UK’s departure from the EU.
Who can claim VGTR?
To claim VGTR, VGDCs must meet the following criteria:
- The VGDC must be the company that produces the video game. The company must:
i.) be responsible for designing, producing and testing the video game;
ii.) be actively engaged in planning and decision-making during the design, production and testing; and
iii.) directly negotiate, contract and pay for rights, goods and services relating to the video game.
- However, the VGDC does not need to have direct responsibility for every aspect of the above activities. Provided that the VGDC retains overall responsibility for the activities and is actively involved, it may engage subcontractors and still quality for VGTR. Note that subcontractors cannot claim VGTR as they are only delivering an element of the video game’s development. For each video game, there is also a £1,000,000 limit on the amount of sub-contracting costs that can constitute eligible qualifying expenditure.
- Only one VGDC can claim VGTR on any video game. Where multiple eligible VGDCs are involved in the creation of a video game, the VGDC which is most directly engaged in the activities described above is the one that is eligible to claim VGTR. To claim VGTR, co-developers need to ensure that at least one company is an eligible VGDC and should avoid scenarios in which one company exclusively designs the game, whilst another company develops and tests it. To avoid this pitfall, co-developers can incorporate a joint venture company to act as the VGDC.
In addition, an eligible VGDC can only claim VGTR on video games that meet the following criteria:
- The game produced must be a video game. The term “video game” is given its common meaning, being an electronic game that is played through a video device and includes traditional boxed video games, downloadable games and games for smart devices.
- At least 25% of the core expenditure on the video game must be on goods or services provided from within the UK or the EEA. As set out above, core expenditure includes spend on design, development and testing.
- The video game must be intended for supply to the public.
- The video game must be certified as British by the British Film Institute (“BFI“). To gain British certification, the video game must score at least 16 points out of a possible 31 points to pass the BFI’s British cultural test. The BFI’s cultural test comprises four categories:
(i.) up to 16 points are awarded for “cultural content”. This category assesses factors such as the video game’s setting and awards points if the game is set in the UK or an EEA country;
(ii.) up to 4 points are awarded for “cultural contribution”. This category assesses whether the game reflects British creativity, heritage and diversity;
(iii.) up to 3 points are awarded for “cultural hubs”. This category assesses how the game was produced and considers factors such as whether 50% of the design took place in the UK; and
(iv.) up to 8 points are awarded for “cultural practitioners”. This category assesses the nationalities of staff who played leading roles in creating the game. Points are typically awarded if at least one in three staff members holding a particular type of leading role (e.g. scriptwriters, software developers, music composers, etc.) are UK or EEA citizens.
- Video games that are produced for advertising or promotional purposes, or for the purposes of gambling, are ineligible. However, video games that contain advertising are not necessarily ineligible, nor are games which include an element of gambling, unless there is a facility to pay out actual cash.
How to claim VGTR
To claim VGTR, eligible VGDCs need to first obtain a British cultural certificate from the BFI. For video games that are in development, the BFI will issue an interim certificate and then issue a final certificate once production has finished. The BFI will normally issue a certificate within 28 days of the receipt of a fully completed application.
Once a British cultural certificate has been obtained, a VGDC can claim VGTR on its company tax return (CT600) that is filed with HMRC for the relevant accounting period. When submitting the tax return to HMRC, VGDCs should include with it:
(i.) the British cultural certificate (either interim or final);
(ii.) a statement of core expenditure for the video game in question split by EEA and non-EEA expenditure; and
(iii.) a breakdown of expenditure for the video game in question by category.
VGDCs can make, amend, or withdraw claims to VGTR up to one year after the company’s filing date.
How can we help?
If you have any question about VGTR, or any other tax issues, then please don’t hesitate to get in touch. Our video games team can also support you on contractual matters, intellectual property, financing, M&A, data privacy, merchandising and consumer protection, employment, payment and financial services (including virtual currencies) and a range of other areas.
[1] See UKIE UK Games Industry Market Valuation 2020.
[2] As at 13 August 2020. See HMRC’s Creative Industries Statistics August 2020.
