By Emma Lewis, Myriad Associates
Latest statistics from HMRC have now been published around creative sector tax reliefs with Video Games Tax Relief (VGTR) claims booming. In fact, the data shows that over £197 million was paid out in VGTR for the year to 31st March 2022, up 4% from the year before.
The VGTR scheme is incredibly generous and with ever-increasing business costs it’s no great surprise that claims are increasing fast. In fact, over £830 million has been paid out since VGTR was launched eight years ago.
The purpose behind VGTR is to encourage UK games companies to invest in video games development, shoring up the UK’s position as a serious competitor in this cutting-edge, global market. Indeed, VGTR has been shown to play a crucial role in nurturing skills where traditionally 80% of the workforce is based outside of London.
VGTR allows qualifying games development companies to claim a deduction against their taxable profits or receive a cash payment. This can be worth up to 20% of the core production costs of a game, or 25% for cash payments for loss-making companies.
Which companies are eligible for Video Games Tax Relief?
To claim VGTR your company has to be classed as a Video Games Development Company (VGDC). It must also be subject to Corporation Tax in the UK. The scheme does not extend to individuals or partnerships.
Only one VGDC can exist per game and each video game is treated separately. Where two companies have developed a single game, only the one which has been most heavily involved in eligible activities can receive the VGTR relief.
How is a games company classed as a VGDC?
To be classified as a VGDC, a company must have:
- Had responsibility for designing, producing and testing the video game.
- The final say in the negotiation, contracting and paying for goods, services and rights that relate to the video game.
- Actively engaged in planning and decision-making during the design, production and testing of the video game.
Although activities can be subcontracted to third parties, a limit applies to qualifying payments made to them. Subcontractors are not likely to be accepted as VGDCs.
Video games must also pass the BFI’s Cultural Test.
What is classed as a video game for VGTR purposes?
For the purposes of claiming VGTR, a video game must be an electronic game (software) that includes graphics, animation, music and sound effects. It also must be playable via a video device such as a TV, monitor, tablet, mobile phone or other portable gaming device. The storylines, outcomes and overall control of what happens in the video game must also be the desires of the player. In other words, the direction and outcome of the game and actions of the character(s) must be directly controlled by the person playing the game.
Bear in mind that the hardware required to play cannot be claimed for under VGTR. If the video game is designed to be played on a specific console – such as a Playstation or Xbox for example – the development of the hardware cannot be treated as part of the video game development.
What types of expenditure will qualify for VGTR?
Only costs that are ‘core expenditure’ relating to the video can be covered by VGTR. This is things like designing, producing and testing the video game. However, you won’t be able to claim for costs involves in debugging a finished game for example, or any maintenance needed on a completed game.
Other ineligible costs under VGTR include:
- Expenditure relating to games hardware or costs once a game is finished and ready to be supplied to the public. This includes advertising, entertaining and marketing costs on a completed game.
- Any bank interest or charges incurred during the course of the project.
- Auditing costs
Remember that expenditure incurred during the creation of an asset can be classed as revenue. Capital Allowances may apply for other capital expenditure in the usual way.
Chris Dowsett, Business Analyst at Myriad Associates, said: “Video Games Tax Relief is one of the most generous reliefs around, boosting creativity, innovation and employment. Any video games development company of any size can be eligible as long as they’re UK based.
“The real beauty of VGTR is that you can either claim for the tax relief at the end of your project, or part way through. In these strained financial times, this can mean a cash injection right when it’s needed, making a huge difference particularly for smaller developers. There’s also a wider range of costs available to claim, e.g rent and office costs that aren’t claimable under R&D Tax Credits, which is why, when applicable, it’s often worth claiming both.”
Video Games Tax Relief is clearly having an impact with £197 million paid out over 330 claims in 2021-22 alone. It’s cash that could be ploughed into a brand new project so don’t let your company miss out.