Video Games Tax Relief (VGTR) and R&D tax reliefs are valuable reliefs
Both Video Games Tax Relief (VGTR) and R&D tax reliefs are valuable reliefs allowing companies to potentially claim a cash repayment from HMRC for part of their development costs, or claim an additional deduction against their taxable profits, if profitable.
Video Games Tax Relief
The Video Games Tax Relief (VGTR) allows eligible companies engaged in the development of qualifying video games to claim an additional deduction against their taxable profits and where that additional deduction results in a loss, to surrender those losses for a payable tax credit.
To qualify for relief the video games development company must be developing a game intended for supply to the public, that it is certified by the BFI as a culturally British video game, and 25% of core development expenditure must be UK/EEA expenditure.
For the game to qualify as culturally British, the studio must apply for a certificate from the BFI as administrators. This is a 31-point assessment and the studio must achieve 16 points to pass. Points are awarded for those elements that contribute to the overall cultural value of a video game in: Cultural content, Cultural contribution, Cultural hubs and Personnel.
Qualifying expenditure covers areas such as designing, production and the development of the game and for goods and services used or consumed in the UK/EEA. Ineligible expenditure includes finance costs, audit fees, entertaining, hospitality, publicity and promotion, etc.
VGTR is claimed via the company’s tax return. The relief is worth either:
- an additional deduction of up to 80% of core development expenditure from the company’s profits, lowering the company’s corporation tax liability.
- a payable tax credit worth up to 20% of total core expenditure on the game when the project makes a loss, which usually will be until a game is released and starts selling.
VGTR has been a huge success story for the UK video games industry. According to figures released by the BFI for 2021/22, 200 games received final certification, with a UK spend of £339m; 160 games received an interim certification, with a UK spend of £939m. Although there are plenty of studios in the UK taking advantage of VGTR, many more could still take advantage of this valuable relief. We strongly recommend that any studio based in the UK reviews their development work to see if they qualify.
R&D tax credits
Research and Development (R&D) tax relief criteria is more prescriptive than that of VGTR. R&D relief is available where a company is seeking to achieve an advance in science or technology. In broad terms for the video games industry this will be where a studio is creating a technology platform which does not currently exist. The studio will have to solve a complex software engineering challenge to complete the project. This could be a bespoke game engine developed by the studio, or an online platform for hosting the game if a general one is not available to the studio.
There are two schemes available:
- The SME (small and medium enterprise) scheme
- The Research and Development Expenditure Credit (RDEC) scheme
A company will qualify for the SME scheme if it has less than 500 staff and a turnover under €100m (or balance sheet total under €86m). There are other caveats if the company is in a group.
If the company qualifies under the SME scheme it will get an extra 130% deduction of the value of its R&D expenditure against its taxable profit for that year, reducing the amount of corporation tax it must pay. If the company is loss making it can choose to surrender this R&D loss for a tax credit payable in cash at a rate of 14.5% of the surrenderable loss.
For the less generous RDEC scheme, a taxable credit of 13% of the R&D expenditure is given which can be paid to the company if it is loss making.
Costs that qualify for the R&D schemes include staffing costs, costs of software directly employed in R&D and up to 65% of subtractor costs (you cannot claim for subcontractor costs under the RDEC scheme).
A common misconception is that a studio cannot claim for both VGTR and R&D relief in the same accounting period. This is not the case, and a studio can claim for both, but there are very complicated rules to follow. A company cannot claim VGTR and R&D tax relief under the SME scheme for the same project (e.g. a game) but you can for separate projects. You can claim under the RDEC scheme for the same project, but any cost that qualifies for RDEC must be included in that claim even if it is eligible under VGTR too. We recommend discussing this with a specialist before going ahead. It is vitally important to identify which expenditure qualifies for which relief, and keep good enough records to demonstrate this.
For more information on tax reliefs available to your studio, or to discuss whether you may qualify, please contact us.