Video Games Tax Relief: the Government support scheme keeping UK developers at the cutting edge of a multi-billion pound industry

Video Games Tax Relief: the Government support scheme keeping UK developers at the cutting edge of a multi-billion pound industry

Last year, 350 claims were made for Video Games Tax Relief, totalling over £180 million. But businesses in the sector could be claiming much more as the industry continues to grow. Video game developers could be sitting on significant amounts trapped cash which could help their business level up. So, what is Video Games Tax Relief - why is it important and how do you pass the infamous ‘cultural test’? Sara Andrews, tax specialist at Haines Watts, explains.

Video games development and publishing was one of the sectors to excel in 2020: with more people than ever seeking home-based entertainment. The industry is set to grow bigger still over the next decade. In the UK alone, retail sales of over £4.22bn were recorded in 2020, with more than half the UK population now regularly playing video games.

In 2019, the video games industry was valued at over £110bn globally, with a projected annual growth rate of over 12%. Little wonder, then, that the UK Government wants to ensure the UK continues to compete on the global video games stage.

What is Video Games Tax Relief (VGTR) and why is it so important?

VGTR offers Government financial support in the form of a rebate against production spend. It’s a great way for studios to reduce the monetary risk they take when developing a game in the UK. You can either get it as a write off on your taxes or as a payable cash credit.

VGTA is often overlooked, either no claims are made at all, or companies are applying for the R&D tax relief, unaware that there is an alternative that might be better suited or provide a bigger cash pay-out. Working with a specialist advisor can help to determine which relief brings the biggest value to your business.

The relief works by providing an additional deduction for corporation tax purposes on qualifying expenditure at a rate of 80% of the total core expenditure. If, after applying the enhanced VGTR deduction there is a loss for tax purposes, then the loss can be surrendered for a tax credit at a rate of 25%. That means profitable companies could claim a tax credit of 15p for every £1 of qualifying core expenditure and loss making companies 20p for every £1.

You can put the cash back into your business, giving you more creative freedom to compete on a global stage. Whether that is to incentivise your team or take on more staff, move your games to a different platform or get your next project off the ground.

Who can claim?

It’s a corporation tax relief which means that it is available to UK companies developing one or more video games. The claim is made via a company's corporation tax return and only one company can claim against each individual video game. Game development needs to run through a Limited company to qualify, so entities such as sole traders or partnerships would not be ineligible.
The video game must also be intended for supply to the general public, certified as a British video game and at least 25% of the core expenditure must be EEA expenditure. While the uncertainty of Brexit looms over VGTR, the European Commission confirmed that it will stay in place until March 31, 2023.

Passing the video games cultural test

The first step in applying for VGTR is going through the British Film Institute (BFI) certification process or ‘Cultural contribution Test’ to prove that the project qualifies as British.

The cultural test covers four core areas:
- Is the game made in the UK or another EEA state?
- Does the games feature the UK or another EEA state?
- Does the game promote the UK or another EEA state?
Are the production personnel ordinarily resident in the UK or another EEA State?

What activity qualifies?

You may make several claims for each game during the production process, and one claim can also be made to cover several different games.

Qualifying expenditure covers costs incurred when designing, producing and testing the video game. Things such as initial concept work, advertising and marketing costs and game maintenance don’t qualify.

R&D or VGTR – which should you choose?

While you can’t claim R&D relief on the same project as VGTR, we always take a big-picture view and will work with you to ensure you apply for whichever relief is most beneficial to your business. With R&D, a company must be able to demonstrate that aspects of its project work involved the pursuit of technological advancements in the sector, which can be a complicated process.

Qualifying R&D activity could include developing new AI algorithms, improving the performance and stability of underlying technology, or testing new code in order to overcome technological uncertainties of different platforms.

R&D reliefs work by providing an uplift on qualifying activity to provide a tax deduction or cash refund. There are two different reliefs available; if you’re an SME you’re entitled to a 130% uplift on qualifying expenditure and if you’re a large company you’re entitled to claim 13% of your qualifying expenditure under the RDEC scheme.

Get in touch and find out how we could help you unlock trapped cash.

Our experts understand the video games industry and can help your business to grow and succeed. We make sure claims are right first time, which saves your time and energy. It also helps to prevent wasting time on costly HMRC enquires further down the line.