The Government announced in March 2023 a significant update in the tax relief system for video game companies, with the replacement of Video Games Tax Relief (VGTR) by the new Video Games Expenditure Credit (VGEC). This transition aims to modernise and simplify the process while aligning it with other creative sectors.
What are the key changes for video game companies?
Replacement of Existing Tax Reliefs
The current VGTR will be replaced by VGEC which will follow a system akin to the Research and Development Expenditure Credit (RDEC). Instead of deducting tax relief from profits, companies will receive an above-the-line tax credit based on qualifying production expenses, this credit will be taxable.[1] This means that instead of companies reducing their tax bills by subtracting certain expenses from their profits, companies will receive a special ‘above-the-line tax credit’ for specific production expenses. This credit will be granted before calculating their taxes, but companies will need to include the credit amount as taxable income, just like any other earnings.
Eligibility and Credit Rates
Video game companies will be eligible for VGEC, and the credit rate will be 34%. This means that the above-the-line tax credit, which companies will receive for qualifying production expenses, will be equivalent to 34% of those expenses.[2] For example, if a company incurs £100,000 in qualifying production expenses, it will receive a tax credit of £34,000 (34% of £100,000). This credit will directly reduce the amount of taxes they owe, as it is deducted from their total tax liability.
Qualifying Expenditure
To claim VGEC, companies must have a qualifying expenditure that is ‘used or consumed in the UK.’ This refers to expenses directly related to the development and production of eligible video games within the UK.[3]
Subcontracting Cap Removal
The new VGEC regime removes the subcontracting cap that was in place for VGTR. This means companies can claim the credit on qualifying expenses incurred through subcontractors without any limitation.[4]
Net Value of Relief
VGEC will be received net of tax deductions at the main rate of corporation tax, which is currently 25%. When a company receives VGEC, they will get it after their taxes have been taken out at the main rate of corporation tax, which is currently 25%. This means that the Government will first deduct 25% of the credit as taxes, and the remaining amount will be the actual benefit the company gets. In this case, after the tax deduction, the net value of the relief will be a credit of 25.5%. So, for every VGEC pound they receive, they will get to keep 25.5 pence after the taxes are taken into account.
Apportioning Expenditure
The mechanism for apportioning expenditure between the UK and non-UK should be on a ‘just and reasonable’ basis.[5] This means that when a company has expenses that are related to both the UK and other countries, they need to divide or split those expenses fairly and reasonably between the UK and the other countries. If a company has some costs that are incurred both in the UK and in other places around the world, they need to figure out how much of those costs should be attributed to the UK and how much to the other countries. Companies should do this in a fair and sensible way by making sure the division of expenses accurately represents the actual costs incurred in the UK and other countries, without being unfair or biased. This ensures the proper distribution of expenses for tax and accounting purposes.
80% Cap Retention
The ‘80% cap’ limits the amount of VGEC companies can claim for their UK Core expenditure. UK Core expenditure refers to the money a company spends on video game development activities that take place within the UK.[6] According to this rule, if a company spends more than 80% of its total core expenditure on activities within the UK, it can only claim VGEC for up to 80% of that UK Core expenditure. In other words, the company can’t claim VGEC for the portion of UK Core expenditure that exceeds 80% of their total core expenditure. For example, if a company’s total core expenditure is £100,000 and they spend £90,000 of it within the UK (more than 80%), they can only claim VGEC for 80% of the UK Core expenditure, which is £72,000. The remaining £18,000 (the amount above the 80% cap) won’t be eligible for VGEC.
Minimum UK Core Expenditure
UK core expenditure must be a minimum of 10% of the total core budget to qualify for VGEC.[7] To qualify for VGEC, a company must spend a minimum of 10% of its total core budget on UK core expenditure. If a company’s total core budget for developing a video game is £100,000, to be eligible for VGEC, they need to spend at least £10,000 (10% of £100,000) on activities related to the development that takes place within the UK.
Exclusion of Payments for Goods/Services from Connected Parties
A new provision will exclude payments for goods/services supplied by a connected party to the extent they exceed that supplier’s own costs incurred in relation to the supply.[8] When one company pays another company for goods or services, like licensing fees or shared employee costs, they may not get full tax relief on the payment. The tax relief will only apply to the amount that matches the supplier’s actual costs. Any extra amount paid will not be eligible for tax relief. This may impact certain types of supply, such as licensing fees and staff recharges between connected parties.
Transition Period
The expenditure credits will be available to claim from 1 January 2024. New productions must claim under the new expenditure credits from 1 April 2025. Companies currently benefiting from VGTR can continue to do so until VGTR ceases on 1st April 2027. From that date onwards, Companies will need to claim under the new VGEC regime.[9]
Compliance and Monitoring
Video game companies must ensure compliance with the new legislation, accurately calculate qualifying expenses, and maintain proper records to support their claims. The Government will monitor the scheme through information collected from tax returns.
How should video game companies prepare for the changes
Video game companies must take proactive steps to prepare for the upcoming changes in legislation.
Firstly, they should familiarise themselves with the provisions of the Draft Finance Bill, focusing on alterations in tax relief and VGEC eligibility criteria. Assessing their eligibility for VGEC is crucial, understanding the specific definitions and ensuring their activities fall within qualifying production guidelines. It is essential to review financial and accounting systems for accurate calculations of qualifying expenses and income from qualifying productions. Additionally, considering the option of treating qualifying production as a separate trade for tax purposes and understanding credit rates applicable to specific productions is vital. Being aware of anti-abuse rules, updating contracting practices, and planning for the transition from existing schemes to VGEC are also critical steps. Ultimately, video game companies must be prepared for monitoring and report in compliance with the new regulations to receive the intended benefits of the expenditure credit.
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[1] HMRC, Policy Paper: Reform of audio-visual creative tax reliefs, 18 July 2023, Link
[2] HMRC, Policy Paper: Reform of audio-visual creative tax reliefs, 18 July 2023, Link
[3] HM Treasury, Draft Finance Bill Measures, 18 July 2023, Link
[4] HMRC, Policy Paper: Reform of audio-visual creative tax reliefs, 18 July 2023, Link
[5] HM Treasury, Draft Finance Bill Measures, 18 July 2023, Link
[6] HMRC, Policy Paper: Reform of audio-visual creative tax reliefs, 18 July 2023, Link
[7] HM Treasury, Draft Finance Bill Measures, 18 July 2023, Link
[8] HM Treasury, Draft Finance Bill Measures, 18 July 2023, Link
[9] HMRC, Policy Paper: Reform of audio-visual creative tax reliefs, 18 July 2023, Link
