Companies whose trade is the production of video games could be entitled to claim Video Games Tax Relief (VGTR).
A company is eligible to claim if it is a video games development company (VGDC). The VGDC has to carry out most of the developing, planning, designing, testing and overall production of the video game.
VGTR can take the form of a reduction in corporation tax or as tax credits. On average the benefit is equal to 25% of the production cost. Both profitable and loss making VGDC can claim VGTR, consequently the relief is of great importance to the high risk sector.
Video Games Tax Relief example calculation can be found <here>.
So, for tax purposes, what qualifies as a video game?
For a video game to come under the umbrella of creative industry tax reliefs it has to be a game developed in the form of software, played on an electronic device such as a TV, portable machine, mobile, etc. This can also include the development of a game’s soundtrack.
A key qualifying feature is that there needs to be an uncertain outcome for the product to be a game; this means that the player’s actions must have a meaningful result in the outcome.
It is important to take care over a claim and, if unsure, to seek expert advice — costs can only be made eligible for one of HMRC’s reliefs and so expenditure that forms part of a R&D tax relief claim will not qualify for VGTR.
Who can claim Video Games Tax Relief?
Corporation tax reliefs for the creative sector are available to UK companies, with companies becoming VGTR-eligible if they conduct themselves in the video game industry. To qualify, the game needs to meet certain conditions:
- intended for supply to the general public
- a British company has developed the game
- 25% or more of the expenditure has to be incurred within the European Economic Area (EEA)
It is important to clearly apportion the relevant costs between EEA and non-EEA costs. This apportionment applies to goods and services at any stage in the development process.
Who can’t claim?
There are specific circumstances for when a claim cannot be made. Video games that have been developed for the purposes of advertising, promotion or gambling do not qualify for creative tax reliefs at all.
Expenditure relating to video game hardware or costs when the game is finished and ready for release to market, such as advertising, marketing, and entertaining, do not qualify for any relief whatsoever as they are not considered to be core expenditure.