The Video Games Tax Relief (VGTR) is one of the UK’s Creative Sector Tax Reliefs, which allows qualifying companies to claim a payable cash tax credit on eligible expenditure. This factsheet sets out a summary of the key points.
What video games are eligible?
A video game will be eligible if it is intended for supply to the general public and if it qualifies for a British Video Game Certificate under the Cultural Test Regulations. Applications for a certificate are submitted to the British Film Institute, and if successful, certificates are issued by the Department for Digital Culture Media & Sport (DCMS).
Additionally, at least 25% of the total “core” expenditure on the video game must be incurred in the European Economic Area (EEA).
Games produced for advertising or promotional purposes are excluded, as are games produced for the purposes of gambling.
Who can claim?
Only a company that qualifies as the Video Games Development Company (VGDC) in relation to the game in question will be able to make the claim – individuals, partnerships and limited liability partnerships are excluded.
To qualify as the VGDC, a company must either be incorporated in the UK or must have a UK permanent establishment that falls within the charge to UK corporation tax, and must:
- Be responsible for designing, producing and testing the video game;
- Be actively engaged in production, planning and decision making throughout the process; and
- Directly negotiate, contract and pay for rights, goods and services in relation to the video game.
There can only be one VGDC in relation to a video game. Where there is more than one company meeting the qualifying conditions, the company most directly engaged in the qualifying activities is considered to be the VGDC – this tiebreaker test is designed to prevent abuse.
If the company most directly engaged is not within the charge to UK corporation tax, then there is no VGDC.
Value of the tax credit
The VGDC can claim a tax credit equal to 25% of the core expenditure which is “used or consumed” in the EEA, up to a cap of 80% of total core expenditure. Thus, in cases where 80% or more of the total core expenditure is incurred in the EEA, the payable tax credit is capped at 20% (25% of 80%) of the total core expenditure.
Subcontracting
The VGDC can subcontract work, subject to a cap of £1 million per game.
The subcontracting limit will not apply to every payment made by the company to a third party, for example a licence payment made to another company for the use of software will not be applicable.
The cap is intended to limit the amount that can be paid where a part of the process of designing, producing or testing the game is outsourced to a third party, for example if the testing phase is outsourced or voice content has been lip-synched by a third party.
Cultural Test
This is a points-based test where 16 out of a possible 31 points are required to pass. The test is broken down into four sections:
Cultural content: 16 points available
This measures the British or European content of the video game. Points are awarded for:
- The setting of the video game in the UK or the EEA (or an undetermined location, such as a fictional world);
- The lead characters being British or EEA citizens or residents (or characters from an undetermined location);
- The video game being based on a British or European subject matter; and
- The dialogue being mainly in the English language (or one of the UK’s six indigenous minority languages).
Cultural contribution: 4 points available
This section measures the British cultural impact of the video game. Points are awarded for those elements of the game which demonstrate British creativity, British heritage or cultural diversity.
Cultural hubs: 3 points available
This section measures the use of the UK’s video game development facilities. Points are awarded for the use of UK facilities for conceptual development, storyboarding, programming, design, music recording, audio production or voice recording.
Personnel: 8 points available
This section measures the use of personnel with creative input into the video game. Points will be awarded for the use of UK or EEA citizens or residents in key video game development roles, including the project leaders, scriptwriters, composers, artists, programmers, and designers.
Glossary
‘Core expenditure’ is expenditure on designing, producing, and testing the video game. It does not include costs relating to original concept design, post-release debugging or postrelease maintenance.
‘EEA core expenditure’ is core expenditure on goods or services used or consumed in the EEA.
Key facts
The tax credit takes the form of cash payment from HM Revenue & Custom (HMRC) directly to the VGDC, with no intermediaries or syndication required.
There is no annual or overall cap on the funds available to the incentive from HMRC
The Video Games Tax Credit is bankable collateral for borrowing purposes.
No sunset date has been set for the incentive, although its operation will be subject to periodic review by the EU.
There is no cap on the amount of tax relief paid out on any individual game.
The BFI will issue ‘comfort letters ‘and interim certificates to provide companies with assurance on cultural points test qualification.
Interim tax credit claims are available to assist with cash flow or to assist with foreign currency matching.
How we can help
Saffery Champness can assist with all aspects of the Video Games Tax Relief. For more information, contact Moses Nyachae.
This factsheet is intended only as a summary of the relevant rules and is not intended to provide advice to any specific person. It is based on law and HMRC guidance at 1 March 2019.
