Video Games Development Company Relieve

HMRC will give you 20% of your development cost in cash!

Video Games Tax Relief is part of the creative industry tax reliefs that allows a qualifying company to claim a larger deduction, or claim a payable tax credit when calculating their taxable profits. Video Game Tax Relief is effective for expenditure incurred on or after 1 April 2014.
The Video Games Tax Relief has been introduced in order to allow UK game developers to compete internationally on a level playing field, promote investment, job creation and support the production of culturally

British video games.

The company is entitled to claim Video Games Tax Relief if:

  • The video game must be European and
  • The video game is intended to supply and
  • At least 25% of core expenditure is on goods or service that are provided from within the European Economic area (EEA)
To qualify as a British video game it must be certified as British by the Secretary of State. To achieve this certification the video game must pass the Cultural Test for Video Games. This is a points based system and is administered by the British Film Institute (BFI). The video games development company must make an application for a British Video Game certificate via the BFI. An application can be made for an interim certificate so that the company can claim the tax relief in advance of completion of the game. This allows the company to claim Video Games Tax Relief on costs incurred so far if development spans over more than one accounting period.
A second application is then necessary after the video game is completed, in order to be granted a final certificate so the tax relief claim can be finalised. The cultural test is set out at the end of this guide and generally, a company only needs to achieve 16 points out of a possible 31 points. There are, however, some exceptions to this.

How to Qualify:

Subcontracting:

Subcontracting does not prevent the company from being a video games development company for tax purposes, but the company must still retain overall responsibility for these activities and have active involvement in them.
There can only be one video games development company in relation to each video game. Subcontractors will not qualify as a video games development company as they are only responsible for delivering an element of the overall development.
It is possible that more than one company could meet the requirements for qualifying. In such circumstances, the company most directly engaged in the activities would be treated as the video games development company in respect of that game.
Responsibilities
A video games development company must be responsible for designing, producing and testing the video game. It must be actively engaged in planning and decision-making during the design, production and testing; and directly negotiate, contract and pay for rights, goods and services relating to the video game. The company does not need to have direct responsibility for every aspect of all of these activities and indeed it is common industry practice for certain elements of a video game to be subcontracted to third parties.
Qualifying expenditure
Design – Design or pre-production is the stage that typically occurs once the decision to proceed with the video game has been taken, but prior to production.
Production – Production is the stage at which the game is developed. Designs and prototypes from the pre-production stage are developed to the point at which they conceivably may be ready for release, subject to testing.
Testing – This stage involves testing both technical elements and the entertainment value of the story, levels and game play. It is possible that
a video game will return to the production stage in order to rectify issues. The development process will inevitably return to the testing stage after this backward step. At the end of the testing stage, the game is considered to be ready for supply to the general public. The separation between testing and debugging is usually clearly signified by the release of the game. Subcontracted costs that fall within the definition of core expenditure are eligible, but are subject to a cap of £1 million per game.
Excluded expenditure
Video Games Tax Relief is only available on core expenditure. Activities designing the initial concept of the game are not core expenditure. Debugging a completed game or maintenance is also not core expenditure.
A video games development company may claim an additional deduction in its corporation tax return based on its qualifying expenditure. The additional deduction is calculated
on the lower of:
  • Core expenditure incurred in the EEA; and
  • 80% of core expenditure incurred in relation to that video game.
Examples:
1. A video games development company incurs core expenditure of £2 million of which all is EEA expenditure. Therefore the additional deduction is the lower of:
  • Core expenditure incurred in the EEA – £2 million; and
  • 80% of the core expenditure incurred by the company – £1.6 million
Therefore the additional deduction available is £1.6 million.
2. A video games development company incurs core expenditure of £2 million of which 70% is EEA expenditure. Therefore the additional deduction is the lower of:
  • Core expenditure incurred in the EEA – £1.4 million; and
  • 80% of the core expenditure incurred by the company – £1.6 million
Therefore the additional deduction available is £1.4 million.
Payable Tax Credits
A video games development company may claim a payable tax credit in an accounting period where it has a surrenderable loss at the rate of 25%. The company’s surrenderable loss is the lower of:
• The company’s available loss for the period in the separate video game trade; and
• The enhanceable expenditure.
Example
The surrenderable loss is the lower of:
  • The available loss of £3.1million; and
  • The available qualifying expenditure of £1.6 million.
In this example the video games development company can surrender part of their loss to a maximum of £1.6 million. The amount of the payment is the payable credit multiplied by the amount of loss surrendered. The payable credit rate is 25%. The video games development company would receive a payment of £400,000. The remaining £1.5 million of unrelieved losses would be carried forward to future accounting periods. Rules around losses are complex and careful consideration must be given as to the use of any losses arising. Where a video games development company has a trading loss before the video game is completed, this loss can only be carried forward to be relieved against profits of the same trade.

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