Some video games companies are in the enviable position of being able to choose between claiming Video Games Tax Relief (VGTR) or R&D tax relief – both of which can generate loss making companies a cash tax credit.
For one client we recently worked with, we were able to claim both in one period on different games, after calculating on a project by project basis which would give the best result. This client benefitted from cash VGTR credits amounting to £70k, and an R&D tax credit of £59k!
R&D tax relief v Video Games tax relief
It’s possible that the development of a video game could incorporate activities which would qualify for both R&D and VGTR; however legislation prevents a company from claiming both reliefs on the same “project”. It is therefore important to consider which relief would give the best result for the company. Unfortunately, the answer isn’t always obvious.
On the face of things, it would seem that R&D tax relief would give the greatest benefit…
R&D tax relief
SMEs can claim a 230% deduction in relation to qualifying expenditure on R&D – namely staff costs, consumables and subcontracted R&D. If the SME is loss making it can surrender the loss up to 230% of the qualifying expenditure for a tax credit at 14.5%. For example if a loss making SME incurred qualifying expenditure of £100,000 the maximum tax credit which could arise would be:
R&D tax credit: £100,000 x 230% x 14.5% = £33,350
Video games tax relief
VGTR was introduced on 1 April 2014 and only “core expenditure” incurred on or after that date spent in the EEA can qualify. Core expenditure is expenditure on designing, producing and testing the video game. Companies can claim an additional deduction of 80% of Core Expenditure. If the game (which must be treated as a separate trade) is loss making the company can surrender a maximum of the 80% additional deduction for a 25% tax credit. For example, if core expenditure amounted to £100,000 the maximum tax credit which could arise would be:
VGTR credit: £100,000 x 80% x 25% = £20,000
Real life example
The client that benefited from a total of £129k in tax worked on the development of nine video games within their accounting period (which straddled the 1 April 2014). An element of the development works on all nine games qualified for R&D tax relief, however a number of the games might also have qualified for VGTR. Whilst working through the comparison calculations and the process for claiming VGTR, we made the following observations:
- We found that across the different projects the average qualifying “Core Expenditure” for VGTR amounted to double the amount which would have qualified for R&D tax relief. This might indicate that VGTR on the whole would give the best result (however, this wasn’t always the case).
- Where VGTR was claimed, the taxable profit/loss for that specific game for the period was deducted/added back to the results of the “main trade”. This therefore impacted on the losses available to surrender by the company for an R&D tax credit.
- VGTR could not be claimed in relation to games for which SME R&D tax relief had been claimed on in earlier periods.
- To maximise a cash tax credit in a particular period it may be necessary to consider a number of different claim combinations.
- To be able to make a VGTR claim the company must apply to the British Film Institute (BFI) for certification that the video game is culturally British. We found that the BFI were extremely approachable when we contacted them to clarify a few points. However, where possible this application should be made early to avoid delays.
For our client, generating the cash benefit of the tax credit was the most important consideration and we found that the optimum result for the period was generated by claiming VGTR on two games only. The answer may have been different if their priority was to maximise the cash benefit over the whole development period. Also, had VGTR been available for the whole period the answer may have been different again!
In summary, the new VGTR rules are not straightforward and there are lots of different elements and interactions to consider. However, we successfully guided our client through the BFI certification process for the two games, with the client receiving the cash tax credits within two weeks of the certificates being sent to HMRC.
Client feedback: “Thank you for all your help with the BFI applications, you’ve been super quick and efficient and a pleasure to work with. It’s very much appreciated.”
If you would like to discuss VGTR or R&D tax relief, please do not hesitate to call Louise Barker, Peter Tindale or Alastair Wilson on 0191 285 0321.