Harbottle & Lewis offer a detailed FAQ on the Games Development Tax Relief for UK games developers
What is the real value of the relief?
The real value of the relief for a game wholly developed in the European Economic Area (EEA) is 20% of qualifying spend, and not 25% as has been reported in certain places. By way of explanation, a games company is entitled to claim 25% of its EEA qualifying spend on a game), subject to a maximum of 80% of all qualifying spend (whether incurred in the EEA or outside the EEA). Qualifying spend in short, means spend on designing, producing and testing the game, excluding debugging and maintenance costs and the costs of designing the initial concept.?By way of a very simple example, if a game has qualifying spend of £1m which is entirely spent in the EEA, the value of the relief will be £200,000, being 20% of £1m (i.e. 25% of 80% of £1m).
Is there a limit on qualifying spend?
No, there is no limit on how much qualifying spend can be incurred which means that the relief is available however high the qualifying spend.
Is there a cap on sub-contracting?
Yes, only sub-contracting costs of up to £1,000,000 will be included in the calculation of a game’s qualifying spend. This was introduced following the Government’s discussions with the EC during the EC’s year-long investigation.
Is there a minimum spend threshold?
No, there is no minimum spend threshold. This is a welcome point, since it means that games companies developing low budget games will be able to qualify for the relief, unlike in certain other jurisdictions such as France where there is a threshold to entry of EUR150,000 of development costs.
Is there a minimum amount of qualifying spend that needs to be EEA spend in order for a game to qualify for the relief?
Yes, at least 25% of the qualifying spend on the game must be EEA expenditure.
Might the relief lead to ‘co-productions’ of games across multiple territories?
One subtlety of the relief is that although it prohibits more than one games company from claiming the UK relief for any one game, it does not preclude another non-UK company that has co-developed a game from also seeking relief under any other video games tax relief which may be available to it in another jurisdiction in which it is registered. ?In the film industry, a practice has developed of co-productions where a UK producer and one or more overseas producers jointly co-produce a film in order to obtain relief in each of the co-producers’ jurisdictions. It will be interesting to see if a similar practice might develop for games. The way the relief works appears to favour a ‘co-production’ structure as illustrated by the following example.?If in the example under the first bullet point above the total qualifying spend was still £1m but only £800,000 of that spend was incurred in the EEA and the remaining qualifying spend of £200,000 was incurred outside the EEA in say North America by a local co-producer, the UK games company could claim relief in the UK of 25% of £800,000 (i.e. 25% of 80% of the total qualifying (i.e. worldwide) spend incurred) and the North American co-producer could, potentially, claim relief under any applicable local video games tax reliefs that are available to it. Therefore, there may be benefits in structuring the game as a co-production depending on the costs of development and the availability and rates of relief in the co-producing country.
Can a games company claim the relief on post-release spend?
Yes, in addition to pre-release qualifying spend, the relief will apply on all direct development spend (that is qualifying spend) incurred after the release of a game (including relevant quality assurance), excluding service maintenance costs. This is good news as it supports the “games as a service” business model that is increasingly important in the current market, and means that DLC will qualify for the relief.
How does a game qualify for the relief?
In order for a video game to qualify for the relief, the following main criteria will need to be met:
- It must meet the definition of a “video game”. The definition of “video game” is left to its ordinary meaning. The aim here is a flexible, simple definition which will encompass all forms of video games, including mobile and tablet games and other formats which are yet to be developed.
- The entity seeking relief must be subject to UK corporation tax and must be directly involved in the production of the relevant video game. The entity must be responsible for the design, production and testing of the game and must be actively involved in the decision making during this process. It must also directly pay and contract for the goods and services relating to the game. Only one entity can claim the relief.?There will be various factors to consider in deciding whether to use an existing trading entity to claim the relief for all of a studio’s games or to set up a special purpose vehicle for each separate game, but it is likely that establishing SPVs will become the norm for a number of practical cashflow and commercial reasons.
- The video game must be intended for supply to the general public. The test is applied at the time when the game's production activities begin, and it is irrelevant if the intention changes later in the process.
- The video game should not fall foul of any of the proposed exclusions. These include games made with a primary purpose of advertising or gambling but games with some product placement or in-game advertising will still be eligible for the relief. Companies will also have to self-certify during the application process that a game does not contain any pornographic or other extreme material.
- The video game must satisfy the Cultural Test. See here.
Has the Cultural Test changed from the previous version issued in 2013?
The final Cultural Test is broadly the same as the version contained in the draft legislation issued in 2013, except for two new rules which refine the Test: the Undetermined Points Rule and the Golden Points Rule, explained briefly below. The Test is a points based test. A video game will pass the Test if it is awarded at least 16 points out of a possible 31. Points are allocated for each of the following main criteria: (i) Cultural Content (16 points), (ii) Cultural Contribution (4 points) (iii) Cultural Hubs (3 points) and (iv) Cultural Practitioners (8 points).
Where is the full Cultural Test found?
?The BFI issued its draft guidance to the Test last week, which also contains what is expected to be the final Test. Such guidance can be found at: http://www.bfi.org.uk/film-industry/british-certification-tax-relief/cultural-test-video-games. Although this guidance still needs to be finalised following the release of the final legislation relating to the relief later this year, it appears very unlikely that the final guidance will be any different in any material respects, so games companies can hopefully be confident that the draft guidance will apply (particularly as the BFI will already be providing comfort letters for games that satisfy the Test based on the draft guidance).
What is the Undetermined Points Rule in the Cultural Test?
?When the draft Test was published in 2013, games could be allocated points not only if they were set in, or had characters from, the UK or Europe but also where they were set in, or had characters from, an undetermined location. This was to reflect the fact that many games have imaginary settings and characters. The position has now been refined by way of the Undetermined Points Rule, the effect of which is that a game can still obtain points where it is set in, or has characters from, an undetermined location, but only if the game satisfies certain other criteria set out in the Test demonstrating that it is culturally British or European.
What is the Golden Points Rule in the Cultural Test?
The Golden Points Rule is designed to ensure that there is sufficient emphasis on cultural content (which is important to satisfy the EC that the relief falls within the cultural exception to State Aid). Without the Golden Points Rule, it would be possible to pass the Test if a video game scores all 15 of the points available in sections C (cultural hubs), D (cultural practitioners) and A4 (language of dialogue or voice-over) and only 1 further point from one of the remaining sections. The effect of the Golden Points Rule is that a game must achieve a minimum number of points in the cultural content sections (Sections A1-A3) in order to pass, and the minimum number of points required will depend on the section concerned.
How does the relief interact with the R&D tax relief?
The relief cannot be claimed in respect of any expenditure that can qualify (or has already qualified) for R&D relief.
Why has it taken this long for the relief to be approved?
The draft UK legislation for the relief was originally published in December 2012. The Government’s intention was to implement the relief in April 2013, but it was held up by an EC investigation into whether the relief was consistent with state aid rules, which has finally been resolved.