Alan Moss and Mark Phillips of law firm Harbottle & Lewis share their insight into the games tax relief, and how developers can make the most out of the help the Government is offering
The waiting has ended and the European Commission (EC) has finally granted full approval to the UK video games tax relief with effect from April 1st 2014.
As the dust settles, an interesting period begins as many studios work out how best to access the relief and what steps to take now. Brief answers to some of the most frequently asked questions on the relief are set out right here. However, two areas of particular interest are (1) how the relief may be used as a source of finance for a game and (2) how the much discussed Cultural Test will work.
The relief as a source of finance
Since the inception of the UK film and TV tax reliefs, film and TV producers have been using them as a source of finance for their films and programmes (rather than as a source of revenue). So, how will games companies be able to do the same?
The relief is only payable by HMRC to the games company claiming it after spend on the game has been incurred, so by its nature the relief is a source of revenue for the games company (rather than a source of finance).
A caveat to the above is that the games company will be able to make interim claims during development and use the proceeds received from HMRC in respect of such claims towards paying for the further development of the game.
However, if a games company wishes the whole of the anticipated relief to form part of its finance plan for a game, and it doesn’t have the funds to cashflow the relief itself, we expect third party financiers to be willing to provide a loan against the future proceeds of the relief. Historically, sourcing financing for games from financiers outside the industry has been difficult due to a lack of understanding of the industry and in particular the perceived lack of security for the financier given the risk that the game may not be successful and generate sufficient revenue to repay the loan. Now financiers should be prepared to lend against the value of the relief as provided the games company that receives the loan properly complies with its obligations (principally to develop the game as planned and comply with the relvant conditions for relief) it will receive payment of the relief. There will of course be fees and/or interest applicable in obtaining such a loan, but in the film sector such loans have become extremely common as they enable the producer to realise the cash value of the relief (or at least most of it) much earlier than when the relief is actually paid by HMRC.
It seems likely that certain existing media financiers will extend their offer of finance to video games companies, and there are likely to be new financiers emerging from the games industry. This may also lead to those financiers seeing opportunities to provide other forms of finance for video games that until now have been unusual, but are far more common in the film and TV industries.
The Cultural Test
Much has been written about the Cultural Test, and some have expressed concerns about how it will work in practice and whether it may be unduly restrictive.
The reality is that for the film, TV and animation industries, the vast majority of projects submitted for application have passed the cultural tests that apply to those industries (even some projects that on the face of it did not appear obviously culturally British or European). We expect the same to be the case for the video games industry, primarily for two reasons: (1) firstly, the Test is points based, and a video game only requires 16 out of a possible 31 points in order to pass. This is a relatively low threshold and should make it possible for many games to pass; (2) secondly, the Test will be administered by the British Film Institute (BFI), which has successfully administered the film, TV and animation cultural tests since their inception and adopts a collaborative and fair approach.
Practical points – applying for the relief and the Cultural Test
One important practical point is that technically games companies will not be able to make claims to HMRC for the relief until later this year when the relevant final legislation comes into force. However, when making claims, the games company will be able to backdate them to 1 April 2014. In other words, all qualifying spend incurred from 1 April 2014 will qualify for the relief.
Notwithstanding the above, games companies have been able to submit draft applications for the Cultural Test from April 1st 2014 and the BFI will provide comfort letters for games that satisfy the Test. This is important for those games companies developing games now where funding is dependent on the relief, as it gives them the comfort that that their games will receive certification from the BFI once the Test is finalised later this year when the final legislation comes into force.
In spite of the detailed and sometimes complicated rules of the relief, we believe it will be a very significant boost to the games industry. The Government estimates that it will be worth 35m per year. While games studios will need to work out how best to utilise the relief in a way that is tailored to their particular circumstances, they will certainly benefit from the fact that those administering the relief have a wealth of experience acquired from dealing with the film, television and animation reliefs, and those reliefs have been viewed as a great success.