Video games tax relief (VGTR) may be old news in the games industry, but, as with any tax incentive, there is a procedural leap between utilising the relief and taking full advantage of it. This article aims to give you an insight into how you can maximise the incentives available.
Although the interim certificate is voluntary, a video games development company (VGDC) would be best advised to always apply for interim certification as, if the development process is delayed, the VGDC will still able to apply for tax relief from HMRC before the development of the video game is completed, ensuring that no deadlines are missed.
Resist the urge to keep all expenditure within the EEA
For the additional deduction the relief available is the lower of: (A) core expenditure incurred in the EEA in relation to that video game; and (B) 80 per cent of core expenditure incurred in relation to that video game.
Consequently there is no further benefit to be gained from ensuring that all core expenditure is incurred within the EEA as the maximum deduction will be reached once EEA expenditure reaches 80 per cent of total core expenditure. The VGDC can therefore adopt a broader approach to 20 per cent of its core expenditure and seek input further afield if it is most economical.
Establish clear divisions in labour
The tax relief applies only to expenditure incurred on designing, producing and testing the video game. To simplify the allocation of expenditure it is wise to separate each stage of the development process.
This may be as straightforward as having different employees tasked with distinct stages or as complicated as restructuring the VGDC.
Focus on the development stages that qualify for relief
Evidence of the expenditure applicable to each development stage should be documented on an ongoing basis. Initial concept design, debugging and maintenance should be undertaken as cost-effectively as possible to mitigate the fact that they do not qualify for relief.
Keep losses separate
While it may seem obvious, to ensure qualification for the 25 per cent payable tax credit for an accounting period in which the VGDC has a surrenderable loss, the VGDC must actually have suffered a surrenderable loss overall.
To that end, it is worth keeping income-generating activities distinct from loss-making activities so that any loss can easily be quantified and used.
Be aware of the limitations
A cap of £1 million applies to the amount of the relief that can be claimed for sub-contracted work carried out within the EEA. As such, if development work is to be sub-contracted, VGDCs should use EEA contractors where feasible, unless the maximum deduction has been reached and it would be more economical to sub-contract work outside of the EEA.
Do not miss key deadlines!
VGTR claims, whether for an additional deduction or a payable credit, may be made up to the first anniversary of the VGDC’s filing date for the accounting period in question. As discussed, it is worth applying for interim certification so as claims can be made promptly and the right to the relief does not lapse.
Understand the interplay with other reliefs
Small or medium sized companies eligible for R&D relief have a choice between that relief and claiming VGTR. An assessment must therefore be made of the respective benefits of each relief to see which would be more advantageous.
Large companies (and certain small or medium sized companies) eligible for the R&D Expenditure Credit must claim that credit in priority to the VGTR when eligible for both. Any costs which are not eligible for the R&D credit may then be eligible for VGTR provided the relevant criteria are met.
Patent box relief may also be available and can be claimed in addition to VGTR. This has the potential to give an effective tax rate of 10 per cent on profits derived from patents.