In detail: UK R&D tax credits

The games market is changing significantly. The rapid growth of a number of casual games companies creating innovative, low cost games for smartphones, tablets and social networking sites is creating major opportunities for both new and well established companies.

The industry is also seeing key changes in the core games market with the arrival of streaming services, the growing success of digital retailers and the increased importance of DLC for across consoles, PC and other platforms.

Furthermore, all of this is happening against a background of cost reduction and streamlining across much of the industry.

The drive for more rapid creation of innovative content across a wider range of platforms, combined with the demand for lower development costs, is driving many developers to innovate.

This may take the form of new ways of working, new development tools, new business models, payment systems, advertising mechanisms as well as new game engines and core technologies.

Much of this work is done to address challenges that are just a normal part of the job, addressing new challenges in specific games, making new revenue models work or enhancing an existing game or technology.

Our experience suggests that developers may be missing out on tax deductions for these research & development (R&D) activities.

Since 2000, companies have been able to claim valuable enhanced tax deductions for staff and consumable costs incurred on R&D projects. Broadly, for tax purposes, R&D takes place where new, or significantly improved, products or processes are being developed.

It continues up to the point where the technological uncertainty is resolved. Basically, the coding, prototyping, and testing that is done to understand how to solve the problem may be eligible R&D activity.

Key technical challenges which are leading to successful R&D claims in the games industry include real time availability over networks, security, scalability and performance. Specific examples include the development of anti-piracy technology and innovative payment platforms, work to develop streaming for online games and the introduction of new platforms or technologies.

Other areas where there could be R&D are the development of bespoke technology to re-purpose games engines, for example building design and crowd flow model, improvements in animation technology and telemetry systems to profile gamers.

The R&D regime in the UK is designed to support companies of all sizes. For large companies, as defined, the regime provides a 7.8% tax saving on staff costs associated with developers and expenditure on prototypes.

The tax benefit is even more generous for small companies. Many organisations with less than 500 employees may fall into this group.

As of April 2011, the potential tax saving for small companies on eligible spend increased from 15% to 20% and will increase again to 25% in April 2012.

The actual amount available will depend on the company’s tax position. Furthermore, if a company is making a loss, they may be able to get back up to 25% of R&D spend on staff and consumables.

There are two real challenges in securing the tax incentive a company is entitled to. Firstly, games companies need to identify eligible R&D activity, as defined by the tax rules, and secondly, companies need to identify the relevant costs.

We have found that these steps can be particularly difficult for some games companies at the moment due simply to the sheer rate of change and the fact tax specialists often lack a deep understanding of development processes and innovation in the games industry.

[Kathie Haunton is a director in the R&D tax services team and Rupert Clark a manager in the Consulting practice at Deloitte.]