Video games tax relief: what do I need to do?

Matthew Appleton, senior manager for tax at Grant Thornton, offers a checklist of considerations when applying for tax breaks
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You will have all heard by now that video games tax relief has been introduced. The gaming industry has lobbied hard for such a relief – and now may be a good time to think about what this relief could mean to UK game companies. 

This brief article is not meant to provide a detailed technical analysis but aims to give some high level, practical thoughts. But first – a quick recap...

  • An additional tax deduction is available for qualifying production costs. Assuming a tax rate of 20 per cent, the benefit could be as much as 16 per cent of qualifying production costs. For loss-making companies, a cash credit worth up to 20 per cent of the qualifying production costs may be available.
  • Qualifying production costs generally include costs incurred on designing, producing and testing the video game. However, there are a number of costs that are excluded e.g. financing costs, advertising or publicity costs or maintenance of a completed game.
  • Each game is treated as a separate trade for the purposes of this relief. Companies will therefore need to track the income and expenses for each game, which could be burdensome.
  • Free-to-play and freemium games should qualify for the relief, as should download-only games, provided they meet the relevant conditions. It may even be possible to claim on game content update.
  • Companies will need to meet the cultural test in respect of any game – and any claim can only be submitted once certification has been obtained. The cultural test is a points-based test and is intended to ensure that only “British” games qualify for the relief. The reality is that the test expands beyond Britain to the EEA, plus fictitious characters/locations in certain cases. Of course, certain games (e.g. those produced for gambling or which are not capable of receiving a PEGI game rating) are not eligible for this new tax relief.

Time to level up

Companies producing video games should be considering how they can benefit from this exciting new tax relief. The following thoughts may help in taking this forward: 

  • Is this relief likely to be relevant for games already in production (for costs incurred from 1 April)?
  • Consider – and plan – for future games. Will they meet the cultural test and continue to do so as the game is developed? How will they be resourced (there is a cap on the level of subcontractor costs that can be included per game in any video games tax relief claim)?
  • Where there is scope to make a claim, consider making an application to the BFI with regards the cultural test, providing the information required. Given that this relief is still new, it is likely that there will be a fair amount of applications, so you may want to make your applications as soon as possible.
  • Consider how easy it is to identify income/costs for each video game. Are there steps you can take to make this easier going forward?
  • Calculate the likely benefit of the relief, so that you can see the potential impact on your business. In some instances, you may need to make a decision as to which tax relief (video games tax relief or R&D relief, see below) to claim and you may want to compare the potential benefit of the different options.
  • Can steps be taken to ensure that the tax reliefs available are maximised?
  • Where necessary, take professional advice.

As mentioned above, in some instances you may need to decide whether to claim video games tax relief or R&D relief. For companies who claim under the small/medium sized companies regime, video games tax relief can be made on qualifying costs, provided no R&D claim is being made on those costs. However, both reliefs constitute State Aid, which may lead to complications (you cannot claim more than one State Aid on the same project; can you demonstrate that each claim relates to a separate project?).

Where a company is eligible to claim the R&D Expenditure Credit (i.e. for large companies, plus certain small/medium sized companies who have to claim under the large regime), it would seem that companies have to claim the R&D relief in priority to video games tax relief (where costs qualify for both reliefs). Any costs which are not eligible for R&D relief may then be eligible for video games tax relief, provided the relevant criteria are met.

Finally, there is a further tax relief, called patent box. This can potentially give an effective tax rate of 10 per cent on profits derived from patents. This can be claimed in addition to either the video games tax relief or R&D relief. Even if you do not have patents now, you should consider whether you can obtain patents.

For more information, please contact Matt Appleton on 020 7728 2956 or by emailing matthew.appleton@uk.gt.com. A guide to video games tax relief, produced jointly by Grant Thornton and TIGA, can be found here.

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