You might be familiar with R&D tax credits, a popular and often very valuable form of tax relief for the digital creative industry. However, there are other tax reliefs specifically available to the industry that are less known but can be equally lucrative.
The government, in fact, has 8 Creative industry tax reliefs that it actively encourages business to take advantage of. In this blog, I am going to cover the Video Games Tax Credits relief.
If you are involved in games development or are thinking about getting into this market then it’s well worth knowing how this can affect you.
What is VGTC?
VGTC are for UK companies that develop video games, whether physical content or downloadable content.
The relief will significantly reduce the cost of development and therefore enable you to compete with other markets whose cost of production is much lower. All games qualify except those made for advertising and gambling purposes.
What conditions need to be met?
There are 3 main conditions to be met;
- Intended to be supplied to the general public
- At least 25% of the core expenditure is incurred on goods and services that have been provided from within the European Economic Area (EEA)
- To be certified as a “British Video Game”
Conditions 1 & 2 can be easily determined, however, to be certified as a “British Video Game”, companies must pass a cultural test.
This test is a points-based test and generally, 16 points are required. The test is administered by the British Film Institute and more details regarding this can be found here.
What Are The Tax Benefits?
The tax benefits of this scheme work similarly to R&D tax credits, where it allows an enhanced deduction of your core expenditure (cost relating directly to the research and production of the video games) for corporation tax purposes (at 100%).
Note: The enhanced deduction calculated of 100% is the lower of;
- Core expenditure incurred within the EEA
- 80% of the total core expenditure
You also have the option to surrender any losses and receive a cash tax credit at 25%.
For example, you have developed a game that has been sold. You receive income of £200,000 and the core expenditure was £400,000 (assuming all the core expenditure was incurred in the EEA).
| Income | £200,000 | |
| Core Expenditure | -£400,000 | |
| Trading Loss | -£200,000 | |
| Additional Deduction | £400,000 | |
| (80% of core expenditure) | £320,000 | |
| Therefore Additional Deduction | -£320,000 | |
| Total Loss | -£520,000 |
So in this case, the company can carry forward the -£520,000 losses against future profits or surrender the losses for a 25% cash tax credit which would equate to £130,000.
The Next Steps
If you’re wondering whether Video Games Tax Credits can benefit your agency then book your discovery call here to find out how we can help you further.
