Video Games Expenditure Credit

What does the transition to a new tax relief scheme mean for video games companies?

The UK video games market has experienced unprecedented growth in recent years and is now worth an estimated £7 billion to the UK economy, according to the UK Interactive Entertainment trade association (UKIE)*. It’s a sector that thrives on innovation, so it's little wonder that it was a notable inclusion in the significant changes to the current tax relief regime the Chancellor, Jeremy Hunt, announced in the Spring Budget. So, what are these changes, who will be the winners and losers, and what do Video Games companies need to consider?

Video Games Expenditure Credit (VGEC)

Video Games Tax Relief (VGTR) currently allows British games developers to claim a 20% tax rebate against the money they spend on the design, production, and testing of a new video game. As part of a sweeping reform of R&D tax reliefs for the creative sector, it is to be replaced by a new refundable expenditure credit known as Video Games Expenditure Credit (VGEC).

There are two main reasons behind this change: firstly, to comply with international tax reforms, namely the implementation of global tax policy, Pillar Two. Secondly, the reform is intended to incentivise UK-based studios to carry out activity solely in the UK. This latter point reflects the Government’s general direction of travel for R&D and aims to boost skills domestically and drive homegrown innovation.

What is the new Video Games Expenditure Credit?

• VGEC will have a headline rate of 34%. However, it’s important to note that the claims process for expenditure credits applies the current rate of corporation tax (25%) to calculations. Therefore, the effective rate is likely to be closer to 25.5% - just a modest increase from VGTR
• It will only apply to expenditure on goods ‘used and consumed’ in the UK, unlike VGTR which includes the European Economic Area (EEA). The exact meaning of the term ‘used and consumed’ is yet to be confirmed by the Government, following consultations on the changes which only ended weeks before the Spring Budget
• VGEC will come into force from 1 April 2025. From that date, all new games must claim VGEC rather than VGTR. Any games already in development before 1 April 2025 can continue to claim VGTR (with EEA qualifying expenditure) until April 2027. It’s also worth noting that companies can elect to claim VGEC from 1 January 2024 for specific projects, but simultaneously claim VGTR for other projects in development until April 2027
• VGEC will scrap the subcontracting limit, which will be welcomed by the industry
• It will impose eligibility requirements, with a minimum of 10% expenditure ‘used or consumed’ in the UK
• VGEC will retain the 80% cap on qualifying expenditure

Winners and losers

As with any changes, there will be winners and losers as a result of the introduction of VGEC. The removal of the subcontracting limit is good news for the sector. However, smaller studios that have adopted a remote working model, with overseas employees carrying out the majority of the design, development and production of video games, may lose out substantially because of the switch to expenditure credit. For example:

• If you spend £1 million on the development of a video game, with 50% of expenditure incurred in the UK and 50% in France, under the current VGTR scheme you would get a 20% rebate on all core expenditure, amounting to around £200,000.
• By contrast, under the VGEC regime, you will only be able to claim against half of that core expenditure (i.e. the 50% spent in the UK), resulting in a rebate of £120,000 against the same overall cost of £1 million.

However, it’s important to remember that there will still be incentives available for everyone, although it may be more beneficial for some than for others.

What do video games companies need to consider?

The timings of these changes may seem like a long way off, but it’s essential to start thinking and planning for the introduction of VGEC as soon as possible. Whether it’s pitching for projects, or speaking to publishers, it’s important to understand what your expenditure credits may look like so you can budget and plan accordingly. The key areas to think about are:

• People – where are you placing work and who are you engaging with?
• Budgets – look closely at the numbers, taking into account what you can and cannot claim against moving forwards.
• Get ahead – if you don’t employ overseas workers, there’s a real opportunity to be an early adopter of the scheme and to consider what VGEC might mean for your business.
• Contingency planning – for certain studios, the changes may not be welcome news. If that’s the case, it’s vital to consider what your options are and how you can remain on the VGTR scheme for as long possible before making the switch.

The question of whether VGEC is a good thing for the industry will entirely depend on which lens you are looking through, after all, this will very much be judged on a case-by-case basis. However, it will require careful thought from every single video games developer, regardless of size, location, or specialism. What’s more, it’s never too soon to start. The time to act is now!

 

*UK consumer spend on game and game related activities in 2022