In March this year, the UK Government announced the introduction of the Video Games Expenditure Credit (“VGEC”). This will come into force on 1 April 2024 and will eventually replace the current Video Games Tax Relief (“VGTR”).
What is the VGTR?
The current VGTR is a tax relief scheme funded by the UK Government which allows qualifying video game development companies to claim 25% of their development costs incurred in the EEA, up to a cap of 80%. So, where 80% or more of the costs are incurred in the EEA, the VGTR is effectively capped at 20% of development costs. Where the development company is loss-making (which is often the case in the early stages) the relief is paid as a lump sum. This can provide a valuable source of funding for studios, which is relatively simple to claim and comes with no strings attached.
The VGTR was introduced in 2014 and was designed to incentivise growth and innovation in the video games sector in the UK. On the whole, it has been a success. As at 2020-21, HMRC had received VGTR claims for 1,640 games with a total expenditure of £4.4 billion and, in that year alone, HMRC paid out £180 million in VGTR. Interestingly, claims over £500,000 accounted for the vast majority (87%) of the total amount paid out.
The new VGEC will eventually replace the VGTR, following a transitional period (set out in more detail below).
What is changing under the new VGEC?
The draft VGEC legislation was released on 18 July 2023, and a reminder of the headline features of the new VGEC is as follows:
- The VGEC will be calculated based on the development company’s qualifying expenditure.
- EEA expenditure will not count towards qualifying expenditure. Only expenditure on goods and services “used or consumed” in the UK will be taken into account.
- On its face, the VGEC is 34% of qualifying expenditure, capped at 80% of total expenditure. This sounds like a significant jump; however, the credit will be treated as income and therefore be subject to corporation tax (currently 25%) meaning that, in reality, the rate will be 25.5% of qualifying expenditure, capped at 80% of total expenditure, giving an effective rate of 20.4%. A much more modest increase over the VGTR.
- At least 10% of qualifying expenditure will have to be on goods or services used or consumed in the UK.
- Payments for goods or services supplied by a connected party (where they exceed that supplier’s costs associated with the supply) will not be taken into account.
- The £1 million per game sub-contracting cap will be removed.
From 1 April 2025, all games wanting to claim relief will need to use the VGEC. However, there will be a fairly generous transition period. Existing projects which are ongoing can continue to claim VGTR until April 2027. Developers can choose switch to the VGEC from 1 January 2024 if they wish.
What happens next?
The draft legislation was open to consultation until 12 September. We will monitor and update on any changes, so watch this space.
Whilst the VGTR has seen good take-up from the industry, based on our experience there are still many studios, particularly at the smaller end of the scale, who are not claiming it when they could be.
In some cases this is due to lack of awareness, and in others due to concerns about the qualification criteria or the application process. In many cases, those concerns turn out to be unwarranted. It’s always worth asking someone if you’re not sure – for those who do qualify, it is the closest thing to ‘free money’ out there.
If you would like to discuss any of the above, please contact Kostyantyn Lobov, Ed Lane or your existing contact in the Interactive Entertainment Group.