Qualifications for VGTR
In order to be eligible for VGTR, a game must meet three criteria:
- The game must qualify as ‘British’ under a cultural test. This is a points-based test and a game must be awarded at least 16 points out of a possible 31. A game is assessed by reference to its cultural content (16 points), its cultural contribution (4 points), the cultural hubs involved (3 points) and the citizenship/residency of the key personnel (8 points). Full details of the test can be found here. However, it is generally reasonably easy for most games to pass this test.
- At least 25% of the core expenditure must take place in the UK/EEA.
- The company responsible for developing the game (DevCo) needs to be a UK company.
How VGTR works
VGTR operates as a deduction in computing the taxable profits of DevCo. If the additional deduction results in a loss, DevCo may surrender the losses for a payable tax credit (i.e. a cash payment from the UK tax authority (HMRC)).
The additional deduction (or payable credit) is calculated on the core expenditure in the EEA (up to a maximum of 80% of the total core expenditure).
- If DevCo spends £300k on developing a game (all of which is incurred in the EEA) and generates £600k in income, DevCo’s trading profit on that game before VGTR would be £300k.
- VGTR allows for an additional deduction of £240k (i.e. 80% of the EEA core expenditure of £300k), reducing the trading profit to £60k.
- Without VGTR, DevCo would have been liable to pay Corporation Tax of £69,000 (23% x the pre-VGTR profit of £300k).
- However, VGTR reduces the Corporation Tax liability to £13,800 (23% x the adjusted profit of £60k). The VGTR is therefore worth 18.4% of the total core expenditure.
Is VGTR relevant to non-UK companies?
Yes. Although DevCo needs to be a UK company, the ownership or control of DevCo is not relevant and so, for example, DevCo can be a subsidiary of a company in any other jurisdiction. In addition, the applicable core expenditure is core expenditure in the EEA and not just the UK.
In addition, if a non-UK company is funding the development of a game by a UK company, in agreeing the amount and timing of that funding the non-UK company may want to consider the VGTR that will be recovered by the UK company.
What has been the take up?
VGTR broadly mirrors similar tax relief that is available for film, high-end television and animation. In July 2016, HMRC published statistics on the use of tax relief in all of these creative industries, which you can find here.
The figures make quite interesting reading. In summary, since the launch of VGTR in April 2014:
- VGTR has provided £45.9m to UK game development studios. In the 2014-2015 tax year (which ended on 5 April 2015), only £500,000 in VGTR was paid to studios. However, in the 2015-2016 tax year (which ended on 5 April 2016) this amount had risen to £45m.
- There have been 135 separate successful claimants and 140 payments. According to the HMRC figures, these claims represent UK expenditure of £417m.
- Tax relief certification has been applied for in respect of 515 games. Of these, 180 games have been granted final certification and 255 interim certification. The remaining 80 applications might still be pending or might have been withdrawn or failed the necessary criteria to receive tax relief.
What about other EU countries?
An incentive for video game development was introduced in France some time before the introduction of VGTR. However, the relief in France is much more limited. Following the introduction of the VGTR, games studios in some other EU countries have started to lobby for tax incentives to support game development and it is likely that Italy will be the next country in which such relief is available.
What about Brexit?
As with almost everything relating to Brexit, nothing is clear. However, it would seem very unlikely that the UK government would want to reduce or remove VGTR because of Brexit, given the need and stated intention to improve the competitiveness of the UK as a jurisdiction.
Indeed, if anything it seems possible that over time the UK government might consider enhancing VGTR (along with the tax relief for other creative industries). It might even consider changing VGTR to reverse or adjust some of the elements that were required to obtain the approval of the EU Commission. For example, the requirement that at least 25% of the core expenditure must take place in the EEA could be limited to the UK (as was the case in an earlier proposal). Similarly, the cultural test was incorporated in order to meet the EU rules on State aid and so (theoretically at least) could be reconsidered. However, it is far more likely that the UK government will not consider any material changes in the near future, not least because its attention and resources will need to be devoted to the wider issues involved with Brexit.