In June, Game Republic hosted a special webinar on VGTR and VGEC practicalities, tax and VAT tips for indie studios featuring Luke Thomas from Plus Accounting. This 30-minute webinar shared tips on videogames tax relief (VGTR) and videogames export credits (VGEC) to understand the eligibility criteria, application process and key considerations. Also, the webinar briefly looked into tax obligations, release and schemes available for indie studios, as well as VAT. A big thanks again to our official partners for supporting our events programme, that’s Barclays Games and Creative, Red Kite Games and Escape technology!
GR members you can have a recording of this webinar if you get in touch as the session was also followed by a really useful practical Q&A session. Here’s just some of what Luke said…
“Just a bit more detail on myself and my firm, we are Plus Accounting, and we are based in Brighton. We specialise in accounting tax for the videogames sector, we have done for more than 10 years now. We currently act for over 200 videogame studios from across the UK from a range of sizes from single developers all the way through to 100+ people, studios and international set ups. We provide a range of services from upkeeping VAT management accounts through to accounts, tax planning and audits, so a one stop shop for all of your accounting needs.
Videogames Tax and Videogame Expenditure Credit
“Here is an overview of videogames tax relief and new videogame expenditure credit, explaining how you can claim, how they compare and some top tips for making sure you make a successful claim. Videogames tax relief is a government funding incentive which allows video games businesses to claim up to 20% of their core production expenditure and this actually came into effect from April 2014 so we have had a good 10 years of it now, but surprisingly, there were still lots of studios out there that have not heard of it and so they never claimed it.
So, thinking about who can claim videogames tax relief, it’s aimed at videogames businesses, but it’s actually restricted to limited companies. It’s a corporate tax relief, so that means that it’s not available to individuals or partnerships – it’s not something that people will get a personal tax relief on and that’s quite important to note. If you’re thinking about making games its worth potentially setting up a limited company at the earliest possible stage to make sure you can maximise your relief. So your company can claim that videogames tax relief: first if it’s a company and then if it is also certified as a British game and that will be certified by the British Film Institute (BFI).
BFI Certification for Videogames
How it works is that if you are making a game and it’s a long term game that may take multiple periods for example, you would go to the BFI and submit an application and you would also apply for an entrance certificate initially; and what that allows you to do is claim for videogames tax relief at the end of each accounting period and then once the game is complete, you go back and apply for a final certificate and that then will be tying up the loose ends of the company and being submitted to HMRC to tell them the game is finished. So, in terms of that big BFI application to make sure that you qualify as culturally British, you have 4 sections of the application, ABC and D. There is a total of 31 points available across the 4 sections and you need 16 points to qualify.
Sections A and B of the certificate, you can usually pick up quite a few points in there and that’s a lot to do with what the game is about; what’s involved; and where it is set and so on. Section C is about where money is being spent on the game and Section D is about who the people making the game are and where they are living or where they reside. What I always would suggest when you are doing your application is really consider where you are applying for, you don’t have to go for absolutely everything you’ve just got to get to 16 points. So try and make sure you’re focused on getting to those 16 points rather than trying to apply for absolutely every section and struggling to try to understand or put in the right detail and narrative that you need to for that.
One really important point that comes up is, if you do need to claim additional points in sections C and D because you haven’t got enough in sections A and B is that when you go to your final certificate application, you have to accompany the application with an accountants report, which needs to be completed by the auditor which we can do. When you are looking at that and the auditor is looking at that, section C is quite detailed and requires the auditor to actually look at all of your expenditure, where it was and makes sure it has been paid and processed properly, payroll, reports and so on. It can be quite time consuming and therefore a bit more expensive in terms of paying the auditor to do that work. Section D is about verifying where those people are, so if you’ve said that your director, the lead of audio, the lead of art is UK based and you provide a passport, that is pretty simple to verify and doesn’t take much time, it is quite cost effective and you can pick up quite a few points in section D just by providing things such as that. If you are going to do something and you need to go to section D first in the worst-case scenario, then go to section C. So, try and reduce the costs of getting yourself through that BFI application as much as you can.
The next part, as well as being certified and the game is British, it has to be intended for general supply to the public and you must also be responsible for designing, producing, testing the videogame, actively engaged in planning, decision making and directly negotiating and paying for goods and services. One key point is that at least 25% of the core development expenditure on goods and services for the game, must have been spent within the UK and European economic area. So, thinking about what expenditure qualifiers, HMRC identify 4 parts of videogame production. They have the initial concept stage, which is when you come up with new ideas for the game and the viability. You then move into pre-production or design then production and postproduction, testing and stages. So, the core costs that are allowable for videogames tax relief are those that are on sections from pre-production, production and the postproduction. So that initial concept stage, where you come to ideas that none of your costs (maybe salaries and so on) qualify for the relief there, so you need to be able to identify at what point that you came up with the initial concept and then moved into pre-production because you could be challenged on the date you apply. So, it is important to be able to have some good information on that to support that.
One thing to note is as I mentioned earlier getting a company and setting up early and making sure you can maximise the relief and so on. If your game started and moved into pre-production before you started the limited company, it might be, for example, that you come up with an idea and you get really good feedback and you think actually, I should set up a limited company as it would be great and I can gain tax relief. If you start it too late and it can be demonstrated that you did or you were always in production or pre-production, then the whole of the game will be ineligible for videogames tax relief just because you may have missed it by a couple of months or days or even a day technically. So, you need to make sure that you have the company in place early on to make sure to maximise the chance of relief for the whole game as that can be a very expensive mistake. I’ve seen it happen sadly on a few occasions.
In terms of the actual expenditure that qualifies a core expenditure for the relief, it will be the usual expenditure that you would recognise in a profits and accounts so the salaries and also the employer’s national insurance, subcontractor costs subject to a 1-million-pound cap a year a game, on subcontractor costs, you can also claim a proportion of overheads. So let’s say for example, you are working on a particular game but also, in order to fund that game you are doing contract work or work for hire, so you have got 2 different activities going on during a year and it might just be yourself that is involved and you may be paying yourself a £20k salary but you spend 50% of your time on the contract work and 50% on the game you would then split your costs between the two and then you could also perhaps use that as the portion of overheads as well. So, travel, rent etc, they can all be split between the game and that and the relief can actually be claimed on that for the proportion of overheads.
Specifically excluded costs are marketing and PR costs, as they are not seen as an actual development cost of the game, they are more to do with the social side of things. Also costs with actually making VGTR claims and so if you were to pay a specialist or accountant to do the claim on your behalf, then those particular costs wouldn’t be allowed and there’s also a restriction on loan interest too, funding and game development.
A note here that there is a common confusion as a lot of businesses are set up where the owner may pay themselves a small salary and dividends to top up their income, salary qualifies as it is an expense of the business however, dividends don’t so you wouldn’t get relief for that. Obviously, that can come into effect in terms of planning and how much you renumerate yourself and become different from a normal business in the sense that you might actually think about increasing the amount you pay yourself. One thing that does qualify and can make a difference is pension contributions.
One of the other key parts for VGTR is the costs that are allowable for relief are those which are incurred within the European and economic area. This is one of the big differences between that and the new relief which we will come to, therefore it is really useful to keep track of where your actual money is being spent because when it comes to doing a claim there needs to be clear identification between non EA spends, so that might be you have a contractor in America for example so that cost will not be allowed, and EA expenditure. All those expenses you incur will still go towards whether the game has made a profit or a loss, but it won’t necessarily mean they are allowable in terms of the additional deduction that you get.
I will explain now how the claim will work and what you can actually get, so you claim an additional deduction to reduce your profits or increase a loss. This will reduce the amount of corporation tax you potentially need to pay and if you make a loss, then you can potentially surrender that loss for a 25% tax credit and that’s actually repayable to the company in cash, which is often a misconception and you do actually get money back from HMRC. Essentially what they are trying to do is give you 20% of your qualifying costs back to you and they calculate that 80% of those costs, divided by the 25%, is 20%. So, the additional deduction you get will be either 80% of the total expenditure or the amount of core expenditure on goods and services that are provided from the UK or EA. So, depending on the level of profit or loss, the rate of relief may be lower than 20%.
So if you take for example, a company that has made a game and at the end of the accounting period had made a profit of £50k, as it stands pre-election, the tax rate on that would be 19%. So, if you then said out of that profit, it could be for example you had £100k income and £50k was spent on the game, so you have made a £50k profit. Out of that profit, 10k qualified as the core expenditure on the game. 80% of 10k is 8k so you reduce your tax by £8k, so instead of paying tax on £50k you are paying tax on £42k. Savings of 90% you save yourself 1520 pounds so that is an actual relief of 15.2%, so under VGTR if you are a profit-making business, you might only actually be saving 15% versus the big headline of 20% that you are getting back. So that’s all to do with the headline corporation tax rate differing from the main relief that you are getting.
If you are a loss making business, broken even or made a loss, so you may have spent a year making a game and you may have not had any income and had to have had loans put in and so on to help it, and you have made a loss you have spent 10 thousand pounds for example on a game over that year, you can claim back 2k so 20% back because you will have 8 thousand pounds additional deduction which is surrendered for a 20% tax credit of 2k. Therefore, loss-making businesses get the full 20% however profit-making gets 15%. So, it is not quite as good if you are a profit-making business but when you are talking quite big numbers, it’s probably nothing to put you off of claiming that’s for sure. So, with videogames expenditure credit, the new relief coming in will actually replace eventually VGTR completely, early adopters can actually take it up from the first of January this year and apply for any game they are working on with affects for cost incurred after the first of January. But for all new games starting after April 2025, you will have to apply for the new videogames expenditure credit. If you started the game before April 2025, you can continue to use videogames tax relief until March 2027, at which point you then will have to move over to the new relief.
VGEC is very similar to videogames tax relief but there are some key differences. Firstly, the eligibility criteria as I mentioned earlier on, for VGTR you have to have at least 25% of your spends in the European and Economic area, as one of your main reasons to be eligible, for VGEC it has to be 10% of the core costs. However, that only is for activity within the UK because under VGEC, the qualifying expenditure is only that which is used or consumed within the UK, EA is no longer part of it and so its either you have spent it in the UK and qualify and that will qualify for the relief, and anything outside of that will not qualify. So, what you can claim is the expenditure credit rate of 34% of VGEC and when you compare that to the 20% rate for VGTR it sounds great, however, the difference being that the 34% rate is going to be for tax and you have to deduct corporation tax at 25% on that. So the effective rate is actually 25.5% showing its actually a lot closer to the 20% for VGTR and you have to take into account that you can no longer claim EA expenditure, so there is a lot of weighing up there in terms of which one is going to be right for you.
The qualifying expenditure is very similar to VGTR, but it will be 80% of the total core costs and the amount or the lower of that and the amount of UK core costs. Again, eligible expenditure is pretty much the same apart from the UK and non-UK spend, the marketing etcetera is all likely to be the same. One thing that it is doing is removing the 1-million-pound cap per game for subcontractor costs, which make for larger entities so there are certainly some positives to that.
So, given the differences between the two, when deciding whether to go for VGTR or VGEC, you have to think about 3 main things in my opinion:
whether your business is profit or loss making;
whether your expenditure is mainly within the UK or if there is a significant amount within the EA;
and your recruitment plans, if you have a plan for a new game coming up and you know that you are going to be pushed into VGEC before long you may want to be thinking about whether you want to recruit UK only people because you want to make sure you get the maximum relief you can.
So, there has to be a little bit of thought put behind these as time goes by for planning and maximizing the relief. An important point to note about VGTR or VGEC is about time and cash flow. If you are relying on VGTR or VGEC for supporting your business cashflow and so on, then you are probably going to want to make sure you are claiming as soon as you can do so. Claims will usually accompany the submission of your year-end accounts and company tax returns so, the claim goes through your return and so that will be the time to do that. The British Film Institute who you get the cultural certification from, they are currently taking around 12 to 16 weeks to process the applications for certification, HMRC customs work towards around a 40 day turn out time for claims that are submitted and in between that you have to actually do all the work to get all your accounts and your claim completed. So, there can therefore be quite a considerable amount of time for the application part and actually getting your tax credit and the relief that’s due. So, I would encourage everyone to organise their BFI applications nice and early if they are keen to get the money in soon, making sure that they have got that and can present it to an accountant when they are doing the accounts so that we can get the claims in nice and early and leave as short a time as possible to get the relief in.
There are alternatives to that, there are quite a number of good businesses out there that will loan against videogames tax relief and you can get a large percentage of what is due to you upfront and that can mitigate some of the cashflow issues and you do usually need an accountant supporting evidence to confirm the amount that you are likely to get but it can be a good way of mitigating the cashflow issues with waiting for delays, because we have seen on occasion that HMRC have got themselves in a right mess and have left it 6 months or longer to actually process some claims. That can put businesses in a lot of difficulty, so it’s worth knowing that there are alternative options out there for people to loan against that.
One point I wanted to add on videogames tax relief and VGEC that can be useful and we have seen work in the past is one that is quite common within the film industry and it is growing in the video game industry is use of subcontractors where you may agree not to pay the subcontractor upfront for their work on the game but agree that they will get a percentage of sales revenue. Now, obviously when you get to release the game that is the development complete so you would normally imagine that there would be no more costs so you can’t make a claim, so sales don’t come in until after that and you start paying the subcontractor after the game is finished. Well, you can actually count those future costs as qualifying subcontractor costs up to the cap of 1 million still but you can still claim videogames tax relief after the game has finished for a number of years obviously subject to the March 2027 for VGTR and the 1 million cap but, it’s an opportunity to, maybe if the budget is tight to negotiate deals with subcontractors to push forward the expenditure. The risk of doing that obviously is, that the game becomes very successful, and the subcontractor becomes very expensive for the game, so there is a balance to these things though it is something to consider from that point of view.
Special Purpose Vehicle
The final point on videogames is the potential to set up a special purpose vehicle (SPV), a separate company which may be subsidiary to your company. There can be a number of reasons for doing that: one being to protect profits; to protect IP; but it can also be used to maximise VGTR. So with what I said earlier on about the dividends not qualifying for VGTR, what some businesses have been able to do is, with their company can continue paying themselves the small salary and top up their income with dividends, but then they have set up a special purpose vehicle company to create the game and develop the game in that half, and they have the legal documentation in place, they have done all the correct invoicing. I won’t go into too much detail on the whole structure of that now but if anyone wants to chat about how that works a bit more then I’m happy to follow up on that, it’s just putting it into your mind that there are potentially alternative routes to doing that.
Games Studio tips for VAT
Moving onto some more top tips for studios, tax and VAT now, the first point I’d like to focus on is VAT and you may well know that there is a compulsory registration threshold of £90k, so that is where your sales have exceeded 90k or are over a rolling 12-month period. Now, when you have income that is perhaps from steam, so you put your game on steam it is a US platform. So, all of that income you get from steam is outside the scope of UK vat and doesn’t count towards the 90k threshold so you might bring in 150k of sales and you don’t need to register for VAT because its outside the scope completely. Lots of people get confused at whether they are allowed to register for VAT or not allowed to register for VAT. So, you can voluntarily register if you want to, and if it makes it worthwhile to do so but you don’t have to. You can avoid a lot of VAT complexities. Steam platforms, they will be responsible for all VAT whether it is sales to UK individuals or all around the world, they will do that stuff for you, they will just take that 30% commission off you. The other part is to consider the cash or invoice accounting for VAT. Cash accounting is where you only put on your VAT return the money that you have actually received or the expenditure that you have actually incurred, which can be advantageous if you are raising invoices of large amounts with VAT on them but you haven’t yet been paid and so you get quite slow payers from that point of view. Invoicing accounting on the other hand, if you are getting all of your income from outside of the scope of UK VAT so there is no VAT due to HMRC and you incur it a lot and receive lots of invoices, that means you can claim that VAT back sooner, even if you haven’t paid the invoice you can get the VAT back on it and delay paying it, so things to think about from that point of view. One point that follows on from US income and steam and so on is about withholding tax, now if it was steam that you put your game on and you made for example 100k sales, steam would make 30k so your growth in profit is 70k. Now, unless you get your paperwork in place with them, steam will withhold 30% of it as well, as a US withholding tax and they will pay that off to the IRS in America. That will mean in theory that you will only get 40k in actual cash out of 100k sales. What you do then is work out your UK tax position, let’s say for example, you have done all of your videogames tax relief and you are left with a tax liability of 10k, you have paid 30k so you can only get relief for the 10k, the rest of it disappears so you really need to make sure you get your paperwork in place.
Corporation Tax and Game Studios
A couple of final points, corporation tax: there is a difference between the deadline for paying your tax and the actual deadline for submitting a tax return. The deadline for paying your tax return is 9 months after the year end, the deadline for submitting your tax return is 12 months after the year end. This means that if you are having cashflow difficulties, for example, you could withhold actually submitting the tax return until the last minute, 12 months later. That means that HMRC won’t be pressing you and chasing you for the money that you owe, there will be interest on the delayed 3 months potentially, but there wouldn’t be any penalties as long as you submitted it within the 12 months. So there is potential there to use that to your advantage. SEIS or EIS which stands for enterprise investment scheme, is encouraging investments and is worth being aware of.
Thanks so much Luke for sharing insights – the full recording is available, just get in touch as many more insights were shared at this invaluable session for our games companies.
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