Video Games Tax Relief is claimed as part of your company’s Corporation tax return (CT600) which you file with HMRC. You need to produce a profit and loss account for each video game as each one needs to be reported to HMRC as a separate trade.
The rules for Video Games Tax Relief (VGTR) set out a consistent approach to calculating taxable profits of VGDCs which applies regardless of whether or not VGTR is claimed in respect of a video game. This approach is important when considering relief for loss-making activities. There are special provisions which restrict the ways in which losses arising from a video game development trade can be used, depending on whether the video game has been completed or whether or not the trade related to the game has ceased.
Video game development completed in a single accounting period.
A VGDC spends £150k making a qualifying game, all of which is EEA core expenditure. The company receives an income of £300k from the game, delivering a profit of £150k, on which Corporation Tax would normally be due at a rate of 19%. The video game was completed in a single account period.
In this example expenditure, the video game is eligible for VGTR. The VGDC is entitled to an additional deduction in computing its profits/losses from the separate trade relating to the development of the video game. Since all of the core expenditure is EEA expenditure, the additional deduction is calculated by reference to 80% of the total core expenditure.
Without an application for VGTR the VGDC would have to pay Corporation Tax of £28,500 (19% x trading profit before VGTR).
VGTR provides a corporation tax saving of £22,800, bring the Corporation Tax liability down to £5,700. (19% x the adjusted profit after VGTR).
Video game development continues for several periods
A VGDC develops a qualifying video game which has a total core expenditure of £1m, 75% of cost is incurred within the EEA, 25% outside or the EEA. The video game is developed over 3 years.
The profile of core expenditure over the 3 years is as follows:
In the first period, because all core expenditure is within the EEA, VGTR is calculated based on the basis of 80% of the total core expenditure, or £140k (=80% x £175k)
At the end of the second period the total core expenditure to date is £400k. As EEA core expenditure is greater than 80% of total core expenditure (80% x £400k = £320k), VGTR is provided on the basis of 80% of the total core expenditure incurred to date. The additional deduction is £320k.
However, £140k of the VGTR has been claimed in the previous accounting period leaving £180k (=£320k - £140k) to be claim in the second period.
By the end of the third period, the total core expenditure is £500k, of which £375k is EEA core expenditure. Because EEA core is less than 80% of the total, the VGDC is eligible to VGTR on the full £375k. The additional deduction is therefore £375k.
Because an additional deduction of £320k has been claimed to date the remaining £55k (=£375k - £320k) can be claimed in this accounting period.
Therefore, the cumulative effect by the end of the three accounting periods is that VGTR is provided on 75% of core expenditure that was also EEA expenditure.