Video Games Expenditure Credit: Development vs Production Phases

Understanding which development costs qualify for the Video Games Expenditure Credit (VGEC) can make the difference between making a strong claim and leaving thousands of pounds on the table.

VGEC offers UK video game development companies the opportunity to claim back 34% of their UK-based core costs as an above-the-line credit, capped at 80% of total expenditure. After corporation tax at 25%, the net benefit works out to 25.5% of qualifying expenditure.

However, not all development costs qualify. Getting this wrong can result in rejected claims, HMRC enquiries, or simply failing to claim your full entitlement.

Understanding the Four Phases of Video Game Development

Video game development is divided into five phases for the purposes of VGEC. Only three of these phases qualify for the relief. Understanding where your costs fall is essential for accurate claims.

1. Conceptual Development (Ineligible)

This is the earliest phase of development, occurring before the project has been greenlit. During conceptual development, your team is determining whether the video game is commercially feasible. Activities in this phase are speculative in nature and do not qualify for VGEC.

Typical conceptual development activities include:

• Market research and competitor analysis
• Creating pitch decks for investors or publishers
• Outlining themes, gameplay style, setting, and plot
• Producing conceptual artwork to visualise ideas

The key indicator that costs fall into this ineligible phase is that they occur before the decision to proceed with full development. Any expenditure incurred whilst the project's viability is still under assessment cannot be claimed.

2. Design/Pre-Production (Eligible)

Once the decision has been made to proceed with game development, you enter the design or pre-production phase. This is when VGEC eligibility begins. Activities in this phase focus on planning and preparing for full-scale production.

Eligible design phase activities include:

• Creating detailed design documentation
• Storyboarding sequences and gameplay flows
• Developing prototypes and proof-of-concept builds
• Level design and world-building

For VGEC purposes, this phase begins the moment your project is greenlit and you commit to developing the game. The transition from conceptual development to design is your starting point for eligible expenditure.

3. Production (Eligible)

Production is where the bulk of your development work takes place and typically represents the largest portion of eligible costs. This phase covers all activities involved in actually building the video game.

Core production activities include:

• Programming and coding
• Creating artwork, animations, and visual assets
• Recording voice-overs and dialogue
• Composing and recording music and sound effects
• Building game mechanics and systems

These are the activities that transform your design documents into a playable game. As long as the work contributes to designing or producing the game itself, it qualifies as a core cost.

4. Testing (Eligible)

Before you launch the game, there will be a testing period to ensure it’s ready to publish. The testing period can take as much as 40% of the total development time. These activities are also eligible, so long as you don’t include any testing post-launch.

Core production activities include:

• Quality assurance testing
• Debugging
• Regression testing
• Compliance testing

Work completed after the game has launched, as well as market research and customer satisfaction testing, will not qualify.

5. Commercialisation (Ineligible)

The commercialisation phase begins once your game reaches its minimum viable product (MVP), the point at which the game could be released to the public. Even though these activities may be crucial to your game's commercial success, they fall outside the scope of VGEC.

Ineligible commercialisation activities include:

• Marketing and publicity campaigns
• Distribution and publishing costs
• Finance and administrative activities
• Post-launch bug fixes and maintenance
• Downloadable content (DLC) developed after launch

It's important to note that post-launch development work doesn't qualify for VGEC, even if the technical work is materially similar to what you were doing pre-launch. Once the game is released, activities shift from core development to commercialisation and ongoing support, which are outside the relief's scope.

Additionally, even if marketing or distribution activities occur concurrently with active development, they must be excluded from your VGEC claim. The relief specifically targets the creative and technical development of the game itself.

The Critical Green-Light Moment

The transition from conceptual development to eligible design phase is marked by what HMRC refers to as the project being greenlit. This is the moment when it becomes clear that game development is going ahead, rather than remaining speculative.

Examples of green-light indicators include:

• Formal board approval to proceed with development
• Signing a publishing agreement or securing funding
• Allocation of budget and resources to the project
• Hiring or assigning a development team

It's crucial to document this decision clearly. You may have records of board minutes, contracts, emails, or internal communications that demonstrate when the commitment to develop the game was made. This documentation may be requested by HMRC during a compliance check.

Some studios operate with very little conceptual development before proceeding directly to production. If your workflow involves minimal pre-planning and you move quickly from idea to development, you may have little to no ineligible conceptual costs. However, you should still be able to identify and document the point at which your project was greenlit, even if that happens very early in the process.

What Counts as Core Costs?

VGEC is specifically designed to support expenditure on the core creative and technical work of developing a video game. Understanding the types of costs that you can claim will help you maximise your claim whilst remaining compliant.

Eligible Core Costs

Core costs that qualify for VGEC include:

• UK-based staff costs: Salaries and wages for programmers, designers, artists, QA testers, and other development staff physically located in the UK. This includes employees working remotely within the UK.
• Subcontractor costs for core development: Payments to UK-based subcontractors who contribute to the game's development, such as specialist programmers, sound designers, or animation studios.
• Rights required for production: Expenditure on acquiring the rights to use a story, book, music, or other intellectual property that is necessary for the production of the game.

Ineligible Costs

Costs that cannot be included in your VGEC claim:

• Initial concept design and commercialisation phases: As discussed, expenditure before green-light and after MVP do not qualify.
• Marketing, publicity, and distribution: These costs are excluded even if they occur concurrently with active development.
• Rights not required for production: Broader rights acquired for commercial exploitation outside of game production, such as merchandising rights, do not qualify. Options also won’t qualify.
• Administrative costs: Audit fees, bank charges, insurance, completion bonds, and entertaining expenses are all ineligible.
• Capital expenditure: Costs related to purchasing equipment or property cannot be claimed through VGEC.

The UK Expenditure Requirement

One of the most important rules for VGEC is that you can only claim on UK-based expenditure. The amount you can claim is the lower of two figures:

• 80% of total core costs, OR
• The actual amount of UK core costs

This means that if over 80% of your costs are UK-based, your claim is capped at 80% of total expenditure. If less than 80% of your costs are in the UK, you can only claim on the actual UK portion.

Where work must be performed: For staff and subcontractors, the individual must be physically based in the UK when performing the work. Designers, programmers, quality assurance testers, and other development staff perform their services wherever they are located. Workers based in a UK office or working remotely within the UK can be included, but workers physically outside the UK are ineligible, regardless of their nationality, the company's location, or group structure.

Special rules for indirect services: Certain services are indirectly used in video games, such as those supplied by script writers, concept artists, composers, and researchers. These creative inputs are used by the development team and transformed into the final game. HMRC allows these costs to be included in your VGEC claim, but they must be apportioned based on where the transformation takes place.

For example, if a German company provides concept art that is later used and developed by your UK-based team of programmers and artists, you must apportion the concept art cost according to the proportion of UK-based developers who transformed it into the game. If 75% of your development team is UK-based, you could include 75% of the concept art cost as UK expenditure.

Apportioning Costs Across Phases

Game development doesn't always occur sequentially. Different team members may be involved across multiple phases, and you'll need to make a reasonable effort to split out costs between conceptual development, core development, and commercialisation.

HMRC requires that expenses are apportioned on a fair and reasonable basis. There are multiple acceptable methods for doing this, depending on the nature of the cost:

• Time-based apportionment: For recurring costs like salaries, you can allocate costs based on the proportion of time spent in each phase. For example, if a game designer spends 20% of their time on conceptual work, 70% on design and production, and 10% on post-launch support, their salary should be split accordingly.
• Project tracking: Using timesheets or project management software to track hours worked on different phases provides robust evidence for apportionment.
• Milestone-based allocation: You might allocate costs based on development milestones, particularly if your team works in sprints or defined stages.

HMRC expects you to document your apportionment methodology and be prepared to explain it during a compliance check. The key is to use a consistent, logical approach that reflects the actual work performed. You may wish to explain your methodology in your Additional Information Form (AIF) when submitting your claim.

Practical Tips for Maximising Your Claim

To ensure you claim your full VGEC entitlement whilst maintaining compliance with HMRC requirements, consider the following best practices:

• Document your green-light decision clearly: Keep records of the moment your project was approved for full development. Board minutes, funding agreements, or formal internal communications can all serve as evidence.
• Track time allocation from day one: Don't wait until year-end to work out which phase each team member was working in. Implement time tracking or project management systems from the start of development.
• Use timesheets or project management tools: Tools like Jira, Asana, or even simple spreadsheets can help you maintain an accurate record of where time and costs are being allocated.
• Maintain clear records of UK vs. non-UK work locations: Keep track of where each team member is physically located when performing work. Remote workers count as UK-based if they're working from within the UK.
• Consider separate legal entities for each game: Setting up a Special Purpose Vehicle (SPV) for individual games can provide clearer segregation of income and costs, simplify compliance, and help with risk management and targeted fundraising.

Conclusion

The Video Games Expenditure Credit offers significant financial support to UK game developers, but only if you understand which costs qualify. The key takeaway is that only costs incurred during the design, production, and testing phases after your project has been greenlit are eligible.

Properly categorising your development phases is crucial not only for HMRC compliance but also for successfully navigating the BFI cultural test. The cultural test requires you to demonstrate UK expenditure thresholds and involvement of UK-based practitioners, both of which depend on accurately identifying core costs.

Need Help with Your VGEC Claim?

Myriad specialises in Video Games Expenditure Credit claims. Our team of BFI certificate specialists, qualified cost accountants, and corporate tax experts can guide you through every step of the process, from the cultural test to HMRC submission.

Download our comprehensive VGEC eBook for a complete guide to maximising your claim, or get in touch today for a no-obligation chat about your game’s eligibility.