Video Games Expenditure Credit - An Overview

The landscape of tax credits in the gaming industry is evolving. The Chancellor has recently introduced the Video Games Expenditure Credit (VGEC), which will significantly impact companies working within the video game sector. Let's delve into what this reform means and how it might affect your business.

Overview of the changes

In a significant move to boost the UK's video game industry, the government has announced the replacement of Video Games Tax Relief (VGTR) with a more robust and aggressive support mechanism called Video Games Expenditure Credit (VGEC). This momentous decision was unveiled during the Spring Budget announcement, which also featured the rise of corporation tax to 25% for companies earning over £250,000 in profits starting next month.

Under the new Video Games Expenditure Credit, the rate of relief will be increased to 34% on 80% of 'qualifying expenditure,' a substantial improvement from the previous rate of 25%. However, the significant change lies in the region where the qualifying expenditure will be applicable.

Unlike VGTR, which allowed expenditure made in the European Economic Area to be eligible for relief, VGEC will focus solely on goods and services 'used or consumed in the UK.' This change aims to channel support more directly towards domestic investments and growth.

To balance the exclusion of expenditure in the European Economic Area, VGEC now eliminates the previous cap on subcontracting, which was set at £1 million per game. This move encourages companies to seek additional help in developing their games without worrying about hitting a monetary limit.

To be eligible for the new Video Games Expenditure Credit, companies will be required to have at least 10% of their expenditure utilised within the UK. This provision further incentivises studios to invest and support local resources and talent.

The implementation of VGEC will begin from January next year, with a transition period to allow companies time to adjust to the new regime. During this transition period, games still in development from the start of April 2025 may continue to claim the existing tax reliefs until April 2027. This move ensures a smooth and gradual shift from VGTR to VGEC.

Dr. Richard Wilson OBE, the CEO of TIGA, a trade body representing the gaming industry, expressed delight at the headline rate of 34% for VGEC. TIGA has campaigned for a higher rate of relief for years and is pleased that the video games sector is recognised as 'critical' by the Chancellor.

The industry currently generates £1.2 billion in annual tax revenues for the Treasury and contributes £2.9 billion to the UK's GDP annually. The new VGEC is expected to drive further growth within studios, the sector, and the broader economy.

The decision to replace VGTR with VGEC came after an extensive consultation on the UK video games tax relief. The government's full response to the consultation is available for review here.

The introduction of Video Games Tax Relief in 2014 provided a significant boost to the industry, with the Treasury granting £197 million in tax breaks to game studios last year.

With the forthcoming Video Games Expenditure Credit, the government aims to enhance support and further stimulate the growth of the UK's thriving video game development sector.

Who is affected?

The changes introduced by the Video Games Expenditure Credit (VGEC) will primarily affect companies that operate within the video game industry. This includes video game developers, publishers, and potentially third-party services closely tied to game development. Here's how each could be affected:

1. Video Game Developers: Developers will be directly impacted as the shift from the Video Games Tax Relief (VGTR) to VGEC will change how they claim tax relief on their production costs. This could affect their financial planning and budgeting for new projects. The removal of the subcontracting cap could provide developers with more flexibility to outsource work without financial drawbacks. Also, the UK expenditure requirement may encourage developers to source more goods and services domestically.

2. Video Game Publishers: Publishers often finance the production of games, so the changes to tax relief could impact their investment strategies and the funding they provide to developers. They might need to revisit their financial models to account for the new VGEC rules.

3. Third-party Service Providers: These include entities providing services such as animation, sound design, programming, and others used in game development. The new 'used or consumed in the UK' rule and the removal of the subcontracting cap could potentially lead to more work for UK-based service providers.

4. Future Projects: Any video game projects that start development after 1st April 2025 will fall under the new VGEC rules. However, projects in progress by that date can still claim EEA expenditure under the VGTR until April 2027, providing a smoother transition.

5. Investors in the Gaming Industry: The change to tax reliefs and their subsequent impact on company profits and expenditure could influence investment decisions in the video game industry.

Overall, these changes will require careful consideration and planning for all parties involved in the video game industry. Adapting to the VGEC will likely entail changes to budgeting, financial planning, and potentially the structuring of future game development projects.

What could the impact be?

The introduction of the Video Games Expenditure Credit (VGEC) is set to reshape the financial aspects of the gaming industry. With a nominal rate of 34%, it may initially seem more generous than the existing Video Games Tax Relief (VGTR) rate of 25%. However, when we consider that VGEC will be treated as an income receipt and subject to corporation tax, the effective rate after deductions will be 25.5% of qualifying expenditure.

1. Slight Financial Advantage: This change essentially represents a modest increase of 0.5% in the effective rate compared to the existing VGTR. For companies with large qualifying expenditures, this increase, albeit small, can result in substantial tax savings. This could ultimately lead to more resources for game development, marketing, or other investments within a company.

2. Potential for More Investment: The slightly higher effective rate of relief could make the UK gaming industry more appealing to investors. Both domestic and international investors might see this as a positive development, potentially leading to an increase in capital inflow to the industry.

3. Profit Calculation Adjustments: The treatment of VGEC as an income receipt to be included in a business's profits may require companies to adjust how they calculate their profits. This change may also have implications for how a company's profitability is perceived by investors, partners, and other stakeholders.

4. Enhanced Cash Flow: For loss-making games, the above-the-line credit could enhance cash flow and provide financial support during the development process.

5. Broader Economic Impact: While the increase in the tax relief rate is minor, when combined with the removal of the subcontracting cap and the requirement for expenditure to be 'used or consumed in the UK,' it could lead to increased domestic spending. This change could, in turn, have a broader positive impact on the UK economy, stimulating growth in related industries such as software services, creative arts, and digital technology.

Remember, these impacts may vary widely depending on the specific circumstances of each company, including the scale of their operations, their financial health, and their approach to game development and subcontracting. It's crucial for each entity to assess the implications of the VGEC within the context of their unique situation.

Planning for the VGEC Transition

While the changes might seem distant, it's crucial for companies to start planning for the VGEC introduction. Evaluating human resources, budgets, and potential for early adoption of the scheme are critical areas to address.

Contingency planning is also essential, especially for studios that might find the changes less favourable. Options should be explored to remain on the VGTR scheme as long as possible before the switch.

Ultimately, the VGEC's impact on the industry will be a case-by-case evaluation. Each video game developer, irrespective of their size, location, or speciality, will need to carefully navigate these changes. Proactive planning and preparation are vital starting now!

Get in touch

We hope this overview of the new video game expenditure credit has provided you with a better understanding of its benefits and impact. However, our ultimate goal is to ensure that more video game developers across the UK can take advantage of this valuable relief.

That's why we invite you to share this article with others who might benefit from it. 

Don’t forget to take a look at our video games tax relief webpage for more information.

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