Is your business eligible for Video Games Tax Relief (VGTR)? The full guide

What is Video Games Tax Relief?

Video Games Tax Relief (VGTR) is a form of UK Corporation Tax relief introduced to support the creative industry. VGTR deductions can be used to reduce the taxable profits of companies that develop video games. In cases where a company is making a loss on video game development and production, the deduction can be applied as a payable tax credit instead.

If your company is developing video games that meet the eligibility criteria, you can apply for VGTR in your next tax return. This article will cover what types of video games are eligible for VGTR and how to make a claim.

Table of contents

• What is Video Games Tax Relief?
• What is Video Games Tax Relief core expenditure?
• When can you claim Video Games Tax Relief?
• How is VGTR calculated?
• How to claim VGTR?
• What are the benefits of Video Games Tax Relief?
• Why is innovation in the video games industry important?

What’s the aim of Video Games Tax Relief?

VGTR aims to encourage creative endeavours in the lucrative and growing global video game development industry. This tax relief is used as a rebate against eligible ‘core expenditure’ where that spend meets certain conditions in the video game production.

VGTR is a tax relief that is of potential major benefit to companies that develop a video game, but it often goes unclaimed. Let’s take a look next at the type of expenditure that can use the tax relief to see if it might help with your current or future game development projects. 

What is Video Games Tax Relief core expenditure?

VGTR can be used for qualifying core expenditure used in video game development, such as in the areas of production and testing. Examples of the type of work in these areas would include writing the original source code for the game and performance testing it under different usage scenarios before launch. When applying for VGTR, you will need to be able to document and prove that your spending meets the set of eligibility criteria.

The tax relief cannot be used for certain costs such as post-release product maintenance, bug fixing, or marketing and promotion.

When companies know that they will qualify for VGTR for total core expenditure as either a reduction in corporation tax or as a payable tax credit, they will be encouraged to develop more innovative games that can positively impact the wider UK economy.

What activities can you claim for?

Although a lot of work goes into before and after bringing a new video game to market, not all costs related to developing and producing the game are eligible for VGTR. 

Expenditure costs that qualify are those from designing, developing and testing the game before its release. Excluded are costs around work for the initial concept, marketing and maintenance.

For example, the research and preparation work undertaken to look into the viability and potential demand for a new game would not include its costs as core expenditure.

Eligibility criteria for applying for VGTR:

• UK registered company

• Your company is responsible for the design, development, testing and production of the video game.

• The game must be intended for commercial release, not for promotional reasons or gambling.

• The game must qualify as ‘British’ under the British Film Institute (BFI).

• At least 25% of production costs must be incurred on goods or services within the European Economic Area (EEA).

What type of video games qualify?

To qualify as British, the game needs to meet BFI criteria that focus on where the game is made. The BFI assesses applications and awards points based on the cultural context of the game. This relates to where the game aligns culturally in where it is based, produced, and promoted.

Applications should be made to the BFI, and the British Video Game Certificate will be issued on behalf of the Department for Digital Culture Media & Sport (DCMS).

If the game is still in development, you can provide an interim certificate and send the final certificate when the game is complete.

When can you claim Video Games Tax Relief?

If your video game’s development meets the criteria, then you should consider applying for VGTR when you file your tax return. According to the UK Government's guidance, it’s possible to “make, amend or withdraw a claim to creative industry tax reliefs up to one year after the company’s filing date.” It is also stated that HMRC “may agree to accept late claims in some circumstances.”

How is VGTR calculated?

VGTR can be made either as a deduction for corporation tax purposes or a payable cash credit where a company makes a loss.

The additional deduction will be the lower of either:

• 80% of total core expenditure

• The amount of core expenditure on goods or services that are provided by the UK and EEA

In cases where there is a loss for corporation tax purposes, then the loss can be surrendered as a tax credit at a rate of 25%.

How to claim VGTR?

You can find guidance on how to apply for Video Games Tax Relief on the UK Government website.

You can claim VGTR on your Company Tax Return using form CT600.

For each video game that you want to claim for, you must provide:

• A cultural certificate showing the game qualifies as ‘British’ from the BFI,

• Statements that show your core expenditure, broken down by category and EEA and non-EEA spending. 

• A breakdown of expenditure by category for each game produced.

You’ll also need to calculate if your game has made a profit or a loss to determine if your claim for VGTR should reduce your level of corporation tax or be surrendered as a cash credit.

What are the benefits of Video Games Tax Relief?

VGTR can add up to a significant amount of money saved on total core expenditure for qualifying companies. Many eligible companies are not aware of the tax relief and may be missing out on it altogether. 

Video games tax relief reduces the financial risks of developing a creative product that may or may not be a commercial success and encourages innovation and creativity, which are key drivers of a healthy economy, especially concerning the tech sector.

The money saved on core expenditure could be used in several ways that are beneficial to the video game developing company and external stakeholders. For example, following a successful claim for VGTR, you may use the money to finance your next game development project. This might involve hiring more UK-based developers or using more advanced technologies that will help the local industry keep pace with global competitors.

VGTR can also make the product more attractive to consumers where cost savings are passed on in the final retail price of the game. This can be important when competing with video game developers from countries of the world with lower labour costs. 

Why is innovation in the video games industry important?

Reducing financial risk by lowering core expenditure when developing something new in the creative space is a great way for the government to encourage innovation in growing industries such as video games. People are spending an increasing amount of time at home and online. A trend accelerated due to pandemic lockdowns and home entertainment such as video games. It is a sector where the UK wants to retain a leading position as it does in most technology segments.

You may have heard mentions in the media of the ‘metaverse’, especially since Facebook changed its name to ‘Meta’ to signal its commitment to the sector. Well, immersive gaming and virtual and augmented reality are all bundled up in what many other big tech and consumer brands are taking a position in. The UK wants to ensure it remains at the cutting edge of emerging technologies and software development and encourages innovation with VGTR aids.

This is why the UK Government is prepared to incentivise and encourage investment in companies looking to produce video games with the potential to grow the industry, create jobs, and bring inward investment into the country.

If you’re working in innovative industries, such as video game development, you may want to learn about how Bloom can help fund your growth without sacrificing control of your business. We’re here to help fund your business the right way. Speak to us to find out more