The House of Lords Communications Committee published a report recently stating that the Creative Industries should sit at the heart of the UK's economic growth plans. To put this in context, in 2019 the Creative Industries contribution to the UK economy was more than the aerospace, life sciences and automotive industries combined. 

From a video games only perspective, the UK games industry is an economic powerhouse, generating £5.26bn in gross value to the UK economy, driving inward investment at a scale other industry sectors could only dream of, and delivering export value through strong international sales. With the likes of France, Germany and Ireland now offering more generous incentives, we hoped that the UK Government would use the Audio-visual Tax Reliefs Consultation as an opportunity to further support this incredible sector, as not doing so might risk weakening one of the true pillars of the modern UK economy. 

Tax Reliefs

The Audio-visual Tax Reliefs consultation, which was launched at Autumn Budget 2022, covered the five audio-visual tax reliefs: Film Tax Relief (FTR), High-End Television Tax Relief (HETV Tax Relief), Animation Tax Relief (ATR), Children’s TV Tax Relief (CTR) and Video Games Tax Relief (VGTR).   

The output of the consultation and the associated policy decisions were published as part of the Spring Budget 2023.  In publishing, the Government stated that it is committed to ensuring the Audio-visual Tax Reliefs remain world-leading and continue to best serve the needs of creative companies.  Although the legislation has yet to be released, from the information published so far, positive developments appear to be limited.   

On the mechanics of the relief calculations, the changes announced will see all 5 Audio-visual Tax Reliefs move to an R&D expenditure credit style calculation.  This reform will change the way that relief is calculated, with the expenditure credits calculated directly by reference to the qualifying expenditure incurred, rather than resulting in an adjustment to the claimant company’s taxable profits.   

Spring Budget 2023  

As part of the Budget, the Chancellor announced what appeared to be significant headline relief rates for each of the Audio-visual Tax Reliefs, with films, high end TV programmes and video games all at 34% and animations and children’s TV programmes at 39%.  However, as ever with tax, the devil is in the detail, with the consultation response document making clear that qualifying expenditure relating to each of the Audio-visual Tax Reliefs will be capped at 80%.  Although the associated legislation is still to be published, using video games development as an example, on the assumption that £100k of qualifying spend would result in £80k being carried into the tax credit calculation, this would result in a net rate of relief of approximately 20%, mirroring that of the existing VGTR.  

The new expenditure credit mechanism will be phased in with companies able to claim under this from accounting periods starting on or after 1 January 2024.  Any film, TV or video games developments that have begun, but not been concluded by 1 April 2025 may continue to claim relief under the current system until 31 March 2027.  With regards to any new productions or games for which work commences after 1 April 2025, relief must be claimed under the new expenditure credit system.   

Location 

In addition to the changes to the mechanics of the relief calculation and the headline rates, a number of other notable changes were announced.  Under the existing tax relief available in respect of the development of video games, the VGTR available is calculated by reference to the amount of qualifying expenditure that is also European Economic Area (EEA) expenditure, i.e. expenditure on goods or services that are provided from within the UK or EEA.  The key test here is the location where goods or services come from.  The Budget announcements will alter that, with expenditure now only qualifying to the extent that it is incurred on ‘goods or services used or consumed in the UK’.   

This has caused significant concern in the video games industry, with the assumption being that any expenditure incurred outside the UK will be rendered ineligible.   

The existing relief in place for animation programmes includes similar rules, with costs only qualifying to the extent that the expenditure is incurred ‘on goods or services that are used or consumed in the UK’.  HMRC’s guidance on this makes clear that the key test here is the location where goods or services are used or consumed, meaning the nationality of the provider of the goods or services is irrelevant, as is their location. 

For example, HMRC’s guidance notes that specific elements of animations may be outsourced and this can create the impression that services are being used outside of the UK. However, HMRC state that the location of the service provider can be misleading. In this instance, HMRC make clear that the location of the animation production company is the physical location of the creative, technical and artistic control of the programme and that this would typically be the location where services, as well as goods, are used or consumed. 

It is imperative though that the Government work with industry to provide further guidance on how the ‘used or consumed in the UK’ requirement will apply in the video games context.   

The £1m per game limit on subcontractor costs 

In other video game related changes, the £1m per game limit on subcontractor costs will be removed, which will help some larger claimant companies.  

With regards to high-end TV productions, the minimum expenditure threshold will remain at £1m per slot hour and the minimum slot length reduced to 20 minutes on an episode-by-episode basis.  The definition of documentary will also be amended such that it will now be ‘factual or realistic programmes based on real events, places or circumstances and intended to record or inform’. 

Compliance considerations  

Certain compliance changes have also been introduced.  For example, an anti-abuse measure will be implemented on payments between connected parties, restricting qualifying expenditure to the costs incurred by the group.  In addition, the Government will legislate to ensure that relief cannot be paid out to undertakings in difficulty, similar to the going concern requirement already in place for R&D Tax Relief.  

Listening only to the Chancellor’s Budget announcement, you would be forgiven for thinking that the Government was making significant moves to invest in the Creative Industries through the tax system.  Although there are some positive developments, the detailed policy decisions will have many in the industry worrying that not enough was done to support the continuation of world leading output produced by the Creative Industries in the UK.  

Get in touch

Read the rest of our Spring Budget analysis on our Budget Hub, and for more information or to discuss any of the announcements, please don't hesitate to get in touch with me or your usual Johnston Carmichael contact.