Transition from VGTR to VGEC

Andrew McMillan

Andrew McMillan

Tax Partner & Head of Innovation Taxes

For years, Video Games Tax Relief (VGTR) has been a pillar for the UK video games sector, supporting growth, inward investment, and job creation, and driving a strong and thriving video games industry.

The UK games industry is an economic powerhouse, generating over £5bn in gross value to the UK economy, driving inward investment, and delivering export value through strong international sales. With the likes of France, Germany and Ireland offering more generous tax incentives to video game development companies, the UK Government had come under pressure to reform VGTR to mitigate the risk of weakening one of the pillars of the modern UK economy.

As part of Spring Budget 2023, the Government announced that VGTR will be phased out and replaced with the Video Games Expenditure Credit (VGEC). The VGEC has been available for companies to claim from 1 January 2024.  Although the new credit is slightly more generous than the existing VGTR, there are some other important differences which, if not considered, could leave studios worse off.         

Some key changes

Before describing the changes, it is important to note that many of the existing features of VGTR remain under the VGEC rules.  For example, the definition of the Video Games Development Company, i.e. which company is eligible to claim, is precisely the same.  In addition, the definition of qualifying expenditure, or ‘core expenditure’, continues to be expenditure incurred in designing, producing and testing the game (subject to certain restrictions).  The 80% cap on qualifying expenditure also remains in place.

It is also important to note that VGTR will have a sunset period, which means that games under development by 31 March 2025 can continue receiving VGTR until 31 March 2027.

So, what exactly is changing?  Well, firstly the mechanics of the relief are changing slightly.  The net rate of relief available in respect of qualifying expenditure under VGEC will be marginally higher than the relief available under the existing VGTR (0.5% when considering the 80% capped amount).

Under the VGEC rules there will also be no cap on the amount of subcontractor costs that can qualify as core expenditure.  Under VGTR there is a cap of £1m per game, above which subcontractor costs cease to qualify as core expenditure.

This all sounds great right?  Surely a company will always be better off under the VGEC than VGTR?  Frustratingly, this isn’t necessarily the case. This is due to perhaps the biggest difference between the two reliefs, which relates to location.  VGTR is calculated by reference to the European Economic Area (EEA) core expenditure incurred by a claimant company.  For this purpose, EEA core expenditure means core expenditure incurred on goods or services that are provided from within the UK or EEA.  VGEC will be calculated by reference to the UK expenditure incurred. 

What is meant by UK expenditure?

UK expenditure is defined in the legislation as expenditure on goods or services that are used or consumed in the UK.  This mirrors the existing rules in place for some of the other screen sector reliefs.  It is clear from the guidance in place that each case will have to be judged on its own merits.  So, for example, this might mean that if your studio outsources part of the game development overseas, the associated cost may not qualify under VGEC.  This could lead to situations where a studio is worse off under VGEC.  There are a number of key points that should be considered in order to ensure that you receive the maximum relief to which you are entitled.     

Key considerations

  • The first point to consider is which relief is available in respect of the game under development. If development of the game starts on or after 1 April 2025, you will have no choice and will be claiming under VGEC.
  • The level and nature of costs that you expect to incur in developing the game should also be considered.  For example, if you expect to incur well in excess of £1m of subcontractor costs in developing the game, then VGEC may well provide the higher level of relief.  However, if those costs do not qualify as UK expenditure, then this might not be the case.
  • With this in mind, you should consider what steps might be taken proactively to ensure that the maximum amount of relief available is received.  For example, in outsourcing work, could you engage with a UK service provider?  In addition to supporting the wider industry in the UK, this should remove any ambiguity over the costs qualifying as UK expenditure. For example, if a VGDC were to incur £100k of costs which did not constitute UK core expenditure, this could lead to it receiving up to £20,500 less relief than it might have had it engaged with a UK service provider.  
  • For any claim made on or after 1 April 2024, whether for VGTR or VGEC, HMRC’s new additional information form will have to be submitted before, or on the same day as the company tax return including the claim. Further information on this can be found here.

VGTR and VGEC are designed to support and enhance the great game development work taking place across the UK.  Despite this, the rules can be complex and the sunset period during which either relief may be available only adds to this complexity.  Make sure that you don’t miss out by taking proactive advice in this area.

In collaboration with TIGA

This was written in collaboration with TIGA - the not-for-profit trade association representing the UK video games industry. Their membership includes game developers, digital publishers, universities and service providers. TIGA’s vision is to make the UK the best place in the world to develop video games. TIGA strives to achieve this in three principal ways. 

  • Engaging with Government and Parliament to create a favourable environment for the games industry.
  • Enhancing excellence in games education and skills through our accreditation programme, the TIGA Games Education Awards and our education conference.
  • Driving excellence across our industry via the provision of best practice reports and participation in the TIGA Salary and Benefits Survey,  the TIGA STAR Employer Awards and the TIGA Games Industry Awards

TIGA has a track record in influencing Government policy. TIGA successfully campaigned for the introduction of Video Games Tax Relief in 2014. TIGA is now campaigning for a more generous Video Games Expenditure Credit and the introduction of an Independent Games Tax Credit.

Get in touch

If you would like more information on the transition from Video Games Tax Relief (VGTR) to Video Games Expenditure Credit (VGEC) then please contact Andrew McMillan.

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