The UK has long been a supportive environment for video game developers, providing financial incentives to boost creativity and innovation within the industry. For many years, the Video Games Tax Relief (VGTR) has been a crucial component of this support, helping studios offset production costs and fuel the development of unique and exciting games. However, as of January 2024, a significant shift is underway with the introduction of the Video Games Expenditure Credit (VGEC).
This transition represents more than just a change in terminology; it’s a complete overhaul to the how companies calculate and receive the benefit of the tax relief. While the shift may seem complex, rest assured that we at Plus Accounting are fully on top of it, so our clients can focus on what they do best—creating amazing games—without worry. Although there are key differences, like the exclusion of non-UK spend and a few additional requirements to secure the tax credit, these changes are manageable with the right guidance.
Key Dates
| VGEC first available to be used for new productions (but optional), or can be transitioned to for existing productions (but optional), on or after | 1 January 2024 |
| VGEC no longer optional for new games, so must be used for games going into production on or after | 1 April 2025 |
| All new and existing productions must use or transition to VGEC and VGTR no longer available from | 1 April 2027 |
Understanding VGTR and VGEC
Video Games Tax Relief (VGTR) has been a staple of the UK’s incentive landscape for video game developers. Under VGTR, eligible companies could claim up to 25% of qualifying expenditure as a tax credit. This credit could be used to reduce a company’s Corporation Tax liability or, in some cases, be payable in cash by HMRC. VGTR is calculated based on the lower of either 80% of the total core expenditure or the actual UK or EEA expenditure.
In contrast, the Video Games Expenditure Credit (VGEC) is a new mechanism that introduces a more streamlined approach to providing relief. The VGEC offers a credit of 34% of qualifying expenditure, but unlike VGTR, this credit is fully taxable.
Video Games Tax Relief will be closed to all productions from 1 April 2027. You may be able to continue to receive relief under the Video Games Expenditure Credit scheme.
You cannot claim Video Games Tax Relief for any productions that do not start production by 31 March 2025. You may be able to claim a Video Games Expenditure Credit instead.
Transitioning from VGTR to VGEC: Key Considerations
For developers currently in the production stages, the transition from VGTR to VGEC is not automatic or obligatory. Understanding when and how to make the switch is crucial to maximising the benefits for your project. Here are the key factors to consider:
1. Eligibility and Timing: Projects that commenced before April 2025 can continue to claim VGTR until March 2027, allowing for a transitional period. However, for projects starting after April 2025, VGEC is the only option. If your project straddles these dates, you may have the option to choose between the two, depending on your specific circumstances.
2. Comparative Financial Impact: One of the most critical steps in determining which relief is better suited is conducting a financial impact analysis. VGEC’s higher rate (34%) might initially seem more attractive, but the fact that it’s taxable means the net benefit could be closer to what you might receive under VGTR. Among other issues, you also need to consider the impact of VGEC spend being restricted to UK costs only, rather than EEA costs for VGTR; as well as the lifting of the £1million cap on subcontractor spending under VGEC. Comparing the after-tax value of the VGEC to the non-taxable benefit of VGTR is essential in making an informed decision.
3. Project Lifecycle and Development Stages: Consider where your project is in its lifecycle. Early-stage projects with significant future expenditure might benefit more from the higher upfront relief offered by VGEC. In contrast, projects nearing completion or those with lower expected future costs might find VGTR’s structure more advantageous.
4. Administrative and Compliance Considerations: In consideration of the fact that the transition to VGEC becomes compulsory over the coming years, it may be worth making the transition earlier so that you can get ahead of the curve and understand the key differences now, rather than defer the transition to a later point which could be at a time where development requires more of your time and focus. This may also benefit any budgeting decisions by understanding and planning for the full impact earlier on.
When to Make the Switch
If your project began before April 2025 and is eligible to continue claiming VGTR, there’s no immediate rush to switch to VGEC, as VGTR does not close until 31 March 2027.
However, you may want to consider making the switch earlier when:
- The majority of your qualifying expenditure will occur after January 2024.
- You anticipate that the taxable nature of VGEC may provide a financial benefit over making a claim under VGTR.
Commencement and opting in
In order to claim VGEC, your company must opt in for each project. A company with multiple projects in development can claim VGTR on some and VGEC on others. You may only opt in for VGEC for accounting periods ending on or after 1 January 2024.
Where a company opts in for an accounting period which straddles 1 January 2024, only expenditure incurred from 1 January 2024 is eligible for VGEC. Expenditure incurred before 1 January 2024 is eligible for VGTR and the company must apply the apportionment rules set out below.
Relevant closure dates
VGEC will become mandatory for new games from 1 April 2025, and for all games from 1 April 2027. The relevant closure date for games which have not entered the production phase by 1 April 2025 is 31 March 2025 and for all other games is 31 March 2027.
Where a game project moves into VGEC for an accounting period that straddles a relevant closure date, your company has two options. It can decide to claim VGEC for the whole period or alternatively claim VGTR on expenditure incurred up to the relevant closure date and VGEC on expenditure incurred after the relevant closure date.
If the company chooses to split the accounting period, it must apply the apportionment rules set out below.
Apportionment rules
If the company’s accounting period straddles either 1 January 2024 or a relevant closure date and it opts a project into one of the new regimes, then the production may be due both a tax relief and an expenditure credit in the same period. In these instances, the accounting period is split into two with expenditure split between them on a fair and reasonable basis.
Productions not opting in
If you do not opt a project into VGEC in the first accounting period ending after the relevant closure date, the separate trade for that project is treated as having ceased at the relevant closure date and the project is treated as if it has been abandoned.
This means no relief is available on expenditure incurred after the relevant closure date. The company cannot opt the project into VGEC in a later period.
Final thoughts
Whilst VGEC will be the only option for game developers in the coming years, some may wonder whether they should transition over to the new scheme early. The transition from VGTR to VGEC represents an important evolution in the UK’s support for the video games sector. While this shift brings new opportunities, it also requires careful consideration and strategic planning. By thoroughly understanding the differences between these two reliefs and analysing your project’s specific circumstances, you can make an informed decision that best supports your development goals.
At Plus Accounting, we are here to guide you through this transition. Our expertise in the video games sector ensures that you have the support you need to navigate these changes effectively. Whether you’re currently claiming VGTR, considering the switch to VGEC, or just starting a new project, our team is ready to assist you every step of the way.
If you have any questions or need further advice on VGTR, VGEC, or any other aspect of financial planning for your video game project, please don’t hesitate to get in touch.
Author: Luke Thomas, Director, Plus Accounting
Any views or opinions represented in this blog are personal, belong solely to the blog owner and do not represent those of Plus Accounting. All content provided on this blog is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site.
Date Published: 10 September 2024