What you need to know about video game tax relief in the UK.
Video games continue to be big business in the UK, and despite issues like Brexit and the pandemic, the industry has been growing year-on-year. One reason that has played an important role has been the UK’s Video Games Tax Relief (VGTR).
First introduced in 2014, VGTR - similar to tax reliefs available in other creative sectors including film, HETV, animation programmes and children’s television - was designed to incentivise video games development in the UK. To highlight what a difference this has made, a 2018 report found that 63% of games developed in the UK would not have been made without it.
The latest report from the HM Revenue and Customs (HMRC) revealed that over £180 million worth of VGTR has been claimed for the 2020-2021 tax year, amounting to 350 approved claims that cover 640 games.
Yet despite its importance in the UK games industry, it can seem daunting for those new to VGTR, especially those new to the industry who either assume their game isn’t eligible or are put off by the extra admin and paperwork involved. But when this relief can help UK game developers save between 16% to 20% of the cost towards making a game, the benefits are obvious and essential to any developer.
What is VGTR and who can claim it?
VGTR allows UK games companies to claim relief against money spent on the design, production, and testing of a British video game.
“The eligible expenditure is referred to as ‘core expenditure’ and encompasses all direct game-making spend during full production of a game,” explains UKIE’s head of policy and public affairs Tim Scott. “It includes voice acting, music and QA but excludes marketing and most prototyping costs.”
Up to 80% of the total core expenditure can be claimed under VGTR, while at least 25% of core expenditure needs to be incurred within the UK or EEA for a game to be eligible. But there is no limit to the game’s budget so the same percentage of relief is provided whether it’s a shoestring indie game or a multi-million AAA production. That relief can take the form of either an additional deduction from the company’s profits, lowering the corporation tax that the company has to pay – or, a payable tax credit worth up to 20% of the total core expenditure on the game while the project makes a loss.
Scott adds, “Many accountants recommend structuring your cashflow so as to claim as much of the relief as a payable tax credit as possible.” For young studios making their first game where they are making a loss until the game ships, that money back can be vital.
“I would say it's the most important source of funding that we have since we don't have external funding, it makes a profound difference in our ability to make the game,” says Jason Davey, founder of Stray Basilisk, a studio making its first game Steamhounds. “It's basically 20% of our budget, which goes to support things like art, writing and other content, so it makes a big difference.”
While VGTR is attractive to global companies and investors, it’s important to stress that the relief can only be claimed by a UK games company. “A games company is only eligible to claim tax relief if it is incorporated at Companies House before full development of the project begins,” explains Scott.
“It also has to be the company that is responsible for designing, producing and testing the video game; actively engaged in planning and decision-making during design, production and any testing of the video game; and directly negotiates contracts and pays for rights, goods and services in relation to the video game. That is, any other companies working on the game should be engaged by the UK games development company, not a separate parent.”
This is because the tax relief is being paid to the company rather than an individual. But given how quick and simple it is to register a company at Companies House for just £12, it makes sense to do this if you are serious about making a game, whether you are a solo developer or a few friends making a game, so long as the game is intended for general release. This even includes games that end up being abandoned for any reason, although not if it’s just for building a prototype.
VGTR can only be claimed for a game by one entity, so in the case when a developer is working with a publisher, the two parties need to agree who is making the claim. In the case of a co-production, Scott warns that in some cases this may render a UK game studio ineligible since it would mean the company is not responsible for all of the game’s production. “Co-developing studios may wish to structure their collaboration in such a way that enables the UK company to take advantage of the relief,” he adds.
What is the cultural test and how to pass it
In order to claim for VGTR, developers first need to apply to the British Film Institute (BFI) who has to certify a game as British, and this is a process done for each individual game.
“We're the first part of the process of accessing the tax relief,” says Anna Mansi, the BFI’s head of certifications unit. “To access the tax relief, video games developers have to qualify as British under the cultural tests.”
The cultural test can sound confusing for some developers who worry it means their game isn’t “British” enough. But what does this really mean? Based on the hundreds of British games already made that have claimed VGTR, it certainly doesn’t mean you need to cram your games with red post boxes and double decker buses.
The cultural test is points-based and broken down into the following four sections:
- Section A: Cultural Content - this covers what’s seen on screen, including game characters, setting, dialogue, and subject matter (up to 16 points)
- Section B: Cultural Contribution - explaining how this game can impact on British culture, diversity, and heritage (up to 4 points)
- Section C: Cultural Hubs - where the development is located, i.e. in the UK (up to 3 points)
- Section D: Practitioners - where the developers are based (up to 8 points, and if a studio is small and a developer wears multiple hats, they can claim multiple points in this category)
Of the possible 31 points in the test, you only need 16 to pass, so it’s not actually necessary to qualify or fill out every section, provided you have enough points elsewhere, but it means it’s possible to get all the points just from Section A. Some of these will be automatic as well, such as if you have British people in the development team or the game has English text -- those instantly gain you points.
Getting away from stereotypes of what’s considered British, the cultural contribution is also not just about making a WWII game or a Victorian period piece. “Cultural contribution is looking at [whether] the game developer doing something new or innovative that's not been seen before in a game, which can be behind the scenes,” explains Mansi. “In terms of diversity, which can be on or off screen, either the individuals that are making the game are from underrepresented groups, or there are underrepresented groups represented on screen.”
In regards to characters, story and setting, a game doesn’t necessarily have to be British to gain points, since VGTR applies to both the UK and EEA. Points are actually awarded to a game that is British, European, or an undetermined location, which includes games in a fantasy world or something completely abstract - categories that Stray Basilisk’s steampunk game Steamhounds and developer High Tea Frog’s party game Cake Bash would fall into.
“Normally, Steampunk is alternate history Victorian England, and we're not doing that. We're trying to make it a bit more diverse and not go for the default alternate history London,” explains Davey. “But that’s indeterminate, and even if the actual content isn't that British, something that's written by a British person still counts despite not being about Britain in an obvious way.”
Laura Hutton, co-founder and artist at Cake Bash studio High Tea Frog, adds: “It's especially strange when your game doesn't have much talking or a storyline, because our game is a four-player party game, and you have to write about the characters' backstory and stuff that just didn't make any sense. We filled it out the best that we could, but then the BFI contacted us and told us the easier way to do it, where we wouldn't need to fill that section in at all.”
Fundamentally Games COO Ella Romanos says, “The BFI are not there to try and catch you out, which I think is the natural sort of assumption. They are going to help you try and find out how to get points to qualify.”
Romanos has had a lot of experience helping developers to with games financing, including assisting with VGTR. She adds: “I can understand that it can be a little bit daunting, but the reality is that there's a lot of people out there who can sit on a call and help you to do it. And if you send it to the BFI and it's wrong, they'll just come back to you and say 'can we help you fix it?'”
How to claim VGTR
Once a developer has received a British certification for their game, they can begin to claim VGTR. And the good news is that if you’re just learning about VGTR, it’s possible to claim back for past projects or expenditures already made, though completed projects must not be older than two years.
The first certification you receive will also only be an interim one that lasts for three years (if development lasts longer, the BFI will re-issue a certificate while also double-checking whether there have been any changes to affect the cultural test points), while a final certification should be requested once the game is completed and shipped.
When it comes to making the claim, it’s actually quite straightforward and can be done with your end-of-year accounts while attaching the interim or final certificate, and possibly some additional documentation if relevant.
“Not all accountants are specialists in games, so not all understand VGTR,” warns Romanos. “If you're a small company, you might use a local accountant and they're probably really good accountants, they may just not know about VGTR. I have in the past come across cases where the accountant hasn't been giving the right advice.”
As VGTR isn’t all that different from other tax relief for other creative industries – in fact, the BFI’s cultural test for games shares a similar same template with that of film - Scott says that the process will be familiar for production accountants across the creative industries.
The government website also provides clear guidance on what can be claimed, what counts as core expenditure and what doesn’t. While it might not be required to hire an accountant for VGTR, especially if you’re a small studio, most developers ultimately recommend it. “It will probably add a few hundred pounds to your accounting bill, but if you're paying an accountant bill, as long as you do it with your end-of-year accounts, it would be silly not to,” says Romanos.
“Our baseline for having an accountant to do our yearly filing is about £500,” says Davey. “So if you're spending more than £5,000 a year, it's worth getting VGTR.”
While it’s important to seek advice from third parties, including other developers who have been through the process, what you should not do is pay for services offering to apply for the cultural test for you, in exchange for a fee or commission. It is very straightforward for the developer to apply under the cultural test themselves for certification.
“I think the fact that these companies exist - trying to make money out of something which is supposed to help people with money - makes you think it's much more complicated than it actually is,” says Hutton.
Why UK game developers should be claiming VGTR
With 294 games receiving final certification for the year 2020/21, the highest since 2016 (not including games with interim certification), it’s clear how important VGTR is for the UK games industry’s growth.
“It's reduced the risk massively, having the ability to claim 20% back,” explains Romanos. “Not only has it made a huge difference in being able to afford to make games, but it has also increased the opportunities of other funding through it, since it makes it a lot more attractive for investors.”
Scott says, “It really contributes to the overall attractiveness of the UK as a place for inward investment when it comes to games development - more investment, more jobs, and more growth in the UK games industry.”
Since VGTR was introduced, the BFI has been reaching out to the industry, both through trade bodies like UKIE as well as through panels and talks through events like the London Games Festival, although the lack of event owing to the pandemic may have affected some of this outreach.
Despite how much of a given VGTR should be, especially something that any major studio with its own accounting department will know to do, Romanos is still shocked when she does speak to developers who aren’t claiming it.
“I think more claim it than don't now, but if you compare the number of claims to the number of studios in the UK, there’s a massive difference,” she says, although it’s worth noting that some studios are either not active or may be working on projects that are not eligible - for instance, educational or non-interactive releases (e.g. a VR film), or completely promotional content. “It's probably a lot of the smaller developers who just feel like they don't quite understand it.”
The industry is also a fast-moving one, with new studios starting up all the time, so there’s always the possibility that newcomers are not aware of VGTR, or even developers who worked at a large company before deciding to go indie and have to handle their own taxes for the first time.
Misinformation can also distract and deter people from finding out about VGTR, from the initial confusion about what’s “culturally British” to media reports that make out that the majority of tax relief is going to the big publishers like Rockstar or Activision Blizzard.
But the fact is there is no limit on budget and expenditure for making the claims. Ultimately, it’s something that all developers should be claiming, which publishers and investors especially in the UK and EEA will assume is a given.
“It’s a bit of a hassle, maybe a couple of days worth of work to put the whole BFI application together, but honestly it was quite easy and I think it's an absolute no-brainer,” says Davey. “Any UK-based studio is practically being recklessly irresponsible if they don't apply for this.”
Scott concludes: “We know that it can look a little tricky from the outside, but the application process is relatively straightforward and the funding you get can make a real difference to supporting your process.
“And if you do need advice, do get in touch with the right people. The BFI are extremely helpful with regards to the cultural test process and we have a number of accountants in the UKIE network who can offer tips, so do ask for help if you need it.”
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