May 8, 2014

Just as significantly, it is great news for owners of other forms of IP, such as book publishers and TV production companies. It encourages, and reduces the economic risks associated with, the new commercial opportunities available to them for collaboration with the games industry.

The Headlines

In short, a video games development company can now claim a payable rebate direct from the British Government based on the level of qualifying spend on a qualifying video game. The headline rate of the rebate is 25%.

Note that this article is based on the draft legislation. This legislation does not have Royal Assent yet. It is expected to be passed into law in the summer of 2014 but until that time it could be changed. Further, no payments will be made until Royal Assent has been given but then qualifying costs from 1 April 2014 will accrue tax credit. 

Please contact us to make sure you have the latest.

Wiggin LLP

The relief is part of a wider package to support the UK’s creative industries and works in a similar way to the tax relief available for feature films which has been in place since 2007 and for high-end TV drama and animations brought in in 2013.

Wiggin initiated the campaign which led to the introduction of the TV tax credit and has been a key architect on the lobbying strategy. Consequently, we have experience of these tax credits unparalleled by any other firm.

In this article, Wiggin partner Guy Sheppard, a specialist media lawyer, explains (i) how a video game (and its development company) qualifies for and can claim the UK video games tax credit and (ii) the value of the tax relief.

Executive Summary

The Video Games Tax Credit can be claimed:

• in respect of a “video game”,
• by a “video game development company” if the video game:
•  is “intended for supply”;
•  is a “British video game”; and
•  complies with the minimum “EEA expenditure” requirement.

Then certain losses incurred on the video game by the video game development company can be offset against profits or surrendered in return for a cash payment (this is the “tax credit”).

Each of these terms are explained in more detail below. 

“Video Game”

 “Video game” is not defined, but the following is excluded from being a “video game” for these purposes:

• anything produced for advertising or promotional purposes;
• anything produced for the purposes of gambling.

A video game is completed when it is first in a form in which it can reasonably be regarded as ready for copies of it to be made and made available to the general public. 

Who can claim it?

The Video Game Tax Credit can only be claimed by the “video games development company” (“VGDC”). It must be a company within the charge to UK corporation tax: it cannot be claimed by individuals.

The VGDC is the company which is (i) responsible for designing, producing and testing the video game; (ii) actively engaged in planning and decision-making during the design, production and testing of the video game and (iii) directly negotiates, contracts and pays for rights, goods and services in relation to the video game. 

Availability

 The VGDC may claim in respect of a video game if the following 3 conditions are met: 

• the video game is intended for supply to the general public.  There is no requirement actually to supply. The test is measured only when video game production activities (which includes development) begin.
• the video game is a  British video game by scoring the necessary points on the Cultural Test.  In brief, the Cultural Test has four sections:
  • Section A: a maximum of 16 points are available based on content of the video game (setting; characters; subject matter/underlying material; and dialogue/voice over)
  • Section B: up to 4 points are available based on the video game’s cultural contribution.
  • Section C: up to 3 points are available in respect of where certain work on the video game is carried out.
  • Section D: up to 8 points are available based on the nationality of the personnel involved in the making of the video game.
• at least 25% of the “core expenditure” (see below) on the video game must be “EEA expenditure” (also see below). 

 “Core Expenditure”

Core Expenditure is expenditure on designing, producing and testing the video game.

This excludes expenditure on, for example (i) certain development activities, (ii) distribution, and (iii) costs of finance.

Expenditure incurred in (i) designing the initial concept and (ii) in debugging or carrying out maintenance on a completed video game is also expressly excluded from the definition of “core expenditure”. 

“EEA Expenditure”

“EEA expenditure” is expenditure on services or goods that are “provided from within” the European Economic Area. The focus is on where recipient renders services, not the nationality of the recipient.

So, the cost of a US developer’s work in the UK is EEA expenditure but the cost of a UK programmer working in Canada is NOT EEA expenditure.

Costs can be apportioned; for example, project leader services could be partly EEA expenditure and partly non-EEA expenditure. Apportionment must be made on a “just and reasonable” basis. 

How much is it worth? 

• if EEA core expenditure < 25% of total core expenditure, no tax credit.
• if EEA core expenditure ≤ 80% of total core expenditure, tax credit = 25% of EEA core expenditure.
• if EEA core expenditure > 80% of total core expenditure, tax credit = 20% of total core expenditure (i.e. a cap of 25% of 80%).

Note that any payments made by the VGDC to another person in respect of work on design, production or testing of the video game that is contracted out to that person which (in total) exceed £1,000,000 will not attract tax credit. 

How do you get the money?

The VGDC may surrender the losses it has sustained (spending on the video game) in return for a cash payment, OR use the tax loss against other taxable profits.

Note that because this is a system where losses must be surrendered to claim the cash payment, other profits can reduce the losses available to be surrendered. Please make sure you come to us and take specific advice early as we can help you avoid any reduction on the tax credit claim.

Conclusion

In conclusion, this is fabulous news for the UK games industry. It is an entirely new incentive, not one replacing an old one, and is a major economic benefit.

It is also an easy system to navigate, payments come straight from Government and these payments will be bankable by banks, funds and other lenders active in the industry. Please contact us if you are looking at such arrangements.

For more information on how we could help you, please contact Guy Sheppard.

This article does not constitute legal advice. For legal advice on any of the topics covered, please contact your usual Wiggin contact partner.