Exploring the Evolving Landscape of Video Games Tax Relief in the UK

The gaming industry has grown immensely over the years, and the UK has played a significant role in shaping its success. British game development studios have proven themselves as pioneers in the field, producing captivating games that have the perfect mix of innovation, creativity, and technical expertise.

With an impressive portfolio of titles, the UK’s reputation as a dominant force in interactive entertainment remains unshaken. Whether you’re a dedicated gamer or simply familiar with the world of gaming through friends and family, you’ve likely encountered iconic characters and Franchises like Sonic the Hedgehog, Zelda, Call of Duty, and FIFA.  Over the past decade, the UK’s video game development sector has experienced an extraordinary evolution, propelling the nation to the forefront of the global gaming industry.

One crucial element that has contributed to this growth is the Video Game Tax Relief (VGTR), introduced in 2014. Since its inception, VGTR has enabled companies to claim relief on expenses related to designing, producing, and testing new video games, amounting to an impressive £5.1 billion in UK expenditure. In a landscape where innovation drives the industry forward, tax reliefs have played a vital role in fostering development and production. The most recent spring budget unveiled a new relief set to replace VGTR – the Video Games Expenditure Credit (VGEC).

Understanding VGTR 

VGTR was designed to allow British video game development companies to claim relief on expenses incurred during the creation process. This could be achieved either through a deduction in taxable profits or by surrendering the loss for a payable tax credit. A company could submit multiple tax relief claims for a single game during production, with each claim potentially covering several games. However, with VGEC on the horizon, VGTR’s days are numbered. 

Introducing VGEC 

Set to run alongside VGTR for accounting periods beginning on or after January 1, 2024, VGEC will require companies to transition to this new scheme for video games starting development after April 1, 2025. Games already in development before April 1, 2025, will still be able to claim through the VGTR scheme until April 1, 2027, after which all games must claim through the VGEC scheme. 

VGEC brings with it a headline rate of 34%, which, when factored with the current corporation tax rate, translates to an effective rate of approximately 25.5% – slightly higher than VGTR’s existing relief rate of 25%. VGEC’s scope is limited to expenditure on goods and services used or consumed exclusively in the UK, as opposed to VGTR, which also covers expenditure in the European Economic Area (EEA). 

A notable difference with VGEC is the removal of the subcontracting limit, making it more favourable for studios that primarily operate within the UK. However, for studios conducting a substantial portion of their operations overseas, VGEC’s UK-specific focus may lead to reduced claimable tax relief. 

The Path Forward 

While the implementation of VGEC may still seem a long way off, it is essential for video game companies to start strategising now. Understanding how VGEC might impact their business will be crucial for navigating the changing landscape effectively. If you’re interested in exploring the potential implications of VGEC for your company, feel free to reach out as we’d be happy to help! 

If you’re a video game developer or part of the gaming industry, VGTR could be your ticket to unlocking substantial financial benefits and expanding your horizons.