VGEC is coming… are you ready?
As part of its bid to modernise the UK creatives tax relief system, the UK Government has decided that video games tax relief (“VGTR”) should be replaced by a new video games expenditure credit (“VGEC”) over the course of the next few years. For now, it's a two-player game, as many existing game productions will have the choice to stick with VGTR or switch to VGEC.
From a headline perspective, VGEC will provide a 34% credit to qualifying company's which incur expenditure when designing, producing or testing video games. Qualifying company's can start applying to use VGEC for accounting periods ending on or after 1 January 2024. Only VGEC will apply to video game productions beginning on or after 1 April 2025 and VGTR will be unavailable to companies from 1 April 2027.
Once you dig into the detail, the actual benefit to a company from obtaining a VGEC will in fact be much lower than the 34% headline figure as this credit will be treated as taxable income in its hands. The VGTR meanwhile currently provides a deduction from profits or a surrenderable loss for a 25% tax credit.
Aside from rates and this fundamental design change there are other differences. Under current draft legislation, qualifying companies will not be able to claim credit for expenditure under VGEC if it represents connected party profit. VGEC will also only apply to qualifying UK expenditure on goods and services used or consumed in the UK (unlike VGTR which applies to expenditure on goods and services that are provided from within the UK or the EEA). VGEC will also not have a subcontractor payment cap (unlike VGTR). So depending on the business, and how it's structured, VGTR or VGEC might be the more generous scheme. Subcontracting outside the UK will start to look at lot less attractive, while subcontracting within the UK could potentially be more beneficial than under VGTR (given the removal of the cap). Even if your production will benefit more under VGEC than VGTR, you will need to get used to new rules and new compliance obligations, which most businesses will find more demanding than VGTR.
The Independent Game Developer's Association (TIGA) - which played a key role in securing government commitment to the original VGTR scheme - has recently called for the government to reconsider those additional compliance hurdles, as well as some other aspects of the VGEC draft legislation. So it's possible there will be last-minute changes through consultation with industry, but it's best to prepare for the worst-case scenario.
Given the date for when companies could start claiming VGEC is fast approaching it is important that companies within the sector decide sooner rather than later if they are eligible to claim VGEC and, if so, decide whether they should start transitioning from VGTR to VGEC for their projects.
(Image courtesy of OpenAI's Dall-E)
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