On Tuesday 18th July, HM Revenue & Customs (HMRC) published draft legislation providing further detail on the reform of the UK’s existing video games tax relief (VGTR) to create a new Video Games Expenditure Credit (VGEC), an expenditure credit of broadly equivalent value. VGEC will be rolled out over the next four years, with the earliest opportunity to claim VGEC arising for accounting periods commencing on or after 1 January 2024 (see detailed transitional provisions below).

This publication is intended by HMRC to provide a final opportunity for industry stakeholders to comment, not so much on the overriding principles but on any unintended consequences of the draft legislation. The deadline for responses to this technical consultation is 12 September 2023.

Many features of the existing VGTR have been retained. Our list below identifies areas where there have been material changes to the existing relief and/or where we consider the draft legislation may have unintended or disproportionate consequences which may be worthy of comment in any feedback:

VGEC will apply at a headline credit rate of 34%, which will broadly equate to a 25.5% credit as a % of qualifying expenditure (see a simplified illustrative calculation here), as opposed to the current 25% under the existing relief.

• VGEC will be structured as a refundable expenditure credit, based on the existing R&D expenditure credit. The credit will be accounted for as taxable trading income and included in a company’s profits and subject to corporation tax (with a deduction allowed from the corporation tax). This is different from the calculation of the existing relief which operates as an adjustment to taxable profits.
• As a taxable trading receipt, VGEC can be utilised in a number of ways, including being surrendered to other group companies and used to relieve their tax liabilities.

• Removal of EEA Qualifying Expenditure: VGEC will require a minimum of 10% of expenditure to be on goods or services used or consumed in the UK, in line with the rules for the film and TV tax reliefs. UK core expenditure will be defined as being goods or services “used or consumed” in the UK, i.e. with the focus on the location of the recipient customer, not the supplier.
• Removal of Subcontracting Limit: The £1 million per game subcontracting limit will be removed from the VGEC.
• Connected Parties: One significant change is a new connected parties rule which will restrict relief on payments between connected parties to the amount of expenditure incurred by the connected party in providing the service. For example, if a company pays a connected company £100 for a service which costs only £75 to provide, the qualifying expenditure of the engaging company will be restricted to £75 (not the £100 actually paid). Many intra-group supplies may therefore be unable to benefit from full relief. For example, intra-group development services.
• AVEC cash refunds are only available after other tax liabilities are settled: HMRC reserves the right to set VGEC off against any existing tax liabilities of the company (including any current or previous year corporation tax or PAYE/NICs or in respect of any amounts that are subject to an enquiry by HMRC) before any cash refund can be obtained. Therefore the level of payments may be less certain at the outset and the payment itself will be made by HMRC later in the production cycle (i.e. once the applicable accounting period has ended, the associated corporation tax return submitted and corporation/other taxes paid). This is a key difference from the existing relief and the resultant uncertainty may impact credit lines (where relied upon), as well as cash flows. The impact of these changes will need to be considered and carefully managed.
• Going Concern: VGEC is only payable if the company is a “going concern”. If the company is in administration or liquidation, then it is not payable. Arguably this is unduly draconian for a company in administration, given that the purpose in those circumstances is to ultimately restore a company to financial health and reinstate its going concern status.
• Eligibility under VGEC and RDEC: Where expenditure technically qualifies under both VGEC and the RDEC, RDEC takes precedence and the draft VGEC legislation therefore contains an exclusion to prevent any double claim.

There is a relatively generous transition period:

• For accounting periods beginning on or after 1 January 2024, VGEC will be available to companies alongside existing audio-visual tax reliefs.
• If a company’s accounting period begins before 1 January 2024 but ends after 1 January 2024, it will have the option to apply the existing rules to expenditure incurred up to 31 December 2023 and apply the VGEC to expenditure incurred from 1 January 2024.
• From 1 April 2025, VGEC will be obligatory for new productions, however, video games that have begun but not concluded development on 1 April 2025 may continue to claim relief under the current system until 31 March 2027. This will mean that:

• • • EEA expenditure will continue to be a qualifying cost for VGTR until 31 March 2027, when the relief ends, unless a business elects to opt into the VGEC in the interim from which point they will no longer be able to claim EEA expenditure; and
    • The £1 million subcontracting cap will also be retained for VGTR until the relief comes to an end on 31 March 2027.

• From 1 April 2027, all productions must claim under VGEC and the current tax reliefs will cease to be available.
• Companies that do not elect to opt into the regime by the relevant ‘closure dates’ as set out above will be treated as though they abandoned their activities (i.e., will be precluded from benefiting).

• Companies must elect to opt into the new regime during the above transitional periods in their company tax return.
• Companies claiming VGEC will be required to complete and submit an online information form intended to improve the provision of additional information.

Please do get in touch if you would like to discuss these changes.