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Your core expenditure is the foundation of your VGEC claim. Find out which costs count, when you can claim them and what the exceptions are for the credit.
With UK video game studios able to claim back up to 25.5% net of their qualifying production costs, knowing exactly what counts as a "core cost" under the Video Game Expenditure Credit scheme can make a significant difference to your bottom line.
The definition of core costs is critical to your claim, informing both your qualification for the scheme as well as the foundation of your calculation.
In simple terms, core costs are any expenses on designing, producing, and testing the game.
These are the three eligible phases of video game production. VGEC supports the development of your game, but not the early speculative stages of development nor the commercialisation of your game.
Knowing what activities you can include in your claim hinges on the "green-lit" moment. This is the moment when the decision to proceed with game development is made. Anything prior to this is ineligible.
Any work completed after you reach an MVP is also ineligible; your commercialisation, marketing and distribution activities cannot be included.
Core costs form the foundation of your claim; you are only eligible for VGEC if a minimum of 10% of your core costs are UK-based.
Knowing what qualifies as core costs is essential to calculating your claim.
You can claim the lower of:
For example, a development company with 100% of its core costs in the UK can only claim 80% of its expenditure. However, a company with only half of its costs in the UK and the other half abroad can only claim 50% of its core costs (i.e., the UK portion).
Knowing the phases of development will help you identify your eligible expenditure early on.
Early stage, speculative activities are not qualifying expenditure. This prevents companies from claiming for games that don’t have any genuine development, which is the focus of the relief.
This phase includes outlining themes, gameplay style, setting and plot, as well as any development work surrounding the search for funding. To this end, market research, pitch decks and feasibility work (like conceptual artwork or even early-stage development as a proof of concept) are ineligible.
Any game development work is ineligible up until the point the game is agreed to go forward. The “green-light” could come from agreement of external funding, or internal communication that confirms the game will proceed.
Once the game goes forward, design work can be included as part of your core costs.
This could include detailed game design documents, like:
This may also include rights required for the game production.
Your project planning activities will be eligible from the green-light too, like budgeting, setting milestones and team management.
Production and actual game development work is also eligible. You can expect programming, artwork, audio production and voice-acting work to be part of this phase. Writing code for game logic, UI, mechanics, physics, and networking, as well as asset creation usually feature in this stage.
All eligible costs must be in the UK, so your team should be based physically in the UK to be included here.
A crucial part of any game development is testing. The testing phase will include quality assurance and debugging, which may lead to further development cycles as fixes and changes are proposed.
It’s important to separate out post-release debugging, patches, updates and maintenance. Once the game is complete and ready for release, any further development is not eligible.
Marketing, PR, advertising and distribution activities cannot be included in your claim. Similarly, any rights not required for actual production or development are not eligible.
Though your commercialisation activities usually happen after your game reaches MVP, they may happen concurrently with development. No matter when the activities occur, they are, by nature, ineligible.
DLC & Expansion Packs
Downloadable content (DLC), expansion packs and additional levels can qualify for the credit, even if the game has already been released. Depending on the new content, you can apply under the same trade as the main game or under a new trade (although this will require its own BFI certification).
The facts of each case will impact your decision. Expansion packs that are materially different from the original game may need their own certification and trade, but a sequel that uses much of the same core development as the original game may be treated as part of the same trade.
Game development is rarely sequential, with design, development and testing often happening at the same time. Commercialisation activities and conceptual development will also sometimes straddle your core development.
Designers may be employed for conceptual development as well as production; likewise, programmers could work on production and post-MVP bug fixing.
Though you do not need to separate out costs by design, development and testing, you will need to ensure ineligible phases are not included. You also can only include UK costs, so you’ll need to exclude any foreign work too.
You should apportion your costs on a “fair and reasonable basis”. Methods of apportionment need to be justifiable in the event of a compliance check from HMRC. Depending on your project tracking systems, this could be:
With any apportionment method, it’s critical to document your reasoning and be prepared to explain the methodology. Should HMRC have questions on your claim, you don’t want to be scrambling to retroactively gather evidence.
When it comes to your core costs, it’s helpful to know which line items this might include. The largest portion of your VGEC claim is likely to be staff costs, but subcontractors, freelancers and other third-party service providers will also be a sizeable segment.
Since you can only claim UK-based expenditure, it’s important to know how this applies to your specific costs, especially for goods and services that cross borders.
Before considering which kinds of costs you can claim, let’s run through HMRC’s non-exhaustive list of costs that will never qualify:
The above costs cannot be included, no matter what phase they’re in or how essential they are to your development.
For staff and subcontractors, the worker must be physically based in the UK. Designers, programmers, quality assurance testers, and other personnel, contractors and freelancers perform their services wherever they are based.
Workers based in a UK office or working remotely in the UK can be included, but workers physically outside of the UK are ineligible. This applies regardless of where the company is based or the worker’s nationality.
Some services are indirectly used in video games, such as services supplied by script/dialogue writers, concept artists, composers, and researchers. HMRC will allow these costs to be included, although they will need to be apportioned based on where they are transformed.
For example, if an American company provides concept art that is later used by a team of developers, it must be apportioned according to how many developers are in the UK.
Many game studios ask if they can claim VGEC on expenditure on rights; the answer is somewhat complex.
Rights needed to actually make the game can qualify (e.g. rights to use a story or book), however, speculative options over rights are ineligible, as they aren’t necessary for actual development of the game.
Music, songs, literary works, stock footage incorporated into the game during production will be eligible, but broader exploitation rights (e.g. character merchandising beyond the game) can’t be included.
Essentially, if the rights are needed to be able to produce the game, you can include them, but not any rights in the conceptual development or commercialisation phases.
There is one important caveat when it comes to subcontractors, agency staff or other third parties. Costs of connected companies must exclude the connected party’s profit (unless priced at arm’s length).
A connected party means any company with shared control, including through partners/spouses, close relatives and close relatives of partners/spouses, or partners in a partnership.
VGEC can be claimed on connected costs, so long as they are priced at arm’s length, i.e., at a standard rate for the connected party. You may need to prove the pricing methodology, so, as with all aspects of your claim, you should document your decision making.
To be allowable, you must disclose any connected party transactions through the Additional Information Form (AIF), including the party name, date, value, description of goods/services.
If you’re thinking of making a Video Games Expenditure Credit claim, identifying your core costs is the first step that the rest of the claim rests on. Your eligibility and your final calculation depend on you getting this right.
Get in touch with our friendly team for a no-obligation chat about your game’s expenditure.
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