VGEC Transition Rules: What Developers with Ongoing Projects Need to Know

In November 2023, the UK government announced the closure of one of the most popular tax relief incentives in its arsenal. Video Games Tax Relief, or VGTR, has enabled nearly £1.5 billion to be paid out to UK game developers since its inception.

But don’t panic – its closure is part of the revamping of creative industry tax relief schemes. VGTR is getting replaced with the Video Games Expenditure Credit (VGEC). For many companies, this scheme is more generous, offering up a net benefit of 25.5% on eligible costs.

What changes are coming?

With the arrival of the VGEC scheme, HMRC announced a transitional period to phase out the long-standing VGTR scheme without severely impacting any games currently claiming the existing relief.

First and foremost, companies need to know when they can claim for VGEC, the new scheme. Companies may only opt into VGEC for accounting periods ending on or after 1^st January 2024. They can only claim for expenditure incurred on or after this date, too.

However, for those still looking to claim the old VGTR scheme, the closure date depends on your game’s production timeline:

• Games that begin their production phase before 1^st April 2025 can claim VGTR until 1^st April 2027.
• Games that begin their production phase on or after 1^st April 2025 must claim through VGEC from this date.

But what if your accounting period crosses any of these dates?

Claiming VGTR and VGEC in the same period

For companies with accounting periods that cross over 1^st January 2024 (i.e., the opening of the VGEC scheme), they will have the following options:

• Opt in to claim through the VGTR scheme for the first portion of costs (up to 1^st January 2024) and the VGEC scheme for the second portion (from 1^st January 2024).
• Apply the VGTR rules to the entire period.

For companies with accounting periods that cross over the closure dates of the scheme (1^st April 2025 or 1^st April 2027, depending on the production timeline of the game, as above), they will have the following options:

• Claim under VGEC for the entire period.
• Opt in to claim through the VGTR scheme for the first portion of costs (up to 1^st April 2025 or 2027) and the VGEC scheme for the second portion (from 1^st April 2025 or 2027).

Both VGTR and VGEC are cumulative schemes. Games that opt in for the VGEC scheme are treated as a continuation of the previous trade. In the same way, a BFI certificate will continue to be eligible under VGEC, even if it was acquired when claiming VGTR.

Some video game developers may be working on multiple games at once and they may have different preferences between VGTR and VGEC for each game. As each video game is treated as its own trade, companies can choose which scheme suits the game best on a per-game basis.

Apportioning costs in a single period

If a company splits its accounting period to claim both VGTR and VGEC, it will need to apportion its costs depending on “notional periods”.

For example:

Company A has an accounting period running from 1^st January 2027 to 31^st December 2027 and wants to claim for a game that began production in 2024 (therefore can use the VGTR scheme until 2027).

Company A will be able to claim for VGTR until 1^st April 2027 but then will need to claim VGEC afterwards due to the closure of the scheme. It will have one notional period running from 1^st January to 31^st March 2027 for VGTR and another from 1^st April to 31^st December 2027 VGEC.

HMRC repeatedly emphasizes the importance of “just and reasonable” apportionments, where necessary. Some companies may choose to work more granularly, with recorded timesheets across the period, while others may choose estimated percentages; whatever your apportionment method is, you must be consistent with it. However, one-off expenses must be allocated to the notional period in which they arise.

On the additional information form, the production should be treated as two productions according to the notional periods. It should be included in both the sections for VGTR and VGEC on the AIF. This means that some information will have to be entered or submitted twice on the form, like the certificate from BFI. You will also need to attach two separate relief calculations to the form.

Similarly, you will need to file the tax return as though it’s claiming for two productions. However, only one CT600 is required for the accounting period.

European and UK Expenditure

With the higher rates of relief under VGEC also comes fewer eligible costs. Companies claiming the new expenditure credit can only claim UK costs. This could be a big deduction for many companies who previously enjoyed claiming European costs under the VGTR scheme.

There are different minimum expenditure requirements for the VGTR and VGEC schemes:

• The VGTR scheme is available to companies with a minimum of 25% European costs (i.e., costs from the EEA and UK).
• The VGEC scheme is available to companies with a minimum of 10% UK costs.

Companies that claim VGTR or VGEC (or both) before their game is completed should meet this requirement in their planned budget. They must then make sure that they meet the requirement by the end of the game development, as they are at risk of any benefit being clawed back if their final cost report does not meet the minimum expenditure requirement.

When a company changes from VGTR to VGEC, these new qualifying criteria need to be taken into account. For a company that previously claimed VGTR and now wants to claim VGEC, the game’s budget should be split into two separate notional periods. The minimum European expenditure requirement applies to all costs claimed under VGTR, and the minimum UK expenditure requirement applies to the VGEC costs.

For example:

Company B begins developing a game on 1^st January 2022, and its planned budget meets the minimum expenditure requirement. Its accounting period runs from January to December and, therefore, crosses the opening date of the VGEC scheme. It chooses to claim VGEC for expenditure incurred from 1^st April 2024.

Company B must meet the European minimum expenditure requirement for all expenditure actually incurred between 1^st January 2022 and 1^st April 2024. It must then meet the UK minimum expenditure requirement for all expenditure planned from 1^st April 2024.

Questions? Check out our eBook!

When and how you should claim for VGEC will depend on the facts of each case. If you’re not sure what the best option is for you, feel free to get in touch with our expert team to discuss your games.

For a deep-dive on all things VGEC, including qualifying costs, BFI certification and example claim calculations, download our comprehensive eBook here.