VGTR or R&D Tax Relief - which should you claim?

Developing video games can be a daunting project with tight margins. Fortunately, there are funding options for these projects, if you know where to look. But which one is best suited to your project? As leading specialists in VGTR and R&D tax relief claims, we often get asked questions to this effect, so we thought we’d answer them in this blog.

What is VGTR?

Video Games Tax Relief, or VGTR, is a government-backed tax relief scheme for the creative industry, found alongside Film Tax Relief, Animation Tax Relief and others. VGTR supports UK game developers with a tax rebate for the costs of design, production and testing. It offers a valuable source of extra cash for companies developing games and puts you in a stronger position for investors.

The tax relief is worth up to 20% of the production costs. You can claim VGTR on whichever is lower: 80% of the total core expenditure or the actual EEA core expenditure incurred.

For profit-making games, the VGTR can be used to reduce your Corporation Tax bill, but loss-making games can claim a cash payment from HMRC at a rate of 25%.

How do I qualify for VGTR?

There are relatively strict qualification criteria for VGTR. Companies need to show that:

• They are responsible for most of the planning, designing, developing, testing and production of the video game (and thus can be known as the Video Games Development Company, or VGDC;
• The game is intended for commercial release (without being created for the purpose of advertising, promotion or gambling);
• The game qualifies as “British”, having obtained a pass from the British Film Institute’s (BFI) Video Games Cultural Test;
• At least 25% of the production costs were incurred within the European Economic Area (EEA).
• The games must be playable on a PC, television, smartphone, tablet or video console.

What about R&D Tax Credits?

Where VGTR offers a tax rebate to companies involved in the production of video games with close cultural ties to the UK (or Europe), R&D tax credits offer government-backed support to companies advancing science and technology beyond the state-of-the-art.

It has a higher rate of relief, as companies can claim up to 33% back from eligible costs for research and development (R&D). There is often some overlap between VGDCs and companies eligible for R&D Tax Credits.

The qualification criteria are slightly more relaxed than for VGTR, as your company only needs to be registered for Corporation Tax and have qualifying R&D activity to be able to claim. However, navigating the two schemes can be a minefield and leave you at risk of an enquiry from HMRC without careful consideration and guidance.

Should I claim for VGTR or R&D Tax Relief?

The short answer is, it depends on the scheme.

SMEs

The SME scheme for claiming R&D tax relief is less compatible with VGTR as both are considered ‘notified state aid’. The rules state that companies cannot claim for more than one kind of state aid for the same expenditure (which also applies to grants).

If your projects qualify for both VGTR and R&D Tax Credits, it’s best to go through R&D Tax Credits as they have a higher rate of relief.

However, if you have multiple clearly delineated projects, of which only some are eligible for R&D Tax Credits, you can claim for R&D tax relief on eligible projects and VGTR on projects which do not qualify for R&D tax relief; for example, developing an innovative game engine and overcoming technical challenges to achieve an advance in science and technology would qualify for R&D tax credits, but you could claim the production of a qualifying game through VGTR.

Large companies

The rules change again for large companies claiming through the RDEC scheme. The R&D Expenditure Credit is not considered notified state aid as it has a significantly lower rate of relief, which means projects eligible for RDEC can also be eligible for VGTR.

However, you must be careful dividing costs as you cannot claim VGTR and RDEC on the same costs and any costs which are eligible under RDEC must be claimed under that scheme, according to HMRC rules. This applies whether the company claims the costs through RDEC or not.

New Video Games Expenditure Credit (VGEC).

From 1 April 2024, qualifying productions can opt to apply for the new Video Games Expenditure Credit. VGEC provides a 34% expenditure credit, which is treated as gross taxable income. Relief is only available on qualifying UK expenditure; however, the £1m cap on subcontractor costs has been removed.

What do I do now?

To make a VGTR or VGEC claim, you should start with a BFI Cultural Test certificate to make sure that your games will qualify. From then on, companies need to show their core expenditure (broken down by category and locality) and a profit and loss account for each video game.

For R&D tax relief claims, you’ll need to provide a breakdown of costs and a technical report covering the R&D activity. You submit this with your CT600 to HMRC for review.

Any mistake made when claiming VGTR and R&D tax relief can be very expensive in time and money should HMRC investigate your claim further. Separating out costs and projects is a dicey process but is made easier with the guidance of a specialist R&D tax advisor like Myriad.

If you would like to speak to a member of the team regarding the best option for you, or if you just want to see if your projects would qualify, give us a call on 0207 118 6045 or use our contact page for friendly advice from the experts.