VGTR is a lucrative lifeline for games developers looking for additional funding. But how much your studio can claim varies greatly depending on your spending and financial position.
Like lots of creative fields, the world of video game development is extremely competitive.
Games rocket up and down the charts, while players constantly crave new experiences.
This frenetic environment puts studios under huge pressure to innovate; to conjure up new characters and settings as they chase the far-flung promise of steady monetisation.
This endless need to create pushes studios into a perpetual search for funding. While there are many options – debt, equity, reinvested revenues – few are as dependable and accessible as Video Games Tax Relief.
Video Games Tax Relief – or VGTR – is a UK government subsidy that lets game studios reclaim up to 20% of their costs as either a corporation tax reduction or a cash lump sum.
One of eight Creative Industry Tax Reliefs, VGTR is designed to support developers making ‘culturally British’ games, meaning games whose subject matter, characters and development teams embody UK and European values.
According to HMRC, the average VGTR payout for the last tax year was a little over £345,000 per claim. Or roughly £200,000 per game. This makes it a genuinely lucrative source of funding.
Exciting though these figures are, they are only averages.
Exactly how much funding your studio will receive depends primarily on two factors: how much you spent developing a VGTR-eligible game and the financial situation of your business.
Let’s explore these factors in more detail.
Factor 1: How much you spend
VGTR works by reimbursing you a portion of your game development costs.
So, generally-speaking, the more you spend on development, the more you can claim back from the government.
It’s not quite that simple though.
VGTR only lets you claim relief on what’s known as ‘core expenditure’.
This is expenditure that’s central to the development of your video game. Costs related to initial concept design and commercial exploitation – before and after the development stage, if you like – are not eligible for relief.
Core expenditure includes things like staff costs for coders, fees for voice actors and subcontractor costs for outside labour.
Read more about which costs are eligible for VGTR in this dedicated blog.
You won’t receive 100% relief on all core expenditure, though. VGTR provides relief on the lessor of:
- 80% of total core expenditure
- 100% of core expenditure incurred in the EEA
Factor 2: Your company’s financial position
The amount of video games tax relief you’ll receive also depends on your company’s financial situation, specifically whether you are profitable or loss-making.
This comes down to how VGTR operates as tax relief.
Profitable companies use their core expenditure to reduce or ‘offset’ their corporation tax.
The corporation tax rate is 19%, so profitable companies can effectively exchange up to 80% of their core expenditure for a tax reduction worth 19p per £1. That’s a net relief rate of 15.2%.
We’ll look at some examples of this in a moment.
Unprofitable companies, meanwhile, have no corporation tax to offset.
Instead, they can surrender their core expenditure for a ‘payable’ cash credit worth 25% of their eligible expenditure.
By surrendering 25% of up to 80% of your expenditure, you’ll receive the maximum relief rate of 20%.
Barely profitable companies
If your studio is only slightly profitable – near or perhaps at break-even – you won’t have much corporation tax to offset.
In which case, you’re allowed to offset however much corporation tax you owe and surrender the balance of your core expenditure for a 25% cash credit.
How is VGTR Calculated?
Now that we understand the variables determining the size of your claim, let’s look at some examples of how VGTR is calculated for companies in various financial situations.
Profitable studio
Living Tapestry Studios makes a net profit of £1,000,000 from a London racing game it spent £500,000 developing.
£400,000 of this investment is classified as core expenditure, and £380,000 was invested in the UK and France.
Living Tapestry can claim the smaller of:
- 80% of its £400,000 core expenditure = £320,000
- 100% of its core expenditure incurred in the UK and EEA = £380,000.
So, Living Tapestry can claim tax relief on £320,000 worth of development costs, reducing the corporation tax bill by £60,800. That’s a 15.2% relief rate on £400,000 of core expenditure.
A loss-making studio
Archangel Games makes a net loss of £35,000 and spends £100,000 developing a platformer for iOS and Android.
£90,000 qualifies as core investment, while £50,000 was spent in the UK, Ireland and Norway.
Archangel can claim the smaller of:
- 80% of its £90,000 core expenditure = £72,000
- 100% of its core expenditure incurred in the UK and EEA = £50,000.
So, Archangel can claim a cash credit by surrendering £50,000 of EEA-based core expenditure at 25%, yielding £12,500.
A barely profitable studio
Key/Stroke Ltd. has net profits of £10,000, all generated by an RPG set in medieval Scotland, which cost £400,000 to develop.
£280,000 of Key/Stroke’s expenditure on the RPG counts as core investment, all of which was spent in Britain.
The studio can claim VGTR on the lessor of:
- 80% of its £280,000 core expenditure = £224,000.
- 100% of its core expenditure incurred in the UK and EEA = £280,000.
So, Key/Stroke can claim VGTR on £224,000 of expenditure. However, because of its small profits, the studio only owes £1,900 in corporation tax, which can be offset with just £10,000 of qualifying costs.
Key/Stoke can now surrender the remaining £214,000 for a cash credit worth £53,500, giving the studio a combined relief of £55,400; a combined rate of £19.8%.
Maximise your relief
VGTR is a great source of funding for studios looking to develop a new game, expand existing titles, and invest more in marketing.
If you want to make sure you’re getting as much money as possible from the government, just drop GrantTree a message.
Our VGTR experts are standing by to get the ball rolling on your claim.
