The European Commission (EC) has finally approved the video games tax relief that comes into effect for companies only for accounting periods beginning on or after 1 April 2014.
Broadly similar to the existing film tax relief, it will allow an additional deduction for qualifying 'core expenditure' against income from the relevant trade. Losses can be surrendered for a payable tax credit. Qualification also requires satisfaction of a cultural test of British or EU content and development.
The relief
At the time development starts, the video game must, be intended for supply to the general public. Video game takes its ordinary meaning, but does not include anything produced for advertising or gambling purposes. A company undertaking the development must be responsible for designing, producing and testing the video game and directly negotiate, contract and pay for all relevant rights, goods and services.
Qualifying expenditure
Qualifying expenditure must be 'ore'. This is on designing, producing and developing the video game and the game must reach completion. At least 25% of the core expenditure on the video game incurred by the company must be EEA expenditure i.e. used or consumed in the EEA. Expenditure on the initial concept or in post completion debugging or maintenance will not qualify. If the expenditure also qualifies for research and development (R&D) relief, video games relief will not be available.
Culturally test
This test must be passed for a company to qualify. It uses a minimum points system based on the aspects which are carried out in or relate to the UK or another European Economic Area (EEA) state.
Examples of the aspects include whether the video game relates to a British story or a story relating to an EEA state, the percentage of the video game that is set in the UK or another EEA state, the language used and the 'promotion' of British culture.
Additional deduction
A qualifying company may claim an additional deduction in calculating the profit or loss of the video game trade.
For the first period of account for the separate video game trade, the amount of additional deduction is 80% of the lower of:
- qualifying EEA expenditure; and
- 80% of total amount of qualifying expenditure.
For subsequent periods, the additional deduction is the difference between the amount calculated above for the later period and the amount of additional deductions given for all earlier periods.
Tax relief through credit
Where a qualifying company has a loss, it may surrender that loss and claim a credit for an accounting period of 25% of the loss surrendered. The relevant loss is the lesser of:
- the loss for the period in the video game trade; and
- the available qualifying expenditure for the period.
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