Q: We run a video games studio and want to plan for a contract that runs over several years but don’t know if the new reliefs planned by the last government will now take effect. What should we do?
A: While no business adviser has a crystal ball and there is little more than speculation about what the chancellor might announce during her budget on October 30, Rachel Reeves has given some indication that certain growth sectors that contribute significantly to the UK economy will be actively supported.
We can’t guarantee that business reliefs now available won’t be cut, but our expectation is that they would not simply be switched off overnight. Whatever reliefs are available at the time of your application are likely to be honoured, and any major change announced in October should include a transitionary period that seeks to phase in any proposed reductions.
You should start by reviewing what reliefs and incentives are available now. As a video game development company, you might consider video games tax relief (VGTR) on your corporation tax bill and its upcoming replacement, the video games expenditure credit (VGEC). The chancellor has given no indication that she plans to change these reliefs, which are designed specifically for UK video game developers and offer significant financial benefits.
VGTR provides relief on up to a maximum of 80 per cent of core expenditure, resulting in a net credit of up to 20 per cent. To be eligible for VGTR, your game must be certified as British by the British Film Institute, and at least 25 per cent of the core expenditure must be incurred within the UK or European Economic Area. For example, a mid-sized game development company with £500,000 in qualifying core expenditure could claim up to £100,000 in corporation tax relief under VGTR, providing a substantial boost to cashflow.
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For productions starting from April 1 next year, the VGEC will offer similar benefits with a slightly higher net credit rate up to a maximum of 20.4 per cent.
In order to apply for the VGEC, you must ensure your expenditure records are meticulous, covering costs related to designing, producing and testing the game, excluding marketing and promotional expenses.
If your development activities include significant innovation, such as developing new gaming technologies or solving complex technical problems, the R&D tax credit regime may be applicable. To be eligible, your project must seek to make an advance in science or technology by overcoming scientific/technological uncertainty, and the solution to the problem must not be readily deducible by a competent professional.
Under the R&D tax credit regime, SMEs can claim up to a maximum of 33.35 per cent of qualifying R&D expenditure. For larger companies, the rate is lower but still beneficial. For example, a small game studio spending £300,000 on an innovative project could receive up to £100,000 back through R&D tax credits. These figures are illustrative and rates are changing.
When considering a multi-year contract, the important thing to remember is that business reliefs are usually beneficial, even if they are reduced. However, a professional adviser can work with you to understand your position and the best course of action to maximise the reliefs available, including scenario planning for any potential change in rates.
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Heather Williams is a research and development tax partner at Azets, the firm of accountants and business advisers
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