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How Can Indies Benefit from Tax Breaks?
Tax breaks in theory are great for the games industry and great for the economy. It’s brilliant that governments can support the creative industries and encourage economic growth. But is it just the big games companies that can benefit? How do the tax breaks work? And how can indies Benefit from tax breaks? We spoke with Matt Appleton tax director at leading audit, tax and consulting firm RSM to gain an insight.
How Can Indies Benefit from Tax Breaks?
My name is Matt Appleton, I’ve been with RSM for approaching three years but doing tax for nearly thirty years (and no parole). But to be serious, I have been specialising with VGTR (video games tax relief) since even before this was introduced; I also have many years of experience with R&D (research & development) tax breaks, including for the games industry.
We help across a whole range of services, from audit to accounting; from tax compliance to tax advisory for businesses and individuals; and across a raft of consultancy-based services (e.g. on overseas expansion, funding, buying/selling, succession planning or human resources) to help, irrespective of whether you’re a start-up, growing business or established multi-national.
What’s the work that your organisation has done around tax breaks?
There are a number of important tax breaks available. The most immediately relevant in terms of the Games sector would be VGTR and R&D. We have a specialist, national team for both these and other tax breaks. Other tax breaks that may be relevant would include EIS (tax relief on investment in certain companies), Entrepreneurs Relief (tax relief on disposal of a business) and patent box (can be claimed in addition to VGTR/R&D tax breaks; it is possible to patent software, which could lead to a 10 percent tax rate).
How do the tax breaks work exactly & what are they worth?
First, a general caveat that this is only an overview; I’d always recommend that advise be taken and nobody should rely on any of my comments in lieu of advice. I’d also add that my comments in this interview are my own, personal views and not necessarily reflective of the views of RSM as a whole.
For VGTR, you need to consider the “core” spend, associated with the production of the game. These costs qualify for VGTR, which can create an additional tax deduction of up to 80 per cent of the spend. And if there are losses, this deduction can be surrendered for cash.
For example, if a company spent £1m on producing a video game and assuming all costs are incurred in the UK and are “core” to the game production (e.g. not including certain costs such as marketing), then the benefit could be up to 20 pence in the pound with regards eligible production spend).
Get Certified
In order to claim VGTR, BFI certification is required. This involves passing a cultural test, which is generally points based to evidence the game is “British”. Points are awarded based on, for example, nationality of lead characters and location of game. Although the test is one of “Britishness”, the definitions are much wider – for example, the lead characters need to be from the UK, EEA or of an undetermined nationality.
For R&D, it will depend if small/medium or large (very broadly, small/medium if under 500 employees and either under 100m Euros turnover/86m Euros gross assets on the balance sheet; you do need to look at the wider group/ownership structure and not just any one company in isolation). If small/medium, qualifying R&D spend attracts an additional deduction of 130 per cent.
Companies claiming under the SME regime could receive an additional benefit of up to c24 pence in the pound in terms of qualifying R&D spend; for loss making companies, these losses could potentially be surrendered, with a tax credit of up to c33 pence in the pound in terms of qualifying R&D spend being payable.
Large companies (which include SMEs in certain cases for example where there are grants or subsidies) can potentially claim an income credit – the current rate is 12 per cent but, as this is taxable, the net benefit is currently just under 10 per cent.
There are some complex rules around the interaction of these reliefs. In short, if undertaking R&D under the large regime, then VGTR cannot be claimed on such costs (even if opting not to claim R&D relief). If undertaking R&D under the SME regime, there is scope to consider which regime would provide the best result (this is not always an easy consideration).
What sort of businesses qualify?
Any company producing a qualifying video game can potentially benefit from VGTR. Sole traders/partnerships cannot claim.
For R&D, the relief is based on whether there is an advance in science/technology – there must also be scientific/technological uncertainty, as recognised by a competent professional. Many companies in the IT world make successful claims, as they look to create new functionality, improve performance or ensure viable integration of technology. The net is potentially wide and outside of the Games sphere would be companies involved with manufacturing, pharma and even banking.
Can Indie developers benefit? Is it just games developers that can benefit or other areas of the industry?
For VGTR, it is the production company that qualifies. So an indie studio could claim, as long as this is a company, producing the game and meets the qualifying criteria.
What sort of businesses have previously benefitted?
VGTR has benefitted many game producers, from small start-up studios to large multinationals. R&D relief is a much wider net – not just gaming companies but any company advancing science or technology can benefit. For the UK gaming sector, there are many supporting sectors who have been able to claim, from animation designers to recruitment agencies, where IT development is core to their business.
Are there any well known UK businesses currently thriving as a result of the breaks?
Absolutely. There are many household names benefitting from these and other tax breaks. The key is that these are tax reliefs made available by the Treasury – and companies are encouraged to claim, as long as they do so legitimately.
There’s been suggestions that it’s mainly big international games developers that are qualifying and taking advantage of the breaks, how can indies benefit from tax breaks??
Whereas it is true that big internationals have benefitted, it is also true that many smaller companies including start-ups – and have made a real difference.
What are the benefits of international developers taking advantage of the breaks in the UK?
In short, one of the primary benefits is that profits may be covered by the additional tax relief afforded by these tax breaks. And even if loss making, there is scope to benefit from cash credits by virtue of these tax breaks.
When did the tax breaks begin and when might they end?
VGTR was introduced with effect from 1 April 2014. In theory, these are due to continue until at least 2023 and hopefully beyond. R&D was first introduced in 2000 for small/medium sized entities, with a separate scheme launched in 2002 for large companies. The rates and rules have increased and evolved over the years but is still going strong.
In theory, Brexit could create uncertainty for the future of these reliefs. In practise, the current (and past) governments have always been supportive – from introduction of the reliefs as well as continual increases. So hopefully, the future remains bright with relief continuing.
Have tax breaks been a positive for the industry and what’s coming next?
I believe so, yes. VGTR was brought in to try and bolster the UK’s games sector and to counter the threat of companies relocating to other territories for tax purposes. In the immediate future, it is unclear if there will be any significant changes to VGTR. We’ll have to see if, longer term, Brexit will have an impact.
From an R&D perspective, there are moves afoot by the Treasury to cap tax credits for loss-making SMEs, to PAYE/NI for the period (x3). This is subject to an ongoing consultation but could reduce immediate cash benefits made available, most notably to start-ups. The large company rate is also likely to increase from 12 per cent to 13 per cent.
With the UK leaving the EU as a result of Brexit, we will need to see how this impacts with regards notified state aid and anti-competition rules. This is likely a longer-term consideration but my personal view is that any changes would likely be beneficial to UK claimants, as the UK may have more freedom when it comings to updating these tax breaks.
This article was written in collaboration with Matt Appleton tax director at leading audit, tax and consulting firm RSM.
Thanks for taking a look at our article How Can Indies Benefit from Tax Breaks? For more interesting articles on the indie games industry, check out the links below.
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