Video game production: 1 April 2025 is a critical date to claim VGTR over VGEC. Do you know what to do?

Back in 2023, the government announced that Video Games Tax Relief (VGTR) would be replaced with a Video Games Expenditure Credit (VGEC) in an attempt to streamline creative industry tax reliefs.

The VGEC operates in a similar way to the research and development expenditure credit (RDEC), providing a taxable expenditure credit calculated as 34% (in the case of VGEC) of qualifying expenditure.

We are in a period of transition as VGTR will remain open to all productions that have commenced prior to 1 April 2025, but VGEC is now available for qualifying expenditure incurred on or after 1 January 2024. The sunset date for VGTR is 31 March 2027 at which point all productions will move over to VGEC regardless of when production began. The transitional provisions create certain opportunities and deadlines for starting production, which are easiest understood having compared the old and new regimes.

Key similarities and differences between VGTR and VGEC

Although the operation of VGEC is different to VGTR (in terms of being a taxable ‘above the line’ credit as compared to an additional tax deduction), most of the conditions of the reliefs are very similar, with key points including that the video game development company (VGDC) must:

• be responsible for designing, producing and testing the video game;
• be actively engaged in planning and decision-making;
• directly negotiate, contract and pay for rights, goods and services;

and the video game in question must be:

• certified as British by the British Film Institute;
• intended for supply to the general public;
• and no relief under either regime is available for expenditure in respect of which the company could claim R&D tax relief.

Both regimes use the concept of ‘core expenditure’, which in a video game development context means expenditure on the designing, producing, and testing of a video game, but does not include expenditure on developing the initial video game concept, debugging the game, or carrying out any post-completion maintenance work.

There are, however, certain differences between the two regimes, which include:

• Under VGTR, relief is given at 25%, whereas under VGEC, the effective rate of relief is 25.5% (the headline rate of 34% adjusted for the fact that the expenditure credit is subject to tax);
• Under VGTR, there is the requirement that a minimum of 25% of core expenditure is on goods or services provided from within the UK or European Economic Area (EEA), whereas under VGEC the requirement is that at least 10% of core expenditure is on goods and services used or consumed in the UK;
• Under VGTR, there is a restriction that limits the additional deduction in respect of core expenditure that comprises payments to sub-contractors to £1m, but there is no equivalent restriction in the calculation of core expenditure for the purposes of VGEC.

When to transition

There is some scope for a VGDC to decide when it transitions from VGTR to VGEC claims in that if production begins before 1 April 2025, VGTR claims can be made up until 31 March 2027, whereas if production begins after 1 April 2025 only VGEC will be available.

In cases where a choice is possible, the relative merits of the regimes need to be assessed. While the difference in effective rate of relief is slim, two of the differences above could have a significant bearing:

• Sub-contracting: if sub-contracted core expenditure is significantly greater than £1 million, VGEC claims would appear preferable;
• Non-UK expenditure: if there is a significant amount of European expenditure, meaning that the UK expenditure condition of VGEC is not met, but that the UK/European expenditure condition of VGTR is met, VGTR would appear preferable.

While the choice of which regime to claim under is less pressing, if sufficient European (and insufficient UK) core expenditure is expected, efforts should be made to begin production (and suitably evidence it) prior to 1 April 2025.

How can Moore Kingston Smith assist you?

This insight is necessarily brief, with the aim of highlighting key differences between the video games tax relief regimes and a particular source of potential urgency to begin production in certain cases. If you would like to discuss your particular circumstances or the legislation in more detail, please do not hesitate to contact us.