Optimism in the UK video games sector: Growth in development roles and tax relief despite global challenges
In our recent Q4 2024 media and marketing services report, we observed that the video games industry has fallen to fourth place in deal activity within the TV, film and entertainment sub-sector, after leading the top spot for the previous two quarters. This decline is likely due to ongoing industry challenges, including layoffs and underperformance, which persisted through the end of 2024. Notably, key players like Ubisoft experienced a 31.4% year-on-year revenue decline in Q3 FY24/25.
Despite the ongoing challenges in the industry, the UK video games development sector grew full time equivalent development roles by 4.8% in the 12 months to May 2024 according to research from TIGA.
As the UK video games development industry continues to grow, so does the Video Games Tax Relief (VGTR), which has continued to grow its importance to the sector. According to TIGA, HMRC have paid out £1.48 billion in relief since VGTR’s inception in 2014, with 525 claims totalling £282 million in the financial year 2022-23. The value of claims has risen annually, with HMRC noting an increase in high-value claims (over £2.0 million).
M&A and VGTR / VGEC
The Moore Kingston Smith tax team has detailed the key similarities and differences between VGTR and VGEC. As the value of claims continues to rise, so does its importance in M&A transactions. M&A deals are typically completed on a cash-free, debt-free basis, meaning the debt and cash in a business are adjusted and added to the headline price. Corporate tax on profits earned up to the completion date is usually treated as a debt item. A critical nuance in the video games industry is the treatment of any VGTR / VGEC credits received post-transaction for pre-transaction expenditure.
In an M&A context, the benefit of the VGTR / VGEC credit on qualifying pre-transaction expenditure is typically transferred to the vendor. This is usually achieved by either:
- Offsetting the VGTR / VGEC benefit against the corporate tax figure within the debt calculation; or
- The benefit of the VGTR / VGEC is paid to the vendor when it is received by the company.
As we transition from VGTR to VGEC, we expect increased scrutiny on qualifying expenditure and connected party transactions. Moore Kingston Smith recommends that any business owner seeking to enter into a transaction have a VGTR expert review upcoming claims, as these can help deliver additional value in a transaction. This will become increasingly important as we expect valuations to be impacted by the increased rates of employer NICs. Clearly, any tax credit claims which are subject to HMRC review represent risk in the M&A transaction for both buyer and seller, which may lead to indemnity.
Notable M&A activity
Whilst it was a quiet quarter for M&A activity in the UK video games sector, December saw two interesting deals:
Build A Rocket Boy’s acquisition of PlayFusion
After raising $110 million in a Series D round in January 2024, Build A Rocket Boy, led by Leslie Benzies, announced the acquisition of PlayFusion in December 2024. This strategic move aims to enhance Build A Rocket Boy’s capabilities in developing next-generation immersive gaming experiences. PlayFusion’s CEO, Mark Gerhard will join as Co-CEO, focusing on AAA video games and user-generated content tools.
Cult Games’ acquisition of Neonhive
Cult Games, a London-based independent games label, acquired Scottish marketing agency Neonhive in December 2024. This acquisition is expected to strengthen Cult Games’ publishing capabilities and expand their reach in the games industry. Korina Abbott, founder of Neonhive, will join Cult Games as Chief Operating Officer.
Looking ahead in the UK video games sector
Looking ahead, Nintendo is expected to announce a release date for the highly anticipated Switch 2 during their Direct announcement in April. Additionally, the industry is hopeful that the release of GTA VI will boost console and game sales in late 2025.
Moore Kingston Smith has been in discussions with several private equity investors interested in companies providing co-development or support services to the video games development industry. There is also significant interest in platform providers for in-game advertising or monetization services. If you are providing these services or would like to explore your options, please get in touch with Paul Winterflood, Partner and Head of Media Corporate Finance at Moore Kingston Smith.
As VGTR / VGEC continues to grow year on year we expect to see increased scrutiny from HMRC, particularly in relation to qualifying expenditure and connected party transactions. If you would like to discuss your upcoming claims please get in touch with Robert Husband, Partner and Head of Moore Kingston Smith’s Video Gaming Team.
For more information on VGTR and VGEC, we recently recorded a video with Ukie that explored key differences and benefits of both, highlighting how each can be effectively utilized to maximise return, the practical aspects of making claims, and the future of VGEC. Watch here.
