Video games and the creative sector: New HMRC guidance on the interaction between R&D and creative sector tax reliefs
New HMRC guidance defines where creative work ends and R&D begins
HMRC has published updated guidance on how interdisciplinary projects blending artistic creativity with technology can qualify for R&D tax relief. It underscores the importance of evidential support for claims when technical and non-technical roles collaborate on R&D projects.
The update provides clarity on an often challenging aspect of preparing claims. There is no alteration to the definition of R&D for tax purposes (contained in the DSIT Guidelines), the categories of qualifying R&D expenditure, or the ability to claim audio-visual and video game tax reliefs for expenditure qualifying for R&D relief. For video game studios, this guidance is especially valuable in distinguishing between R&D activity and VGEC‑eligible work on projects where creative choices (such as narrative design, aesthetic direction or gameplay) overlap with technical problem‑solving in areas like engine optimisation, tooling, physics or AI‑driven systems.
HMRC offers two examples to minimise misinterpretation of borderline activities, emphasising that the efforts of creative roles directly contributing to the technological/R&D aspects of projects should be included in R&D claims, rather than the more generous creative reliefs. They also confirm that purely cosmetic, aesthetic, non-technical activities remain ineligible for R&D tax relief. The examples discuss a simulation/digital double for virtual garments, where activities to generate more realistic fabric textures would likely be eligible for R&D tax relief, whereas designing the garments themselves would not. Another example involves a car racing game: developing systems to render more realistic driving conditions would be eligible for R&D expenditure credits, but designing car liveries or colour schemes would not, although the latter may contribute towards Video Games Expenditure Credits.
These updates reinforce that eligibility for tax relief is determined by the nature of the work undertaken, not by an individual’s job title or professional background; individuals working in non-technical fields (e.g. fabric textures) may still contribute to a project seeking an advance in science or technology.
The updates also continue a theme of recent HMRC activity, emphasising the importance of the ‘burden of proof’, requiring supporting evidence and a clear articulation of the project’s R&D characteristics and how ostensibly non-technical roles contribute to the R&D.
Companies working in the creative sector, whether claiming Audio-Visual or Video Games Expenditure Credits, as well as R&D Expenditure Credits, should review and apply the updated guidance to their projects. Given HMRC’s increased emphasis on these areas, companies with boundary cases involving creative roles collaborating with technical teams should review how costs are apportioned and the evidence supporting the nature of the qualifying activities. This will lessen the risk of enquiry, reduce the prospect of penalties for inaccuracies, and prevent disallowed or delayed repayment of credits.
How we can help
Moore Kingston Smith can assist with reviewing and applying the updated guidance. Our video games and media sector team work together with our R&D experts to identify qualifying R&D activities while considering broader tax and compliance implications for other creative reliefs. Contact us for a no-obligation chat on how these changes could impact your tax reliefs.
The updated guidance can be read in full here should you wish to do so or download our guide.
