What is video game tax relief and the curious story of Grand Theft Auto

This is the first piece in a three-part series on our blog, shedding light on the creative industries reliefs made available to create content that is predominantly generated within the UK, checking out case studies where available, and perhaps looking at how things could be amended/improved.

We kick things off by looking at Video Game Tax Relief, examining how it works, some of the hoops a developer would have to jump through, and how one of the biggest game studios in the industry was able to release the most commercially-successful video game of all time whilst still claiming millions of pounds in tax credits.

What is Video Games Tax Relief (VGTR), and how does it work?

The long and short of it: if your UK-developed video game meets certain criteria, your company can submit a claim to the UK government for a reduction to taxable income.

The Gov.uk guidance actually explains this pretty well, but to summarise the important bits, your game must be certified as “culturally British” by the British Film Institute, and at least 25% of design, production and testing costs must have been provided from within the European Economic Area (EEA). Oh, and your game can’t be designed around gambling (though gambling can feature if it does not use real-life money), nor can it effectively be an advertisement for something else.

If you meet these criteria, your reward is an additional deduction to your profits (or a larger loss), based on the lower of either 80% of the total core expenditure (internationally), or the amount of goods and services that are provided from within the EEA. This just means that you can’t meet the minimum criteria and expect to be able to claim against your international expenditure – a sensible protective measure, included to make it harder to cheat the system.

A reduction in profits sounds negative – isn’t relief supposed to be a good thing? – but the effect of this deduction, much like an R&D claim, is a reduction in tax. If the company is then loss-making once VGTR is applied, the company can even claim a payable credit (at a rate of £25% of the deduction), injecting cash into the British video game industry, with developers that need it the most.

So, is Video Games Tax Relief a success story?

Back in December 2012, the Treasury affirmed its goals with the implementation of the creative sector reliefs as follows:

  1. To promote the sustainable production of culturally relevant productions in the UK through a tax relief that provides support directly to producers.
  2. To incentivise investment into UK productions that would otherwise take place outside the UK or that would not be economical without relief.
  3. To create the necessary critical mass of infrastructure and skills to enable and support production in the UK for both today and in the longer term.

It’s important to note that, although these goals are discrete from one another, a qualifying product (in this instance, a video game) must meet all the criteria laid out above – most abstractly, the necessity for a game to be considered “culturally British” – in order to benefit at all. So, even if a game is developed solely in the UK, and raises awareness and interest in the UK video game development industry (and, hopefully, applications for related undergraduate degrees), it can still fall short of government support if it isn’t deemed to be British enough by the BFI.

Looking at the numbers, since the introduction of VGTR back in 2014 up until the 2019-20 tax year, £444 million of relief has been granted across almost 1,500 claims, with £121 million claimed in the 2019-20 tax year alone. Only “48% of game developers (according to TIGA’s Business Opinion Survey 2020-21) believe that the economic and business environment in the UK is favourable to the video games industry”, which is the lowest approval rate since 2015. The impact of the pandemic is almost certainly to blame for these rather negative results, although it’s possible that the honeymoon period of the relief has run its course, and industry members feel like they need more of an incentive to justify developing videogames on British soil when it could be done cheaper elsewhere. But does the government support go where it’s most needed?

The good news is that 51% of claims in the 2019-20 tax year were for under £50,000, suggesting that over half the claims were submitted by smaller, independent games developers in the UK – money going where it’s needed most. Much like the imbalanced distribution of social wealth, however, that same 51% of claims only accounted for around 3% of the total value of claims. Conversely, 13% of claims were for over half a million pounds, but these claims account for a whopping 80% of the total value claimed.

Now, those large UK developers are absolutely entitled to claim Video Games Tax Relief and it’s no surprise that a developer with a multi-million pound budget is going to submit a claim many orders of magnitudes higher than one person producing indie games out of their bedroom. Allowing these larger companies to claim also facilitates the production of industry-defining, AAA (i.e. big budget) titles within the UK, showcasing the country’s developer talent on the world stage and attracting foreign talent, as well as creating potentially hundreds of industry jobs during development. This no doubt achieves the third goal laid out by the government. But…

video games tax relief, grand theft auto, UK, optimal compliance

Being a Rockstar doesn’t make you invincible – or does it?

Grand Theft Auto. That’s a name that’s synonymous in the gaming industry with its fair share of controversy over the years – namely surrounding the violence and criminal activity that one can undertake during the course of playing the game, and how some groups (rather unfairly) blame the game for normalising violence in children. I personally think that Rockstar North, the game’s developers, get an incredibly unfair rap on these fronts. But one of its most controversial practices – at least, in my opinion as a tax adviser – is something that most people aren’t even aware of: claiming tax credits whilst paying nothing in corporation tax.

Corporation tax avoidance isn’t illegal, but Rockstar North have consistently chosen to allocate their profits outside of the UK whilst claiming tax credits through the VGTR scheme. According to a report by TaxWatch UK, Rockstar North had claimed £80m by the time of its March 2019 accounts, whilst not paying a penny in Corporation Tax. Wouldn’t that at very least be considered against the spirit of the government’s goals with the creative industry reliefs? Additionally, did you know that Grant Theft Auto since its release in 2013 has made more money than any movie to date? So what do Rockstar North have to say about this?

Rockstar North’s response to the report was deflective at best, and didn’t comment on the lack of Corporation Tax paid:

“The program has directly resulted in Rockstar Games significantly increasing its investment in the UK, creating well over 1,000 highly skilled and long term jobs across London, Lincoln, Yorkshire and Scotland. This investment and the success of British video games supported by the program not only significantly contributes to the economy, and to UK tax receipts, but also helps solidify the UK’s position at the forefront of video game development well into the future.”

Whilst what the press release said is true, I feel like it almost hints at being a threat… This might just be my interpretation, but it feels like Rockstar don’t have plans to change their practices any time soon. We will be able to see how much they’ve claimed for more recently, once they get round to publishing their March 2020 accounts – they’re only five months late…!

What’s next?

Let us know if you’d like to hear more about the various types of creative sector reliefs available. If you’re interested in other (non-creative, but still very innovative) tax reliefs, check out our R&D page and Investor Relief page. Alternatively, if you have a question, get in touch with us here.

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ben crampin

Partner

Ben’s been here pretty much since the get-go and, as such, has been instrumental in growing the business into what it is today.
 
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Ben looks forward to the day when automation will, once and for all, fumigate the fear and confusion caused by oppressive bureaucracy and strongly believes that ‘technology holds the solutions to the problems we’re trying to solve’.
 
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Ben doesn’t think much of government agencies and he doesn’t suffer fools; two points that aren’t always mutually exclusive.