The UK government is replacing the outgoing Video Games Tax Relief (VGTR) with the new Video Games Expenditure Credit (VGEC), which has big implications for game development studios based in the UK.

And following the government’s autumn statement, trade association TIGA has put together an explainer on the impacts it will have on the games industry.

After seven years of TIGA campaigning, the VGTR came into effect in 2014 and employment in the sector proceeded to grown by 9% year after year on average. Millions have been paid out to game makers by HMRC over the years.

Then, in November 2022, the HM Treasury launched a consultation on its proposals to amend VGTR in a number of ways - namely replacing the eligibility of European expenditure from VGTR with a requirement for expenditure to be ‘used or consumed’ in the UK, raising or removing the £1 million subcontracting cap, and replacing VGTR with VGEC.

The current situation

In the Autumn Statement of November 2023, the government amended its draft rule so that companies will be required to disclose connected party transactions when claiming tax relief and must charge connected parties for goods and services "at an arm’s length price", TIGA explained, which is in line with the well-established principles of transfer pricing.

"Therefore, provided the connected party transaction is at arm’s length and details are disclosed to HMRC (and qualifying expenditure of course) then it will qualify for VGEC," TIGA continued. "VGTR will be transformed into VGEC. VGEC will apply to 80% of qualifying costs with a headline rate of 34%. The credit is subject to corporation tax with a deduction allowed from corporation tax.

"This new relief will be recognised above the line and then subject to tax. The credit will apply to 80% of qualifying costs with the headline amount recognised above the line at a rate of 34%. After Corporation Tax rate at a headline rate of 25%, the net benefit to the claimant will increase slightly from the current rate of 20% of qualifying expenditure to 20.4% under the new regime.

"VGEC can be claimed on expenditure incurred from 1 January 2024. Games commencing from 1 April 2025 must claim VGEC rather than VGTR. On 1 April 2027, VGTR will cease and all games must claim VGEC. All qualifying costs for video games will need to be used and consumed within the UK. EEA expenditure will no longer be eligible for relief. The £1 million subcontractor limit that existed under VGTR will be removed."

Recent TIGA and Games Investor Consulting research suggests that the introduction of VGEC could drive as much as £52 million in new development expenditure. TIGA also gave a full response to the Autumn Statement, one of many initiatives in recent months; so too has TIGA called for interventions against the Unity Runtime Fee, and released a study alerting the UK games industry to a 68% skills shortage.