Scottish games industry : uncertainty over EEA expenditure following Spring budget

Andrew McMillan (Johnston Carmichael)

By Andrew McMillan, Johnston Carmichael, Partner

FOR NINE years, Video Games Tax Relief (VGTR) has been a pillar for the Scottish video games sector, supporting growth, inward investment, and job creation, and driving a strong and thriving video games industry. 

In Scotland, the games development sector is now worth over £300m, supporting 6400 jobs and producing world leading talent and Intellectual Property (IP).

However, things are about to change for many companies, with the valuable tax relief they are so used to set to be replaced with the Video Games Expenditure Credit (VGEC) from 1 January 2024. Although, at first glance, the new credit may look more generous, with a baseline rate of relief of 34%, there is concern within industry over the removal of an important element of the VGTR – European Economic Area (EAA) expenditure – which could make companies worse off.

In an industry where it can be very hard to access funding, video game companies of all sizes have valued VGTR and factored in receiving the relief when budgeting for new or ongoing projects. 

Earlier this year UKIE, in its response to the Government’s Audio-visual Tax Relief Consultation, urged the government to ‘do no harm’ to VGTR. Its response highlighted ‘significant concern’ across the industry about the potential removal of EEA expenditure, which its members said could be ‘damaging’ to the UK video games sector.

One of the main reasons for this is that companies often rely on the global skills market to produce IP. Despite the continued success of the Scottish and UK games industry, the talent pool here is significantly smaller than other world leading markets such as the US, which can cause difficulties when trying to fill specialised roles.  In response, many companies look further afield for talent.   Under VGTR rules, if you hired development staff from Poland or Spain, the associated costs would not be excluded from qualifying for VGTR. 

However, it is unclear as to whether such costs will definitely qualify under the new Video Games Expenditure Credit (VGEC). Although the Treasury document states that EEA expenditure will be excluded, it also states that, costs incurred on goods and services that are ‘used or consumed’ in the UK will be allowable.  As the Government has yet to provide guidance around what this means in practice, it is difficult for those operating in the industry to plan effectively.

A sunset period, allowing companies with games currently under development and not concluded on 1 April 2025 to continue claiming VGTR and EEA expenditure until 31 March 2027 will be in place, but businesses looking to start new game development on or after 1 April 2025 will have to claim under the new VGEC rules.  With game development plans often taking many months to come to fruition, this will mean many companies are left in limbo, having to factor in the new rules but without clarity about what they can claim.

Inward investment is another concern when it comes to changes to the tax system. The UK video games sector benefited from £7.7bn investment between January 2017 and June 2022. With other countries such as France, Germany, and Ireland offering attractive tax credits the UK must offer competitive incentives to continue this essential flow of inward investment and maintain its global status. 

Initial commentary following the budget announcement focussed on the headline rate being 34%, which is up on the previous rate of 25%. However, the effective rate of relief represents an extremely marginal increase and with the uncertainty around EEA expenditure, it could mean – depending on the interpretation of ‘used and consumed’ in the UK – that companies are worse off.

We hope the government reflects on the significance of the games sector as part of the broader UK creative industries, which have generated more value to the UK economy than the life sciences, aerospace and automotive industries combined. There is no room for complacency if we do not want to jeopardise the sector’s commercial potential and lose out to other countries in the global market.

At Johnston Carmichael helping our clients build thriving and profitable gaming businesses is key to what we do. Our industry-leading Tech Advisory Board includes some of Scotland’s most senior figures in the sector and provides clients with expert advice on achieving growth. We are engaging with government and industry bodies such as UKIE, to ensure we are amongst the first to know how the new rules apply and can ensure our clients interpret them correctly. We would urge any company within the video games sector to start discussions with an advisor early and plan for making the switch from VGTR to VGEC in the near future.

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