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HMRC internal manual

Video Games Development Company Manual

Taxation: profit/loss calculation - introduction

Part 15B Ch 2 Corporation Tax Act 2009 (CTA 2009)

Where a company is a Video Games Development Company (VGDC) (VGDC10110) for the purposes of Part 15B CTA 2009:

  • the development of each video game is treated as a separate trade (VGDC20010),
  • the profits or losses of producing a video game are on revenue account (VGDC20230), with
  • costs debited as incurred (VGDC20240), and
  • income credited as earned (on a prescribed estimated basis if necessary) (VGDC20220).

Expenditure is deductible earlier than would generally be the case if the deduction had to await disposal, or part disposal, of a capital asset.

This is particularly relevant for VGDCs that retain all the rights to the game. The company may mainly receive exploitation income against which the cost of creating the asset might not otherwise be set.

The method of calculating profits or losses of the deemed trade for tax purposes broadly follows the model provided by Statement of Standard Accounting Practice 9 (SSAP9) - ‘Stocks and long-term contracts’. This sets out the principles and methodology for recognising income and profit arising on long-term contracts as activity progresses.

SSAP9 defines a long-term contract as:

‘a contract entered into for the design, manufacture or construction of a single substantial asset or the provision of a service (or a combination of assets or services that together constitute a single project) when the time taken substantially to complete the contract is such that the contract activity falls into different accounting periods.’

The method set out in SSAP9 calculates and spreads the profits over the lifetime of a project and recognises income and expenditure in line with the state of completion of the project. SSAP9 envisages alternative methods for doing this depending on whether the work done can be independently valued or whether the proportion of the budget spent provides the best measure of completion.

In video game development, the total budget for the video game may be agreed at the outset and costs are then carefully monitored and controlled to ensure delivery within that budget.

In contrast, the income that the video game is capable of generating can be more uncertain. This is particularly true where the Video Games Development Company retains rights which it can sell itself, or otherwise exploit.

Consequently, taxable profits are recognised by apportioning the total expected income to the degree of completion as measured by the proportion of total expenditure incurred and reflected in work done (VGDC20250).