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HMRC internal manual

Video Games Development Company Manual

Taxation: profit/loss calculation - expenditure - nature

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

Where profits or losses of the video game trade of a Video Games Development Company (VGDC) are within the rules in Part 15B CTA 2009 (VGDC20010), the expenditure to be brought into account in calculating the profit or loss will be:

  • all the expenditure on producing the video game, and
  • where rights are retained by the VGDC, the costs of exploiting those rights.

Expenditure which would otherwise be treated as capital because it relates to the creation of the video game (rights in which would be reflected as an asset on the balance sheet) is treated as revenue expenditure. This treatment extends only to costs that relate to the creation of an asset (the video game) - so it does not apply to expenditure on the acquisition of plant and machinery since that would be capital regardless of the creation of the video game.

The Video Game Tax Relief (VGTR) rules determine how income and expenditure of video game development are brought into account as debits and credits in computing the profit of the trade. These rules take precedence over the intangibles regime for expenditure which is related to making the video game (S808A CTA 2009).

Where income or expenditure is not related to making the video game and is subject to a specific tax regime (for example because it is proper to the loan relationships or intangibles regimes) the computational rules in those regimes will take priority, as they do for other trades. Any trading debit or credit arising from those regimes will then be brought into account in addition to those for VGTR.

The normal rules determining whether particular items are allowable for tax purposes in computing the profits of a trade (see BIM42051 onwards) still apply.

For more information on the loan relationships legislation in particular, see CFM30000 onwards.


Company A is a VGDC carrying on a trade in relation to a video game. In the year, income from the video game to be brought into account as a credit is £2000. Costs of the video game to be brought into account as a debit are £1500, which include £50 spent on entertaining. The video game is financed by a loan on which interest of £100 is payable. The cash from the loan is deposited in the bank and interest of £50 is receivable.

The credits and debits for the year are therefore:

  Credits Debits
Income from video game 2000  
Production expenditure   1500
Interest received 50  
Interest paid   100


The loan is a trading loan relationship while the deposit with the bank is a non-trading loan relationship. The debit for interest paid is therefore deducted in computing the profit on the video game-making activity while the credit for interest received will be a non-trading loan relationship credit. A computational adjustment is needed to disallow the expenditure on entertaining giving a net debit for costs of the video game of £1450.


The computation of the profit or loss on the video game-making activity will therefore be made up of the following debits and credits:

Income from video game 2000
Costs of video game (1450)
Interest paid (100)
Profit 450

The requirement to treat capital expenditure as being on revenue account only applies where the expenditure is on creation of the video game, and would otherwise be treated as expenditure on creation of an asset.

The revenue treatment of expenditure does not apply to the purchase of capital items, such as computers or software with an enduring benefit. Expenditure on these items remains capital expenditure and capital allowances will be available where appropriate.

No double deductions

Expenditure is not deductible under Part 15B CTA 2009 if it has been relieved under the reliefs available for Research and Development (R&D) expenditure (see CIRD80000). These reliefs are the SME scheme, large company scheme and the Research and Development Expenditure Credit (RDEC). Video game development may qualify for R&D particularly where the development involves work on an underlying software engine.

Interaction of VGTR and Research and Development reliefs

Some video games development companies (VGDC) may be carrying on research and development and or may have claimed research and development (R&D) tax relief in the past. It is important to note that where SME R&D tax relief is claimed on a project that project cannot claim for any other State Aid reliefs (including video games tax relief and grants). This means that if a VGDC chooses to claim VGTR any R&D ‘bubble’ within a project wouldn’t qualify for R&D relief under the SME scheme.

For large companies who carry out R&D and claim under the large scheme, the rules are different. This is because R&D claimed under the Large scheme is not State Aid, and therefore the ‘bubbles’ of R&D within a project may be eligible for R&D relief.

However, the Research and Development Expenditure Credit (RDEC) scheme for large companies is different to the Large Scheme. Under this scheme the VGDC does not have a choice.

For more details, look at CIRD81670.