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HMRC internal manual

Video Games Development Company Manual

Taxation: profit/loss calculation - estimating amounts

S1217BE Corporation Tax Act 2009 (CTA 2009)

The treatment for calculating taxable profits of the video game activities of Video Games Development Companies (VGDCs) (VGDC10110) may involve estimating the total income and total costs of a video game (VGDC10100). The rules set out the basis on which such estimates are made.

The aim of these rules is to ensure that the income that is recognised is in accordance with the substance of transactions in the same way that would be expected for statutory accounts.

To be income, sums should be recognised using the same principles that are set out in FRS5 Application Note G and IAS18. These require that revenue should be recognised as the seller carries out its contractual obligations and so earns its rights to the revenue. This is on the basis that it is probable that the revenue will flow to the company and that the expected revenue can be measured reliably.

For VGDCs the estimate to be made is at the end of the accounting period using all the information available at that time, on a just and reasonable basis and taking into consideration all relevant circumstances. It follows, under the principles in FRS5 and IAS18, that speculative income, where potential buyers have not yet been identified, would not be brought into account. But where a seller has entered into a transaction with a buyer, revenue should be recognised in accordance with the substance of that transaction.

If the revenue does not arise until the occurrence of a critical event, it is not recognised until that event occurs only if the occurrence is outside the control of the seller. The delivery of the completed video game is regarded as an event that is within the seller’s control, and does not delay recognition. Similarly, the mere fact that the buyer has to accept the completed video game does not delay recognition.

Speculative developments

Some game developments that come within this legislation may be highly speculative. There may be little, if any, income that can be brought into account in calculating profits for an accounting period.

Nevertheless, it is likely that there will be a reliable estimate for the estimated total cost and so the costs to be debited in each accounting period will be the additional costs reflected in the work done while the income may well be zero.


The examples below which relate to qualifying British video games are intended to illustrate the calculation of the accounting profit or aspects of it. Entitlement to the additional Video Game Tax Relief (VGTR) is not addressed here, but is dealt with separately - see VGDC55000:

Example 1: Sales forecasts

At the start of development income and expenditure for a video game is estimated as:

Total cost of producing according to the budget and development schedule £220k
Grants and equity investments £50k
Existing pre-orders £100k
Forecast of sales £120k

As development commences, the income to be brought into the computations under the VGTR rules is the money which the VGDC has, or expects to receive; this is the grants and equity investments of £50k plus the pre-orders of £100k.

The forecast of £120k is the company’s judgement of how much might be expected if the remaining rights are sold. The estimates, in this instance, are not considered to be sufficiently just and reasonable for the purposes of Part 15B CTA 2009 and are not included in the company’s estimated income.

Example 2: Contracts under negotiation

A VGDC is commissioned by a major publisher to make a video game. It is estimated that the video game will take three years to make and will have a total development budget of £150,000 which will be incurred on a straight line basis over the three-year period (that is £50,000 a year).

Under the terms of the commission contract, the VGDC will receive income of £210,000 in two equal tranches - the first after 18 months and the second on delivery of the video game.

During the second year of development, the company enters into negotiations with a film company for the sale of the film rights in respect of one of the characters in the game for £60,000. Although initial discussions were promising, negotiations fall through early in a third year of development and both parties decide not to proceed with the deal.

The negotiations do not give the VGDC a realistic and quantifiable expectation of income and the income remains £210,000 spread over the three years of development, in the form of £70,000 per year following the straight line expenditure of £50,000 per year, giving taxable income of £20,000 per year.

If the negotiations were brought to fruition in the third year, and the contract agreed as described, then the additional income of £60,000 is recognised in Year 3.

Example 3: Speculative video game-making

A company has purchased the game rights for a film franchise. They hope to produce a video game using these rights.

The total cost of designing the concept and developing the game is reliably estimated at £1m. The company has established distribution channels for the video game and intends to retain all the underlying rights itself. From the company’s experience of developing and selling such games it expects sales of not less than £6m over the normal sales profile.

In the absence of contracts to sell copies of the video game or the rights, the company has no reliably predictable income which it must estimate.

Consequently, although expenditure needs to be fed into the VGTR calculation and will be deductible, there is no income to bring in until sales are made.