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HMRC internal manual

Video Games Development Company Manual

Losses: completion and later periods

S1217DB Corporation Tax Act 2009 (CTA 2009)

The rules in Part 15B CTA 2009 modify the normal rules for relieving corporate trading losses. The losses incurred by a video game trade of a Video Games Development Company (VGDC) are restricted to being used against future profits of the same trade prior to completion of the video game.

Losses of the completion or later period

The restriction to the use of losses applies until the accounting period in which the video game is completed.

Losses are then treated differently depending on whether they are:

  • losses not attributable to Video Games Tax Relief (VGTR), or
  • losses attributable to VGTR.

This divides the losses into two distinct elements.

Losses brought forward are treated as losses of the current period

Where losses have been brought forward into the completion period, or any later period, they are treated as having been incurred in that current period.

They also need to be separated into the two elements of losses which are attributable and non-attributable to VGTR.

Losses not attributable to VGTR

‘Losses not attributable to VGTR’ includes all the expenditure of the video game trade not including the enhancement for VGTR. This means enhanceable core expenditure not including the enhancement and non-enhanceable expenditure.

The losses not attributable to VGTR are calculated by removing the element of losses attributable to VGTR.

This element of the loss in the completion, or later, period can be:

  • offset against total taxable profits of the VGDC in the current or previous period, or
  • surrendered to other companies in the group.

Losses attributable to VGTR cannot be relieved in this way.

Losses brought forward that are attributable to VGTR

‘Losses attributable to VGTR’ are the losses that have arisen from the enhancement element on top of the enhanceable expenditure only.

This is calculated by calculating what the losses for the period would be in the absence of VGTR. Where there would be a profit, the loss is nil.

Losses attributable to VGTR may only be used against future profits of the same trade.

For brought forward losses, this is calculated by looking at the previous periods and considering what losses for each period would be in the absence of the VGTR.

Care must be taken where income has been received in respect of the video game trade prior to the completion period. If the losses attributable to VGTR are not calculated for each period separately, they may be overstated.

Losses brought forward

Losses that are brought forward from an earlier period do not increase the surrenderable loss for Video Game Tax Credit (VGTC) purposes (VGDC55100)

Order of set-off

Because the losses not attributable to VGTR can be utilised more readily, the VGDC will want to retain these losses in preference to losses attributable to VGTR.

Therefore, where losses are used against future profits or surrendered, it is usually the losses attributable to VGTR that are considered to be used first.

Reform of Corporation Tax loss relief: as of 1 April 2017, the relief available for trading losses carried forward has changed. A restriction has been introduced, limiting the total amount of relief available for carried-forward losses. In addition, most carried-forward trading losses incurred from 1 April 2017 can be set against total profits, and may be available for surrender as group relief for carried-forward losses. Three sets of guidance have been published in draft: tranche 1, tranche 2 and draft guidance on commencement provisions.