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HMRC internal manual

Video Games Development Company Manual

Eligible expenditure: distinguishing ‘initial concept design’ from later stages of development

Video Games Tax Relief (VGTR) for video games is available on development expenditure incurred at all stages except initial concept design and post-release debugging and maintenance. It is therefore important to identify and quantify development expenditure.

The development process for video games may vary significantly between different companies and particularly where different video game techniques are involved. However, in most cases it should be straightforward to distinguish between activities that constitute production and testing.

The critical distinction is usually between design of the initial concept and design that is core expenditure.

Initial concept expenditure relates to those activities that are usually undertaken with the aim of determining whether the video game is commercially feasible. The expenditure is speculative in nature.

Design expenditure is expenditure that would typically occur after the decision to proceed with development has taken place but prior to production. It is also known as pre-production. The expenditure is not speculative in itself.

In larger software developers, a game designer will often produce a proposal for a video game, sometimes referred to as a pitch. This will outline several aspects of the video game including:

  • concept,
  • gameplay,
  • feature list,
  • setting and story,
  • target audience,
  • requirements and schedule,
  • staff and budget estimates.

These elements may not always be considered in detail at the initial concept design stage, especially for smaller VGDCs. This may be particularly true where the video game is a sequel or heavily based on another existing game, where the concept and gameplay may be determined by the existing game.

These initial considerations are speculative in nature and typically do not qualify as core expenditure. They also relate primarily to commercial decisions that may be addressed by the development team or the publisher.

However, there is no reason that some of the activities undergone at this stage may not also contribute to qualifying design. This might be where an aspect of the initial concept design is given specific attention in order to distinguish the game from other similar concepts.

For example, a game may rely heavily on aspects of gameplay to produce a unique selling point for the game. A programmer may become involved to help address initial queries over whether some aspects are possible and how they might affect other aspects of gameplay.

This might be considered to fall within initial concept design because it is still uncertain whether the video game will commence development. This activity may also be considered to be qualifying design on the basis that it would usually occur, and any resulting code will be also be used, after the game had received approval.

Expenditure attributable partly to initial concept design and partly to later stages of development

Some costs relate both to the concept design stage of a video game and to other stages of development. Examples of such costs would be those incurred on gameplay design and the story.

In each case it is necessary to establish to what extent the expenditure on the story is incurred on establishing whether a video game should be made and how far it is incurred on actually making the video game.

The correct apportionment will vary according to circumstances. There is no definitive apportionment method and any reasonable method may be used. A Video Games Development Company (VGDC) may rely on an estimate used in the development of previous video games, but this will only be appropriate where the facts are similar.

If a developer worked substantially full time on a video game for a year, with the first three months being taken up with initial concept design and the remaining nine months with design, production and testing, it would be reasonable to allocate 25%one quarter of the developer’s fees, for that period, to the initial concept stage. That is, 75% of his annual fee would be treated as core expenditure.

A plot story could likewise be used during the design stage of a video game as well as the later stages of development. If the original story was more or less unchanged through this process then it may be reasonable to allocate its costs according to how it is used through the various stages of development. This could be evidenced by the extent to which reference is made to it throughout these stages.

It may be the case that a writer is engaged and is paid for an initial fee for a first draft of a story for development purposes followed by further instalments as development proceeds and refinements are made and a script for the voice actors produced. It may be reasonable to allocate costs according to the timing of payments and the use to which the various versions are put.

For example, if a single rough draft of the story is required for the pitch, the initial fee related to this would be concept design expenditure and not be included in core expenditure. Provided that all subsequent payments for story development and the script for actors follow the decision to proceed with the video game, then these may be treated as core expenditure.

Book rights

Expenditure on the rights to use a story or book as the basis of a video game is development expenditure.

Expenditure on wider rights, such as the rights allowing the commercial exploitation of characters or other intellectual property, is not always development expenditure. Some of these rights may be required to produce the video game, and so qualify as core expenditure, but where these are not necessary to the development of the video game the costs associated with these rights will not be core expenditure.

Methods of producing video games vary extensively, so each case must be considered carefully. However, in general, a payment for an option over the right to use a book or story is speculative and not core expenditure. Each case needs to be considered on its facts, but in general the purchase of the actual rights needed to produce the video game is not speculative and so will be core expenditure.

Example 1

A producer likes a book and thinks that a video game might be made out of it.

She does some preliminary work, including setting up a Special Purpose Vehicle (SPV) and seeking initial opinions from colleagues and financiers. An SPV, in this instance, is a company through which any costs associated with the video game will be channelled. If the SPV is not a company then it will not be eligible for VGTR.

All seems favourable, so the company pays for an option over the game rights. This is purely to protect their position and is speculative.

Further development work follows, which includes commissioning artists and game developers to work on potential gameplay. Finance is found. At this stage the SPV exercises the option so that it can produce the video game.

The SPV’s payment for the rights is core expenditure. The payment for the option is not core expenditure.

It is not yet possible to say whether the payment for the artwork and gameplay development is core expenditure or not. If the initial artwork and gameplay is changed then the payment for this early work might be considered to be purely concept design expenditure. However, if the artwork and gameplay were to remain largely unchanged, then a reasonable proportion of the cost would be core expenditure.

Example 2

A video game publisher buys outright the intellectual property in a series of popular children’s adventure stories and sets to work making a series of video games based on them. It does this by engaging different SPV companies to produce and deliver different games based on different aspects of the story which provide the scope for different types of gameplay.

Included with the costs borne by each SPV is a recharge to the video game publisher of the book rights relating to the video game it has been commissioned to produce. The video game publisher retains all other intellectual property rights that are not necessary for development.

Each SPV will treat the payment to the video game publisher for book rights as core expenditure.

Musical, literary and stock film rights

The considerations for rights connected to music, songs, literary works and stock footage are similar. Where these are incorporated into the video game during production, these will be core expenditure.