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HMRC internal manual

Video Games Development Company Manual

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HM Revenue & Customs
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Eligible expenditure: apportionments - ‘fair and reasonable’

S1217AE, S1217CG Corporation Tax Act 2009

The amount of Video Games Tax Relief (VGTR) to which a Video Games Development Company (VGDC) is entitled in respect of a video game trade is determined by the amount of core expenditure which is also European Economic Area (EEA) expenditure.

Where a video game is partly produced in the EEA and partly outside of the EEA it will follow that some goods and services may be non-EEA. In such cases, it will be necessary to make an apportionment of the relevant core expenditure between EEA and non-EEA expenditure.

This applies in the case of goods and services provided throughout core expenditure stages. That is, it applies to expenditure incurred during pre-development, production and post-development.

The method for making an apportionment is not fixed and can be determined on a case by case basis. The key criterion is that it must be done on a fair and reasonable basis.

More than one fair and reasonable basis

There will often be more than one ‘fair and reasonable’ basis. The requirement is not that the apportionment must be made using the fairest and most reasonable basis, but simply that it must be made on a basis that is fair and reasonable.

Example 1

Two principal actors, Mr A and Ms B, are respectively paid fees of £100k and £50k for providing voices for a video game. The voice recordings are made partly in the EEA and partly outside the EEA to coincide with their other commitments.

Recording studios are booked for two weeks in the UK and two weeks overseas. Both actors commit to making themselves available throughout these periods. However, they are not required for the full length of time.

  Mr A Ms B
Time available for recording in the EEA 14 14
Time available for recording outside EEA 14 14
Actual recording days EEA 10 3
Actual recording days outside EEA 5 9

From this information, it is possible to apportion using two fair and reasonable methods.

It would be reasonable to apportion the actors’ fees between the EEA and outside the EEA based on the time that each has made themselves available for recording in the respective locations. That is, 50% in the EEA and 50% outside.

Total fees apportioned to EEA expenditure would be £75k.

It would also be reasonable to apportion the actors’ fees between EEA and non-EEA territory based on the time that each spent in the recording studio. In that case, the respective proportions of Mr A and Ms B’s fees attributed to the EEA would be 67% and 25%.

Total fees apportioned to the EEA would be £79.2k.

Each method may be used. However, it should be used consistently where possible. It would not be acceptable to ‘cherry pick’ and apportion Mr A’s fees by reference to recording days and apportioning Ms B’s fee by availability.

Use of allocation keys

It may be that expenditure cannot be easily apportioned between particular locations or that considerable effort is required to do so. Where this is the case, it may be fair and reasonable to base the apportionment on other expenditure that is considered to be related. This should provide a fair and reasonable approximation.

For example, in the above example, concerning Mr A and Ms B, it may be fair and reasonable to allocate the costs of sound technicians on the same basis used for Mr A and Ms B.

Impact of the result

What is a fair and reasonable method of apportionment in any particular case should have regard to the likely impact of the result.

Where the method used involves larger costs, or is used as an allocation key for a larger cost, more consideration is required as to what is fair and reasonable.