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HMRC internal manual

Video Games Development Company Manual

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HM Revenue & Customs
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Calculation: additional deduction - single-period developments

S1217CG Corporation Tax Act 2009

A Video Games Development Company (VGDC) entitled to Video Games Tax Relief (VGTR) can claim an additional deduction in computing the taxable profits of a video game trade.

The effect of the additional deduction is to increase the level of expenditure for tax purposes. This decreases the amount of Corporation Tax which would otherwise be payable. It may also create a loss, or greater losses, which are then available to be surrendered for the payable credit.

Example: Development completed in single period

A VGDC makes a qualifying British video game for £300k, all of which is EEA core expenditure. It retains and exploits the video game in the EEA, receiving income of £600k and therefore generating a profit of £300k on which it would normally pay Corporation Tax. The company is subject to Corporation Tax at a rate of 23%. The video game is completed within a single accounting period.

Expenditure on the video game is eligible for VGTR. The VGDC is entitled to an additional deduction in computing its profits/losses from the separate trade relating to the development of the video game. Since all of the core expenditure is EEA expenditure, the additional deduction is calculated by reference to 80% of the total core expenditure.

Income £600k  
     
Expenditure (£300k)  
Trading profit before VGTR   £300k
     
Enhanceable expenditure (£240k)  
(80% of EEA core expenditure of £300k )    
     
Additional deduction   (£240k)
(Enhanceable expenditure of £240k x 100%)    
     
Trading profit after VGTR   £60k

Without VGTR, the VGDC would have been liable to pay Corporation Tax of £69,000 (23% x the pre-VGTR profit of £300k).

VGTR reduces the Corporation Tax liability to £13,800 (23% x the adjusted profit of £60k), thereby gaining a benefit of £55,200.

In this case, the VGTR is worth 18.4% of the total core expenditure (VGDC50010).