# VGDC55120 - Calculation: surrenderable losses and Video Games Tax Credit - example - multi-period development

The following example illustrates how a Video Games Development Company (VGDC) that sustains a surrenderable loss can surrender that loss in return for a payable tax credit (VGDC55100). In this case the development runs over two periods.

As with the additional deduction (VGDC55050), the calculation of the payable credit is cumulative where the video game takes more than one period to complete.

### Example

A VGDC makes a video game with total core expenditure of £1m, all of which is European expenditure. The video game was commissioned by a publisher which pays £900k for it.

The video game takes two periods of account to make, and the VGDC incurs expenditure of £400k in the first period and £600k in the second. The commissioning publisher pays the VGDC £500k in the first period and the remaining £400k in the second.

In order to establish the profit or loss made in each accounting period, the VGDC should apply the income recognition rules, rather than the amount which the publisher actually pays during each period (VGDC20220).

In this example, the income is calculated on the basis of the proportion of total expenditure incurred in each period multiplied by the estimated total income.

### First period

In the first period, estimated income is £360k (£400k/£1m x £900k).

Of the total core expenditure of £400k, 80% is eligible for Video Games Tax Relief (VGTR), giving an additional deduction of £320k (£400k x 80%) and total deductions in the period of £720k (£400k plus £320k).

The adjusted trading loss in the period is therefore £360k (estimated income of £360k less deductions of £720k).

The surrenderable loss for the accounting period is the lesser of:

• the available loss of £360k, and
• the qualifying expenditure of £320k.

Therefore, only £320k of the loss can be surrendered, giving a tax credit of £80k (25% x £320k).

A loss of £40k is carried forward.

### Second period

In the second period, total expenditure to date is £1m. This gives enhanceable expenditure of £480k in the period. This is calculated as £800k enhanceable expenditure to date (£1m x 80%), less the £320k enhanceable expenditure claimed in the previous year.

The additional deduction for VGTR in the year is £480k.

Total estimated income to date is £900k, of which £360k has already been accounted for in the first period. This gives an estimated income for the second period of £540k. Total deductions for the year equal £1.08m (core expenditure of £600k plus the additional deduction of £480k).

The trading loss for the period is therefore £540k (estimated income of £540k less deductions of £1.08m).

The surrenderable loss for the accounting period is the lesser of:

• the available loss of £580k (£540k loss for the second period + £40k relevant unused loss), and
• the qualifying expenditure of £480k.

Therefore, only £480k can be surrendered, giving a tax credit of £120k (25% x £480k). The remaining £100k loss can be carried forward, or treated as a terminal loss if the trade ceases on delivery of the video game (VGDC30040).

### Cumulative effect

This means the tax credit is worth £200k over the two years (£80k plus £120k), the same as it would have been had the video game been made in a single year.

This is provided that claims for tax credits are made in both years. The amount of tax credit that may be claimed in the second period is restricted due to the enhanceable expenditure incurred in that period.

### Summary

Period 1 Period 2
Expenditure incurred to end of period (all European) £400k £1m
Enhanceable expenditure (in this case 80% of total core) £320k £800k
Additional deduction to end of period (100% of enhanceable expenditure) £320k £800k
Less additional deduction claimed for earlier period(s) - (£320k)
Additional deduction due for the period £320k £480k

Estimated total income attributed to period £360k £550k
Expenditure attributed to period £400k £600k
Additional deduction due for the period £320k £480k
Post-VGTR trading profit (loss) for the period after additional deduction (£360k) (£540k)
Surrenderable loss (lower of trading loss for the period and enhanceable expenditure) (£320k) (£480k)