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HMRC internal manual

Video Games Development Company Manual

Avoidance and disclosure: avoidance - inflation of development costs

S1217CJ, S1217CK Corporation Tax Act 2009 (CTA 2009)

The legislation of Video Games Tax Relief (VGTR) is based on the legislation already in place for Film Tax Relief (FTR). FTR was designed to ensure that it did not suffer from abuses similar to the previous tax relief regime for films.

The previous film tax regime was subject to regular abuse by those seeking a means to avoid tax. One such abuse was the artificial inflation of the actual level of development expenditure through the inclusion of deferred fees or other contingent costs, such as participations, which might never arise in practice.

The tax regime for video game development includes features intended to ensure that it does not suffer from similar abuse in the future.

Recognition of expenditure

There are rules for determining when expenditure on video game development is recognised for the purposes of the Video Games Development Company’s (VGDC) basic tax computation under Part 15B CTA 2009. This is the case regardless of whether or not VGTR is available or claimed.

Under these rules:

  • expenditure is recognised to the extent to which it is represented in the state of completion of the video game,
  • any amount that has not actually been paid is only recognised where its payment by the VGDC in the future is unconditional, and
  • costs relating to an obligation that is linked to income being earned can only be brought into account to the extent that the relevant income is brought into account.

Unpaid amounts

In calculating a claim for VGTR any costs which remain unpaid four months after the end of the relevant period of account are excluded, irrespective of whether there is an unconditional obligation for them to be paid in the future.

Deferments or contingent fees (unpaid four months after the end of the period) should be disregarded for the purposes of calculating a claim for VGTR, even where such costs are subject to an unconditional obligation to be paid.

This disregard does not apply to the basic tax computation.


A VGDC is commissioned to produce a VGTR-qualifying video game. Development costs (all UK) are £500k. The video game is completed within a single accounting period (Period 1).

The development agreement provides that the VGDC will be paid:

  • £420k for producing the video game, and
  • a further £50,000 dependent on download figures.

A key subcontractor has an agreement with the VGDC that if the target for sales figures is met he will receive an additional £40,000 from the VGDC.

The contingent receipt of £50,000 is too uncertain to bring into the calculation of the video game’s profits or losses until download figures are known.

Download targets are met towards the end of Period 2. At that point the additional £50,000 is treated as earned and brought into the calculation of profit or loss for Period 2. The obligation to pay the subcontractor will also be recognised in that period for the purposes of calculating the profits or losses of the separate video game trade under Part 15B Ch 2 CTA 2009.

But the VGDC does not receive the payment, and does not pay out the £40,000 due to the subcontractor until midway through Period 3. This is more than four months after the end of Period 2. So for the purposes of VGTR, the £40,000 is ignored when looking at Period 2, but is brought into Period 3.

Profits or losses of separate trade (Part 15B Ch 2 CTA 2009) Period 1 Period 2 Period 3
Income £420k £50k nil
Expenditure incurred during period (all UK) £50k £40k nil
Trading profits (losses) (£80k) £10k nil
Calculation of additional deduction and surrenderable loss (Part 15B Ch 3 CTA 2009)      
Expenditure incurred to end of period (all UK) £500k £500k  
(disregarding £40k unpaid within 4 months of end of period £540k
(including £40k incurred in Period 2 but paid in Period 3)        
  Increase over expenditure incurred over previous period £500k nil £40k
  Enhanceable expenditure (in this case 80% of total core) £400k nil £32k
  Additional deduction to end of period (100% of enhanceable expenditure) £400k £400k £432k
  Less additional deduction claimed for earlier period(s) - (£400k) (£400k)
  Additional deduction due for the period £400k - £32k
  Trading (profit) loss for the period after additional deduction (£480k) £10k (32k)
  Surrenderable loss (lower of trading loss for the period (after additional deduction) and enhanceable expenditure) (£400k) - (£32k)


Pre-VGTR loss: £70,000.

Surrenderable losses: £432,000.