VGDC80070 - Avoidance and disclosure: Interaction with Research and Development Credits and State Aid
S1217C(4) Corporation Tax Act 2009 (CTA 2009)
Interaction of VGTR and Research and Development reliefs
S1217C(4) says:
‘But video games tax relief is not available in respect of any expenditure if:
The company is entitled to an R&D expenditure credit under Chapter 6A of Part 3 in respect of the expenditure; or
The company has obtained relief under Part 13 (additional relief for expenditure on research and development) in respect of the expenditure.’
From 1 April 2016, large companies which make a claim for Research and Development (R&D) relief do so by claiming R&D Expenditure Credit (RDEC). There are some circumstances where SMEs (Small and Medium Sized Enterprises) are not able to claim SME R&D Relief and are also entitled to RDEC. The RDEC legislation can be found in Chapter 6A of Part 3 of CTA 2009. HMRC’s guidance starts at page 89700 of the Corporate Intangibles Research and Development Manual.
A company is entitled to claim the RDEC if it has qualifying expenditure for the accounting period. As per the legislation above, any such expenditure is not eligible for Video Games Tax Relief (VGTR), whether or not RDEC is actually claimed. So if a large company is also a video games development company (VGDC), then it doesn’t have a choice between claiming RDEC or VGTR in respect of any qualifying expenditure. If it is entitled to claim RDEC as a result of carrying on a qualifying activity and incurring qualifying expenditure, then it must claim RDEC rather than VGTR. However, if the expenditure is not qualifying for the purposes of RDEC then it may qualify for VGTR provided all the other qualifying requirements for the relief are met.
Where a SME VGDC claims SME R&D Relief on a project, that company cannot receive any other State aid reliefs (including VGTR or grants) on that project. This is because a project cannot usually attract two or more different types of State aid. In fact, if a company claims VGTR in respect of a project, the SME R&D Relief legislation specifically stops any claim for SME R&D Relief. This is covered in s1138 CTA 2009 and still applies even if the company later withdraws a successful claim for VGTR. This means that if a VGDC chooses to claim VGTR, any R&D ‘bubble’ within that project wouldn’t qualify for R&D relief under the SME scheme.
Limit on State aid
A State aid is defined in Article 107(1) Treaty on the Functioning of the European Union as:
‘any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods.’ Any such aid ‘shall, in so far as it affects trade between Member States, be incompatible with the internal market.’
The Department for Business, Energy & Industrial Strategy (BEIS) provides further information on State aids.
Companies applying for any of the Creative Industry Tax Reliefs, which are all State aids, must bear the following in mind when applying for relief.
State aid intensity and Cumulation
A company must also consider whether it has received other forms of aid from other sources as these must be ‘cumulated’ to arrive at the intensity figure.
Cumulation means that you must add up any State aid received from more than one source going to the same project.
Other forms of State aid may include: grants, direct payments, interest rate subsidies, tax reliefs, repayable advances, reimbursable grants, guarantees, tax advantage or exemption, risk finance, or any aid by a state or through its own resources. This list is not exhaustive and companies should determine whether any payments, grants etc. they receive are State aids which may need to be taken into account when determining whether they have reached an intensity level. The intensity level is the maximum amount of State aid that a project is permitted to receive in relation to the costs of the game, after cumulation from all sources.
VGTR is a State aid notified to the European Commission and must adhere to the terms of the permission granted. The intensity level for video games is set at 50% of the cost of the game. Therefore the aid received from all State aid sources must not exceed 50% of the total budget for making the game.
There is no limit to the amount of State aid that a company can receive as long as it does not exceed the intensity level. Receipts of aid in excess of this limit will need to be repaid to the organisation or Department granting the aid which exceeds the limit.
Undertakings in Difficulty
Undertakings in difficulty can only receive a State aid under the restrictive conditions for rescue and restructuring aid. Any other form of State aid received is explicitly excluded, even when other companies that are not in difficulties can receive such aid.
This means that to be eligible for any State aids, a company must be trading and a going concern at the time it receives the aid.
Undertakings in difficulty are defined in the European Commission Guidelines: Guide lines on State aid for rescuing and restructuring non-financial undertakings in difficulty (2014/C 249/01).
See also the General Block Exemption Regulation No 651/2014 of 17 June 2014, particularly Article 2.
The 2014 guidelines are lengthy, but these extracts from point 20 of the rescuing and restructuring guidelines define a company in difficulty as follows:
For the purposes of these guidelines, an undertaking is considered to be in difficulty when, without intervention by the State, it will almost certainly be condemned to going out of business in the short or medium term. Therefore, an undertaking is considered to be in difficulty if at least one of the following circumstances occurs:
(a) In the case of a limited liability company, where more than half of its subscribed share capital has disappeared as a result of accumulated losses. This is the case when deduction of accumulated losses from reserves (and all other elements generally considered as part of the own funds of the company) leads to a negative cumulative amount that exceeds half of the subscribed share capital.
(b) In the case of a company where at least some members have unlimited liability for the debt of the company, where more than half of its capital as shown in the company accounts has disappeared as a result of accumulated losses.
(c) Where the undertaking is subject to collective insolvency proceedings or fulfils the criteria under its domestic law for being placed in collective insolvency proceedings at the request of its creditors.
Point 24 of the guidelines states an SME that has been in existence for less than three years will not be considered to be in difficulty unless it meets the condition set out in paragraph 20(c).
Transparency
As part of State Aid Modernisation measures, the European Commission has created a database to publish information about State aid granted by all Member States. HMRC is required to populate this database with details of relevant tax reliefs received above €500,000, which the Commission will then publish.
From March 2018, any VGTR claims received in excess of the threshold will be reported on the database.
The actual amount of the State aid will not be published. Instead, the name of the recipient will be published alongside one of six broad bands ranging from €0.5 million to €30m or more.
The UK has a legal requirement to provide the information on State aids granted above €0.5m to the European Commission. HMRC is disclosing this information because there is a specific legal basis to do so. Information about the amount of tax paid by a company, and any other details about the company’s tax affairs, remain confidential.