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A Clean Break

If you're a UK business and you want tax relief, then this will definitely be of interest...

While many were hoping for some governmental love for the games industry in the UK, there wasn't a great deal of confidence in the air that the Pre-Budget Report would - in the current economic and political climate - supply much cheer. Sure enough, the Chancellor said nothing specific about the business of videogames, with no mention of a benefit linked to cultural games - which might have happened following such a measure being introduced in France - or anything to level the playing field with the second most important entertainment industry in the UK - the movie business.

However - all is not lost, and there was one change in particular that should be of interest to all developers in the UK, not just those developing 'culturally British' titles... whatever that actually means. Here Sheridans partner Alex Chapman gives an overview of how companies can take advantage of the new situation, while Lucraft Hodgson & Dawes partner Will Taylor explains just how the R&D Tax Credits work.

What the Pre-Budget Report Really Said - Alex Chapman

The initial reaction to last week's Pre-Budget Report (PBR) was that there was nothing in it for the games sector (unless you wanted to trade in your old boiler). However while there was no overt tax break announced for "culturally British" games, as the industry had been campaigning for, the Chancellor has provided a much needed tax benefit. Indeed the change to the tax system is one that benefits all developers - not just those that produce "culturally British" games.

That change is to the Research and Development Tax Credit System and means that all developers can now benefit from the scheme in a way that they couldn't before.

Tucked away in note six to the PBR is a brief mention about intellectual property requirements: It means that developers no longer need to own the IP in the product of their research and development in order to qualify for an R&D Tax Credit.

What Does the Change Actually Mean?

Before the PBR amendment there were two main qualifying criteria for R&D Tax Credits (and still are for companies making claims in respect of accounting periods ending before 9 December 2009):

  • 1: The R&D project "seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty"
  • 2: The developer "must own any intellectual property that might arise from the project"

The first category has generally never been a problem for most games developers, because the work undertaken by them is inherently innovative and necessarily involves research and development. Her Majesty's Revenue & Customs gives an example of R&D as being "an appreciable improvement to an existing process, material, device, product or service through scientific or technological changes" - which is what developers do on a daily basis. Therefore developers have generally always satisfied the first criteria.

However because most large scale games development in the UK is work-for-hire, a significant proportion of the R&D that many UK developers undertake does - or did not - obviously satisfy the second criteria.

An Opportunity Not to be Missed

Generally-speaking these developers will own their underlying development tools and technology and know how and will have a right to claim in respect of certain other IP that they have created. However that is not always the case especially for developers working on ports or conversions or using the publisher’s own underlying tools and technology.

Even where it is the case, in large scale projects funded by publishers, the developer is generally required to transfer the copyright in the rest of the game to the commissioning publisher. This therefore removed a significant proportion of the research and development spend from the tax credit claim or else created difficulties in persuading HMRC over the level of tax credit a developer should receive.

There are (and were) ways of squeezing more R&D spend into a claim (which I explain later) but they relied on the subtleties of tax law, intellectual property law and the intimate workings of games development contracts. This meant that some developers didn't claim everything they were entitled to, or simply didn't bother claiming at all - and those that did often saw their claims rejected because of these complexities.

So while the strict legal position is that developers were already entitled to claim for a great deal more that they have been, this announcement in the PBR will make it easier for developers to claim in respect to their entire R&D spend rather than just a proportion of it. Therefore the impact can be felt by all developers, and so the impact on the industry could be significant.

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