A Clean Break

And That's Not All

In addition developers should consider also that while they might not retain copyright in any art, environments and models under the old R&D tax credit rules it may still be possible to claim in respect of the R&D spend associated with their creation.

This is because the developer may have also be devising a new physics engine or lighting technology which will form part of its development tools and technology and which are typically carved out from any transfer of rights to a publisher. In order to research and develop that physics engine or lighting technology it is necessary to test it and the only way to do that is to have suitable art, environments and models. Accordingly there is a good case for including that spend.

A remaining consideration (and one that HMRC may now look more closely at) is that an R&D tax claim may be reduced or rejected to the extent that the R&D spend is considered to be "subsidised expenditure". HMRC have taken a mixed approach on this issue and have at times argued that if a developer is paid to produce a game then the developer has been subsidised in respect of the R&D component also.

However this is, in my view an incorrect position. Firstly as anyone involved in games development knows, publishers are not in the business of subsidizing a developer's R&D. The contracts clearly say that the developer must deliver on a time and date and if the developer decides to engage in risky R&D as part of that development that is up to it - no delivery no payment.

Therefore the developer has a choice - engage in R&D for the new physics engine or lighting technology or license it in. The R&D has much greater risk attached but it 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" and should therefore be rewarded with the R&D tax credit. That, at least is why the system exists.

In Conclusion

Of course each contract is different and each situation will turn on its facts (and this article isn’t a substitute for taking appropriate advice on your circumstances) but it should be apparent that the change to the R&D tax scheme could have a significant impact for all developers and it also allows us to bring into focus that, at a time when there is some angst over the support the government gives the industry we should all look to see if we are making the best out of what is already on offer.

With that in mind it pays to work closely with accountants and lawyers who understand the system and importantly understand games development contracts (and intellectual property for past accounting periods). The announcement in the PBR should substantially increase what can be considered R&D spend for many developers and should also make it considerably easier to claim. However an eye should be had on the small print and the principle of subsidised expenditure.