CREC054300 - Eligible expenditure: UK expenditure: video game examples
For video games, core development activities such as programming and detailed game design are the equivalent of principal photography for films and TV programmes, while work听诲辞苍别听to assemble different assets or code听into a single game is akin to post-production for film and TV.听
HMRC applies the used or consumed rule accordingly.听Core development activities are used or consumed where they are performed. The work required听to assemble different elements together into a final product is considered to be听used or consumed where it is carried out, but that 诲辞别蝉苍鈥檛听mean the costs of those different elements can automatically be attributed to that final location.听
More detailed explanations are set out below.
Goods听
Expenditure on goods is qualifying UK expenditure when those goods are used in the UK. It does not matter if they are manufactured overseas or purchased听from an overseas supplier, provided they are transported to the UK for use听as part of UK development activities.鈥�听
For example, the cost of a prop weapon used as a reference for asset designers working in the UK would be qualifying expenditure.鈥�听
The same principle applies to intangible goods such as music rights, copyright听and intellectual property. The cost of obtaining copyright so that designers and programmers can develop a game using that material will be qualifying expenditure if those designers and programmers carry out their work in the UK. It is the location of the recipient who uses or consumes the goods that determines听whether they qualify.鈥�听
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Services听鈥� direct services听
Expenditure on services is UK expenditure if the services are performed in the UK. In many cases, where the work done contributes directly to game development,听this rule is straightforward to apply. Designers, programmers, quality assurance testers and other staff perform their services wherever they themselves are based. This means that:鈥�听
the costs of staff who work in a UK office or work remotely from somewhere in the UK are UK expenditure鈥�听
the costs of staff who work from outside the UK are not UK expenditure, even if the development company is mostly based in the UK鈥�听
The rule applies in the same way to work carried out by subcontractors.鈥�听
Example 1鈥�听
A UK development company is in the same group as a company in Poland. The UK company hires the Polish company to design and build the user interface and loading menus for its latest game. Programmers working in the UK for the development company add the Polish company鈥檚 work into the final game.听
The fee paid to the Polish subcontractor is not UK expenditure, because the design and programming services are performed in Poland. The cost of adding the code produced by the Polish company into the game听is UK expenditure, because the UK programmers perform their services in the UK.听
Example 2听
A UK development company subcontracts a company in Sweden to design and programme the hair textures for character models in its latest game. The Swedish company carries out the work entirely in house using staff working in Sweden. The finished hair textures are added to the character models by the UK developer and appear in the final game without any changes.听
The work of the Swedish company appears directly in the final product, and the service听鈥� designing and creating the hair textures听鈥� was performed in Sweden. The fee paid to the Swedish company is therefore not UK expenditure. However, the cost to the UK developer of adding the textures to its character models is UK expenditure.听
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Services 鈥� indirect services听
In the case of some services, it is not obvious where the services are 鈥榰sed or consumed鈥�.听Generally, these听are services which contribute indirectly to the video game. This includes, in particular, services听supplied by script/dialogue writers, concept artists, composers听and researchers. Their work does not appear directly in the game but is used by others to help develop the game, or听must be incorporated into the game by others in some way.鈥�听
Expenditure on such services will be considered to be听expenditure on services used or consumed in the UK to the extent that the service is used by developers/programmers who are working in the UK. For example, the services of an overseas researcher taking reference images of a location in the USA would be used in the UK if those reference images are used by UK-based designers and programmers to help develop the game, and听would therefore be UK expenditure.鈥�听
It is also common for some of these services to be used or consumed in more than one way. The only way to determine听whether such services are used or consumed within the UK is by looking at the facts in each case, and where necessary, apportioning the costs between UK and non-UK expenditure.鈥�听
Example 3听
A concept artist based in France produces a piece of concept art for a character design. The character asset is later modelled and incorporated into the game by a team of programmers, half of whom work in the UK and the other half in Romania. The video game development company should apportion the expense paid to the concept artist half and half, to reflect that the artist鈥檚 work was used in both the UK and Romania.鈥�听
Example 4听
A UK development company commissions a composer in听Canada听to write music for a video game soundtrack. The composer produces the score in Canada, which is used to record the soundtrack听by an orchestra in London. Because the score is used to record the soundtrack in London, it is used in the UK. Expenditure on the score will therefore be UK expenditure despite it being composed in Canada.听听
Example 5听
A UK development company wants to use motion capture to create character model movements. It subcontracts the motion capture work to a German company, which sources actors and records the motion capture for the actions the UK developer has requested. It carries out all of听this work in Germany. Programmers working in the UK for the development company then apply their character models to the captured actions and incorporate them into the wider game.听
The fee paid to the German company will be UK expenditure, because the motion capture work underpins development activity which takes place wholly in听the UK. The service is therefore used in the UK despite the work being carried out in Germany.听
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Apportionments听
For goods and indirect services that are used partly in the UK and partly overseas听based on the rules above, it may be difficult to determine听the proportion of听UK use when expenditure on that good or service听is first incurred.听This may be especially true for video games that are developed over several years.听
In such cases, when the expenditure is听first听incurred and included in a claim, companies must assess the proportion of the expenditure that is UK expenditure based on a fair and reasonable expectation听of the balance of UK usage听vs overseas usage across the whole development process.听
This proportion should be reviewed for each accounting period听as development progresses and adjusted if circumstances have changed materially听since the last period.听This may require amending previous听claims.听
If HMRC considers that a company鈥檚 estimate of the proportion of expenditure that is UK expenditure is not just and reasonable听and that the UK proportion is too high, it will amend a company鈥檚 claims and/or issue assessments accordingly.听
It is not necessary for companies to track the usage of goods听or indirect services听down to the level of individual staff. Apportionments based on the proportion of staff working predominantly in听the UK as opposed to predominantly overseas听are acceptable.听
Example 6听
A听development company pays a听拢10,000听fee for the rights to use characters from听a book series in its latest听video game.听The fee applies to the life of the development but听is all paid upfront in the company鈥檚 first accounting period听for the separate production trade.听
The company has its own staff working in the UK but also expects that it will need to bring in a subcontractor to work on some of the character models, using the rights to the book characters. At the end of the first accounting period, the听company has not听finalised听its plans but expects to award the work to a small development studio based in Austria.听
Of the staff from each company that will be working on the game, and therefore using the character rights, 70% are from the development company, based in the UK, and 30% work in Austria for the subcontractor听studio. The development company therefore includes 70% of the fee, 拢7,000, as UK expenditure in its VGEC claim.听
In the next accounting period, the company ceases work on a different project, which frees up developers to work on the听book series game. It is decided that the Austrian subcontractor will no longer be needed听and the book rights will now be used wholly by听developers working for the development company in the UK.听
This means that the development company can claim the full 拢10,000 book rights fee as UK expenditure. It can听claim the 拢3,000 not already claimed by amending its return for the original听period, or听including the additional听UK expenditure in its cumulative totals for the current period.听
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Determining听the location of subcontractors听
To apply the rules above to determine听whether a good/service is used or consumed in the UK, it is important to be able to identify听the location of a subcontractor: UK or overseas. Where a subcontractor is an individual, this is usually straightforward, but where a subcontractor is a company that employs multiple people, the situation may be more complex.听For example, a company based in Germany could employ some staff who are based in the UK.听
In such cases, a听just and reasonable听apportionment should be made based on the proportion of staff who work in the UK and the proportion who work overseas. Mobile employees who spend time working in multiple jurisdictions听should be counted as working in the jurisdiction听in which they spend the most time.听
HMRC will make adjustments to听correct apportionments that are not reasonable. It is the responsibility of development companies to ensure that information provided by their subcontractors is reliable.听
The proportion of UK to overseas staff may fluctuate over the course听of the subcontractor鈥檚 involvement in development.听Provided the apportionment applied听by the development company was just and reasonable at the time it entered into听a contract with the subcontractor, fluctuations need not be accounted for. If a听development听company is aware when it enters into听a subcontracting arrangement that the UK proportion of the subcontractor鈥檚 staff is likely to change significantly during the subcontractor鈥檚 involvement, it should factor this into听its initial听apportionment.听
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Different phases听of development听
The location in which goods and services are consumed for each phase of development is determined听independently of earlier phases of production. If most expenditure on a phase of production is UK expenditure, it does not follow that expenditure at later phases will also be mostly UK expenditure.鈥�听
For example, a development company undertakes design work on a video game entirely in house. The concept artists, level designers, programmers and other staff working on this stage all perform their services at the company's UK offices, so the expenditure incurred by the company for this phase of development is wholly UK听expenditure.鈥�听
Once the game has moved into full production, the company hires a subcontractor in France to produce some of the assets for the game, based on designs produced within the UK. The French subcontractor performs its work overseas and the expenditure on it is not UK expenditure. It does not matter that the earlier design phase of development was wholly in听the UK or that the assets were based on UK designs.鈥�听