VGDC55120 - Calculation: surrenderable losses and Video Games Tax Credit - example - multi-period development
The following example illustrates how a Video Games Development Company (VGDC) that sustains a surrenderable loss can surrender that loss in return for a payable tax credit (VGDC55100). In this case the development runs over two periods.
As with the additional deduction (VGDC55050), the calculation of the payable credit is cumulative where the video game takes more than one period to complete.
Example
A VGDC makes a video game with total core expenditure of 拢1尘, all of which is European expenditure. The video game was commissioned by a publisher which pays 拢900k for it.
The video game takes two periods of account to make, and the VGDC incurs expenditure of 拢400办 in the first period and 拢600办 in the second. The commissioning publisher pays the VGDC 拢500k in the first period and the remaining 拢400办 in the second.
In order to establish the profit or loss made in each accounting period, the VGDC should apply the income recognition rules, rather than the amount which the publisher actually pays during each period (VGDC20220).
In this example, the income is calculated on the basis of the proportion of total expenditure incurred in each period multiplied by the estimated total income.
First period
In the first period, estimated income is 拢360办 (拢400办/拢1尘 x 拢900k).
Of the total core expenditure of 拢400办, 80% is eligible for Video Games Tax Relief (VGTR), giving an additional deduction of 拢320办 (拢400办 x 80%) and total deductions in the period of 拢720k (拢400办 plus 拢320办).
The adjusted trading loss in the period is therefore 拢360办 (estimated income of 拢360办 less deductions of 拢720k).
The surrenderable loss for the accounting period is the lesser of:
- the available loss of 拢360办, and
- the qualifying expenditure of 拢320办.
Therefore, only 拢320办 of the loss can be surrendered, giving a tax credit of 拢80k (25% x 拢320办).
A loss of 拢40k is carried forward.
Second period
In the second period, total expenditure to date is 拢1尘. This gives enhanceable expenditure of 拢480办 in the period. This is calculated as 拢800办 enhanceable expenditure to date (拢1尘 x 80%), less the 拢320办 enhanceable expenditure claimed in the previous year.
The additional deduction for VGTR in the year is 拢480办.
Total estimated income to date is 拢900k, of which 拢360办 has already been accounted for in the first period. This gives an estimated income for the second period of 拢540k. Total deductions for the year equal 拢1.08m (core expenditure of 拢600办 plus the additional deduction of 拢480办).
The trading loss for the period is therefore 拢540k (estimated income of 拢540k less deductions of 拢1.08m).
The surrenderable loss for the accounting period is the lesser of:
- the available loss of 拢580k (拢540k loss for the second period + 拢40k relevant unused loss), and
- the qualifying expenditure of 拢480办.
Therefore, only 拢480办 can be surrendered, giving a tax credit of 拢120k (25% x 拢480办). The remaining 拢100k loss can be carried forward, or treated as a terminal loss if the trade ceases on delivery of the video game (VGDC30040).
Cumulative effect
This means the tax credit is worth 拢200k over the two years (拢80k plus 拢120k), the same as it would have been had the video game been made in a single year.
This is provided that claims for tax credits are made in both years. The amount of tax credit that may be claimed in the second period is restricted due to the enhanceable expenditure incurred in that period.
Summary
| 听 | Period 1 | Period 2 |
|---|---|---|
| Expenditure incurred to end of period (all European) | 拢400办 | 拢1尘 |
| Enhanceable expenditure (in this case 80% of total core) | 拢320办 | 拢800办 |
| Additional deduction to end of period (100% of enhanceable expenditure) | 拢320办 | 拢800办 |
| Less additional deduction claimed for earlier period(s) | - | (拢320办) |
| Additional deduction due for the period | 拢320办 | 拢480办 |
| 听 | 听 | 听 |
| Estimated total income attributed to period | 拢360办 | 拢550办 |
| Expenditure attributed to period | 拢400办 | 拢600办 |
| Additional deduction due for the period | 拢320办 | 拢480办 |
| Post-VGTR trading profit (loss) for the period after additional deduction | (拢360办) | (拢540办) |
| Surrenderable loss (lower of trading loss for the period and enhanceable expenditure) | (拢320办) | (拢480办) |
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