How The New UK Tax Laws Will Affect Indie Developers

This will upset some people, but John just isn’t a financial expert. His stabs at trying to understand the new UK tax relief rules for games development have been enthusiastic, but inexpert. Which is why we’ve turned to Chris England – developer of Xenonauts, and qualified accountant. As an independent developer, and a financial expert, the subject affects and interests him directly. So he’s taken a deeper look to see how it really applies to the UK’s indie developers, and why it fails to take into account the newer methods for funding development.

Back in March, the UK government made all of us happy by announcing that 2013 would herald the arrival of a new tax relief for the video games industry. They confirmed this in the Autumn Statement last week – but what does the draft legislation actually mean for British indie companies? Well, it’s (qualified) good news! The tax relief being proposed is pretty generous. Here’s a simple breakdown of how it will work.

Unsurprisingly it is calculated based on the development costs incurred in making a game, but specifically it refers to the “core expenditure”.

What counts as core expenditure? Most things, really. It’s a general term that encompasses the cost of designing, producing and testing the game. The most notable exclusion is marketing, but also specifically discounted are the costs in producing the initial concept for the game and debugging or “maintenance” work on a completed game.

If more than 25% of this core expenditure is spent in the UK, congratulations – you meet the financial criteria for the tax relief!

If so, this core expenditure is placed in a separate pot, with a different pot for each game in production. Also added to the pot is any income received from that game (pre-order sales or Kickstarter revenue, for example). This gives a core profit / loss for each game, which can be used in two ways.

The first is a 100% tax relief on the lower of either:
1) 80% of the core expenditure
2) 100% of the core expenditure spent in the UK

The second is a 25% tax credit, which can only be taken if the calculation of the core income / loss for a game has come out as a loss. If there is a loss, that amount can be surrendered to receive a 25% tax credit on the amount of the loss.

Here’s an example to show how it works in practice:

A UK indie begins work on a game 2013. Inevitably, it will be called NOUNFACE. NOUNFACE takes two years to produce, costing £20,000 in total. In 2015, NOUNFACE is released on Steam and the company receives £50,000 in sales.

Without Tax Relief
• There is a net profit on NOUNFACE of £30,000. (£50,000 – £20,000 = £30,000)
• In 2015, the company pays £6,000 of tax at the 20% small company tax rate ( £30,000 * 20% = £6,000)
• This leaves the company with £24,000 total profit, received in 2015.

Tax Relief
• There is £50,000 of income for NOUNFACE and £20,000 of core expenses.
• £16,000 extra tax relief arises (£20,000 x 80% = £16,000)
• This gives a net profit of £14,000 (£50,000 – (£20,000 + £16,000) = £14,000)
• The company pays £2,800 tax (£14,000 * 20% = £2,800)
• This leaves the company with £27,200 total profit, received in 2015.

Tax Credit
• NOUNFACE spends two years in development, each costing £10,000. Therefore there is a £10,000 loss in both 2013 and 2014.
• The company can surrender this loss in return for a 25% tax credit, worth £2,500 per year (£10,000 * 25% = £2,500)
• On release, the net profit is £30,000 and the company pays £6,000 tax as normal.
• The company therefore receives £2,500 in 2013, £2,500 in 2014 and £24,000 in 2015. This is a total post tax profit of £29,000.

Both the tax relief and the tax credit are useful, but the 25% tax credit is the better option. A developer receives more money in total and also receives a portion of it earlier than they would if they just used the tax relief (allowing it to be spent on development).

Simple, eh? But the maths hides a few important issues, the largest of which is the infamous cultural test. In short, you’re not entitled to any tax relief if your game is deemed insufficiently “British”.

This is down to European Union law. Nations can’t offer direct financial aid to companies as it would give them an unfair advantage over others in the common market, but for some reason it is allowable to offer them based on promoting culture. Hence the cultural test.

This presents an additional obstacle, but it isn’t an impassable one – particularly for gamers, who are more used than most to operating within arbitrary sets of rules. The full test can be found here, but there are a few key points:

• You need 16 points to pass the test.
• You get 4 points if more than 75% of the game is set in the EEA (pretty much all of Europe), or 3 points if more than 66% of the game is set in the EEA or an “undetermined location”
• You get 4 points if more than 66% of the lead characters are from the EEA, or an “undetermined location” .
• You get 4 points if more than 75% of the game is in English.
• You get a point (max 2) if more than 50% of any of the following are done in the UK: concepting, storyboarding, programming or visual design.
• You get 1 point if more than 50% of the audio is done in the UK.
• You can get up 8 points if any of the following roles are from EEA (1 point each): project leader, scriptwriter, composer, lead artist, lead programmer, lead designer, any head of department, bonus point if more than 50% of the team are from Europe.
• Almost all of the above are on a sliding scale, so you’ll get points for partially ticking the boxes.

It is thus very easy to pass the test. An indie team based in Britain consisting of an artist and a programmer would get 14 of the 16 points just for their nationalities, making their game in English and splitting the project leader, lead designer, lead artist and lead programmer roles between them.

That said, this tax relief and the cultural test are still in draft form and are yet to be approved by the EU. They may therefore be changed before April 2013 – but if not, these are my concerns at present:

1) The structure rewards traditional development models. To take advantage of the 25% tax credit, you want to make as large a loss as possible each year until release. An indie who alphafunds their game or does a Kickstarter will gain an income for that, so will have to take the less generous tax relief on the equivalent amount of core expenditure. Annoying.

2) The small print of the legislation states a “A video game is completed when it is first in a form in which it can reasonably be regarded as ready for copies of it to be made and made available to the general public.”

Again, for a traditional development model that works fine – but many indies rely on alpha-funding to support themselves. The wording potentially implies that releasing an alpha version of a game to pre-orderers will mark the game as completed, which may mean that further development on the completed game would just count as “maintenance” and not generate tax relief. Potentially massive issue!

3) The small print makes it explicit that UK expenditure consists of products or services that are used within the UK by the game developer, but that this is assessed purely on the recipient rather than the provider and the nationality of the provider has no bearing on this. It is possible that this means using overseas contractors (even those outside the EEA) actually counts as UK expenditure. Got an American freelancer? That’s UK expenditure! Maybe.

I’m seeking some clarification from the relevant government bodies on the last two points, as well as enquiring about a more specific definition of “undetermined location” for the cultural test (i.e. does a fictional location count as an undetermined location, or must a name actually not be specified for it to count?) and will let you know once I hear back.

Overall, though, my provisional opinion is that the tax reliefs on offer are pretty damn good. Every penny counts when you’re an indie, so having 25% more of them will certainly help out!


  1. Borklund says:


  2. moocow says:

    Presumably ‘Sir, You Are Being Hunted’ scores over 9000 Britishness Points, for the tea and pipes and whatnot

  3. Unaco says:

    Thank you for the reasonable, measured piece Mr England. I have seen some pretty outrageous comments about this, and the whole “cultural test” stuff since it was announced a few days ago. I think it’s important to realise that it’s a ‘hack’ almost, of the EU rules… it’s a workaround, designed to give the impression of promoting our Culture or whatever, but not actually doing that in practice. It’s NOT going to change or influence the contents of games… people won’t be rewriting their games to embrace Britishness, or making jingoistic products just to take advantage of this relief. No projects will have to compromise to fit with these rules.

    A good example of this in action would be something like ‘Heavy Rain’. It qualified under exactly the same rules, for Tax relief from the French… and it was hardly a bastion of Gallic culture (a few accents in the voice work aside).

    • Simon Hawthorne says:

      Indeed, this part of the article:

      This is down to European Union law. Nations can’t offer direct financial aid to companies as it would give them an unfair advantage over others in the common market, but for some reason it is allowable to offer them based on promoting culture. Hence the cultural test.

      Should be in bold and repeated until people begin to understand that it’s not ‘the bloody Tories with their extreme nationalism’, etc, etc. I only wish it had been stated in the first article, the comments there were terrible.

      • Jamesworkshop says:

        Tories with their extreme nationalism

        I don’t think any of our 3 main political parties count as anything other than raging moderates.

        What we get are different faces we don’t get different polices.

        Iraq, Afghanistan, Libya, still would have happened no matter the party involved at the time, same with next stop Iran

        DC,NC,EM, nothing screams reincarnation of Oliver Cromwell to me

  4. lordcooper says:

    “You get 4 points if more than 75% of the game is set in the EEA (pretty much all of Europe), or 3 points if more than 66% of the game is set in the EEA or an “undetermined location””

    Is that the percentage of time a player would likely spend there, a percentage of levels, or a percentage of the space it takes up?

    • Llewyn says:


    • Gap Gen says:

      At least 66% of the variable names in the code have to refer to UK places or public figures. You can query databases by selecting nelsonsColumn, or convolve your vertex positions with a trafalgarSquareMatrix, while implementing a belfastSqrt operator helps with normals for lighting.

  5. Lord Custard Smingleigh says:

    Does being named “Chris England” help with the score?

    • The Random One says:

      Chris actually changed his name to that for tax reasons (though he claims he just likes England so much he changed his name to it). His given name is Ian Accountancy de Turnbasedshooterworthington.

  6. gravity_spoon says:

    I want to play NOUNFACE now

  7. Sakkura says:

    I hope the EU strikes down this blatant example of protectionism.

    • Skabooga says:

      As far as protectionism goes, I’m pretty okay with this type, that is to say, those for creative and artistic endeavors. Commodities and manufactured items not so much, but infinitely copyable pieces of entertainment I can live with.

    • Ovno says:

      I thought protectionism was when you taxed foreign goods more when coming into the country than the ones produced here, which is not the case here, as this is about the production of goods not the sale or import/export.

      • Syra says:

        Protectionism refers to all government related barriers to free trade, this is effectively a subsidy.

  8. jatan says:

    thanks for that article will be forwarding it to few people-very useful

  9. dx0ne says:

    What if it’s set on exoplanet which is colony of UK?

    • povu says:

      I wonder if Jamestown counts as within the UK. :)

    • ocelotwildly says:

      Ooh, like Freelancer. With its ludicrous system naming convention that had me doing space adventures of great dash and derring do in the ‘Leeds System’, or the ‘Manchester System’, with the Sheffield space station and the Battleship York.

      ‘C’mon Kiddo, lets fire up the afterburners and go to Leeds’ is not game dialogue that noticeably quickened my pulse…

      • Hoaxfish says:

        It’s the ship that made the M11 commute in less than 12 miles per litre

      • Kasab says:

        In Freelancer, Planet Leeds is so polluted that residents lose their sense of smell and taste within a matter of months. I’ve been to the real Leeds, and I can tell you that future Leeds seems much nicer.

        I feel sorry for whoever has to live on Planet Hull. Is there a Planet Coventry, by any chance?

      • Ovno says:

        It used to take longer to do the birmingham to leeds trade run in the game than it did in real life :)

      • sinister agent says:

        “Good news, sir! The enemy have occupied Wigan.”

        • Lord Custard Smingleigh says:

          Excellent news. They’ll have surrendered within the week!

    • Hmm-Hmm. says:

      That might (or might not) fall under the ‘undetermined location’, I suppose. But who knows, really.

  10. andytizer says:

    Is there any chances that UK games media (websites, etc.) can get involved in this?

  11. Llewyn says:

    I’m not sure the alpha issue will turn out to be an issue at all; it could be argued that alphas are made available to a subsection of the public which is interested in testing a WIP, rather than being a product ready for release to the wider public. However, if it turns out that it is then I’m sure developers will be able to adapt and, instead of releasing alphas of the ‘full’ game, release proofs of concept of areas of the game.

    Sure, it’s a little more work, but worth it for 25% tax credit on all your work. It might also benefit some customers, potentially reducing the alpha fatigue that leads some early adopters to never actually play the finished version of the game they’ve helped fund.

    • Chris England says:

      I’m still waiting to hear back some of the other points, but HMRC have confirmed that the game is done when the developer says it’s done. Happily, my concerns were not warranted!

      • Llewyn says:

        Good news, would have been a shame if something so obviously beneficial would have meant jumping through lots of unnecessary hoops.

  12. Radwulf says:

    This may not be RPS’s normal cup of tea but I thought this article was very informative and would be interested in seeing more of these alongside the WITs.

  13. Lev Astov says:

    I’m curious how this would affect the profitability of the Free to Play (F2P) business model.

    I feel like most of their real “core expenditures” would be expected to come under maintenance and debugging, while their profit comes in slowly over a longer period.

  14. Simon Hawthorne says:

    I would like to point out that what the British government are hoping is that companies will follow the examples of Amazon and Starbucks and base themselves in the UK in order to take advantage of this tax break, this minimising their tax bill.

    I have a feeling that people will feel weird looking at it from the other side of the coin, as it were.

    • Ovno says:

      Amazon – based in Jersey… (or Gernsey or something)
      Starbucks – based in the US

      In fact it is the way they are based overseas which enables them to pay so little corporation tax, also they already pay plenty of tax of employment, premises and vat.

      • Hoaxfish says:

        It’s a bit messier than that… my poor understanding goes a bit like this:

        US companies set up weird “unrelated” businesses in the Bahamas, Ireland, and Holland. The actual company then “licenses” themselves from these companies (i.e. the profit goes to the tiny company in a low tax place, but money spent doesn’t come from there).

        Ireland is a gateway to the European Tax zone, and then there’s some weird thing (Double Irish Sandwich, or something) which involves passing money to Holland, so it can then leave the Euro-Tax zone and go to the Bahamas.

        What Starbucks has done, is offer to pay more tax in the UK… no laws or incentives have changed, it’s just the general public think it’s naughty to not pay as much tax so Starbucks has volunteered so it’ll make them look better.

      • Simon Hawthorne says:

        Yeah sorry I wasn’t very clear – what I meant was, Amazon and Starbucks base themselves in overseas tax havens to pay minimal tax (including in the UK).

        We’re encouraging games companies to base themselves in the UK to pay minimal tax.

        • CKScientist says:

          Amazon wasn’t ever based in the Channel Islands. It had warehouses in the channel islands and dispatched its goods from here, so as to avoid paying VAT. Thats stopped now, though. The law changed last summer. It kind of sucks because it put 2000 people out of work.

  15. Radiant says:

    Nounface hey?
    Someone certainly does not think much of us comment monsters.

  16. Surlywombat says:

    Pretty sure I played Adjective Wars on a handheld once.

  17. Flimgoblin says:

    On the tax credit front, what’s does it mean to “surrender the loss”?
    Doesn’t that mean the 50k income in 2015 is counted as entirely profit? Presumably I’ve misunderstood something there…

    (which leaves you with 10k spent y1, 2500 credit, 10k spend y2, 2500 credit, 50k income y3, 10k tax bill on profits, net profit 25k)

    • Chris England says:

      Yes, that’s correct (as detailed in my reply to Iktovian below). Thanks – I’ll include this in my update when I hear back from HMRC!

      • Flimgoblin says:

        Aha, OK, so unless you really need the money or don’t expect to sell anything the tax relief is a better idea.
        Great post btw :) really helpful!

  18. Liquidoodle says:

    Cheers for that article, nice and informative. I’ve had a quick look through the scoring of the actual doc to see as a developer if my game will be eligible and it will indeed which is grand! Hopefully with this incentive we will see some more British based games that don’t just feature London :D

  19. The Random One says:

    I like how every picture is of piles of paperwork. It’s like they were trying to say “Hey, Chris England’s piece is concise and informative, but don’t worry: it’s still about finances and therefore BORING!”

  20. Itkovian says:

    I’d like to make a few points – source: Working in a tax department specialising in reliefs for innovative companies.

    I’m not sure its necessarily clear enough in the article but this relief is only available for “companies”. If you haven’t incorporated, you can’t claim the relief. A lot of the smaller indies are not going to be incorporated so should consider becoming so (seek advice) if they want the relief. There are many other effects of incorporation which should be considered in addition to this relief before making that step.

    There is also an error where you say that the relief is a 100% deduction on the lower of… (etc). It’s actually an 80% deduction on the lower of… (etc). So if all of your expenditure is in the UK it is 80% x 80% x the expenditure. (Read s1217CG(1) carefully and note the definition of “E”).

    A further error was pointed out by Flimgoblin in that the surrender of losses means that “net profits” in 2015 in your example would have been £50k resulting in £10k tax and £25k total profits after tax. Where “tax credits” are offered they are invariably less generous than the relief option but have the advantage of helping cashflow (£2.5k a year for the first two years rather than a reduction in tax of £7.2k in the final year). Bear in mind the entire example fails to estimate the income in years one and two which as mentioned below is a requirement.

    The first major issue I see with the legislation is that it requires the total income the game is expected to generate to be estimated when preparing the tax returns for the first period of account in which the game starts being developed. That’s actually pretty damned unusual and I would imagine extremely difficult to do when you have potentially no idea whatsoever how much interest your game will generate. (s1217BA(2)(b) is what says that). You are required to do this on a “just and reasonable basis” but I really have no idea how you’d justify this.

    Note that the fact that the credit is actually less generous than the relief and the point above mean that your concern 1 is not relevant. The other two concerns I completely agree need addressing.

    Finally, this is draft legislation and open to consultation. The contact details for comments on the legislation are:

    Kerry Pope: T: 020 7147 2617 E:
    Des Ryan: T: 020 7147 0818 E:

    • Chris England says:

      Good points, thanks for the critique. My reading was based on an overly brief readthrough of the (extensive) legislation and it’s more than possible I may have missed a few things. If I have, I’ll try to get the article updated accordingly. Let’s have a look.

      Yes, I did indeed misread the double 0.8 as a single one. Good spot.

      You’re also right about the estimated total income, at first reading 1217BA(2) implied that it was just the income earned in that period but it’s actually as a proportion of the total income that is estimated for the game. Interesting.

      It’s somewhat negated because you’re also correct about the error I made in surrendering the loss in 2013 and 2014, which makes the tax relief more generous than the tax credit. The fact you’re making a “profit” then doesn’t matter as you’d rather be taking the tax relief either way (unless you’re desperate for the cash, of course, in which case you’re stuck).

      So yes, all your corrections are correct. Thanks. I’ll try to get the conclusions updated based on these points, as well as the clarifications recieved from HMRC on the points I was following up with them.

      • Itkovian says:

        No problem. Excellent article by the way – aside from those minor points it explains what is pretty awkwardly phrased legislation (as it always is) very clearly.

  21. Beefeater1980 says:

    Chris and Itkovian – thank you both very much for the informative and interesting comments. I hope we get more articles like this going forwards.

    @Itkovian – if the contact people are at HMRC does this mean that it is HMRC that is directly responsible for granting the relief? Or will another ministry grant it and then HMRC needs to see the certificate?

    • Itkovian says:

      HMRC will be responsible for the administration of the tax relief / tax credits (they are responsible for the administration of most UK taxes).

      In order to satisfy the cultural test, a certificate must be obtained from the Secretary of State, however. Satisfying the cultural test just means that the game qualifies for the relief but says nothing about how much of the expenditure qualifies etc etc. That will be up to the taxpayer to satisfy HMRC about…

  22. bill says:

    Well, i’ve learned something interesting about tax credits today. I never realised that it was basically just a cash payment from the government. I assumed it was just another way of reducing tax.

    Explains why there are so many ways to scam the system by making losses and getting free cash. If the game never makes a profit in the 3rd year, the government has effectively lost 5000 quid, right?

  23. Dan Griliopoulos says:

    “A video game is completed when it is first in a form in which it can reasonably be regarded as ready for copies of it to be made and made available to the general public.”

    Good definition. Is that the point we should be reviewing / WITting it as well?