Video Game Company Losses – Hidden Value
Many people set out to self-launch, self-develop and self-publish video games. Few manage to make it on to one of the official government funding schemes. Fewer again manage to find any private funding or support for a publisher and only a slim number of these lucky few manage to release a game that is profitable and successful.
There are an awful lot of small companies out there that didn’t manage to quite reach commercial success and have significant video game company losses.
If you’re in the games development industry you probably already know this. What you might not know is that even in a company that has ceased trading, that failed to ever become one of the few successful games in the market there is a hidden store of significant value in the form of tax losses.
What are tax losses?
When your company makes a profit, you are subject to Corporation Tax at a rate of 19% – 25% on all profits you make. However, by the same rules, when your company makes a loss you’re entitled to recognize these losses. The value they have is that losses can be carried forward and offset against future profits. If I lose £3000 in Year 1 and make £10,000 in Year 2, I am only taxed on £7,000 of profit as I can carry my losses forward against my future profit.
Why do video games companies have such large tax losses?
The old Video Games Tax Relief (VGTR) scheme operated in tight connection with Corporation Tax losses. While this scheme is being replaced by Video Games Expenditure Credits (VGEC), it remains in force until April 2027. In very simple terms, VGTR operated by amplifying a business’ recognized tax losses and then trading a % of these in for a payable tax credit from HMRC
The leftover element of the losses is then carried forward and available in future.
In addition, if your project was funded via a loan, your business likely generated significant tax losses when it spent the funds issued via loan. This funding model is extremely commonly used by government funding bodies e.g. NI Screen
If my project succeeds, what happens to these losses?
You carry these losses in directly against the profit you make. You’ll only start paying Corporation Tax once you’ve made enough profit to fully offset the losses incurred to date.
If my project does not make a profit, what can I do with these losses?
Since April 2017, provided there’s no change in company ownership, you can offset losses against all future profits of the company. If ownership does change, the losses aren’t necessarily lost, but you need to take advice and review the losses against a number of anti-avoidance measures to prevent abuse of the system.
Let’s say that you have attempted to launch a game and have had limited commercial success. There are two situations where these losses are extremely valuable
Option 1 – Attempt to launch a new project
If you launch a new development project in the same company, your initial losses don’t vanish – you can now use them against any profits that you make on the launch of a new game. If your new project is wildly successful, you’ll end up trading in all the losses you built up to date against profits you make on the new project, letting you avoid paying 25% of these profits over to HMRC
Option 2 – Invoice for a new trade
This is the key element which is missed by many developers. You may decide that you no longer wish to continue developing your own game. However, you can still use these losses in the future.
You can become a consultant or contractor for another developer in the industry. By invoicing out of your original development company, you have full access to all of these losses and can now use them to offset the tax you would otherwise have to pay when you invoice customers for your services.
As long as there’s no change in company ownership, you can even change trades entirely. Perhaps you’ve had enough of the games industry and want to go work in the art sector or general software development? If you start working as a contractor, you can still use these losses to shelter profits!
Have £10,000 of losses? It can be used to save you £2,500 of corporation tax.
Summary
There is nothing unusual or objectionable about using losses in this manner. It’s not a tax avoidance scheme, the tax system is designed to operate in this manner.
HMRC recognize that when you start a business you are taking an enormous risk. They recognize that a lot of the time you lose money for years before you ever turn a profit. The UK’s tax system has always recognized the risks that go along with being an entrepreneur and the loss relief system exists to recognize the losses and costs you incur when trying to build a successful company.
No one starts a business or a development project with a plan to lose money, but we all recognize that game development is one of the most difficult and high risk industries you can enter.
Take advantage of the few ways the UK tax system can work in your favour and make sure you don’t squander valuable tax losses.