Chapter 2: Taxation of Activities of Video Games development Company
150.New sections 1217B (2) to (3) provides that the activities of a video games development company in relation to each game will be treated as a separate trade, (“the separate video game trade”) so that where a video games development company makes more than one game it will have more than one trade.
151.New section 1217B(4) sets out when a company is treated as beginning a video game trade which is the earlier of when income is received or the design starts.
152.New section 1217BA (1) provides the basic rules for the computation of amounts to be brought into account for the purposes of determining a profit or a loss.
153.New section 1217BA (2) explains how this works for the first period of account. It brings in as a debit the cost incurred and as a credit the proportion of the income determined by the formula set out in sub paragraph (4).
154.New section 1217BA (3) explains how this works for subsequent periods of account. It brings in as a debit the difference between the costs incurred to date and the corresponding amount for the previous period and as a credit the difference between the proportion of total estimated income treated as earned at the end of the period and the corresponding amount for the previous period.
155.New section 1217BA (4) sets out the formula for calculating the proportion of total estimated income treated as earned at the end of the period of account.
156.New sections 1217BB(1) to (3) set out that income from a video game constitutes any receipts in connection with its making or from its exploitation. This includes:
Receipts from the sale of the video game or rights in it;
Royalties or other payments for use of the video game or aspects of it (for example characters or music);
Payments for rights to produce games or other merchandise;
Receipts received by the company by way of a profit share agreement;
Income from games held as capital assets (the income will be treated as revenue in nature).
157.New section 1217BC (1) to (2) provide the basic rules for when costs on the video game are taken to be incurred. However, expenditure that is prohibited or limited by the Corporation Taxes Acts is excluded.
158.New section 1217BC (3) addresses the situation where a company is making a video game that is treated as a capital asset in its hands and such expenditure would be capital and naturally fall to be prohibited. Section (3) ensures that such expenditure will instead be treated as being of a revenue nature.
159.New section 1217BD (1) sets out the primary rule that costs are incurred when they are represented in the state of completion of the work in progress.
160.New section 1217BD(2) elaborates on this to make clear that payments in advance are ignored until the work is done and deferred payments are recognised to the extent that work is represented in the stage of completion.
161.New section 1217BD (3) makes clear that only amounts for which there is an unconditional obligation to pay can be treated as incurred.
162.New section 1217BD (4) ensures that where this obligation is linked to income being earned, then the cost can only be included when an appropriate amount of income has been brought into account.
163.New section 1217BE provides that estimates at the balance sheet date for each period of account must be on a just and reasonable basis and must also take into consideration all relevant circumstances.
