Introduction: Video Games Tax Relief Rewards the Studio and Bills the Owner
Video games tax relief is among the most generous subsidies in the British tax system, and for an American who owns the studio it can quietly manufacture a personal tax charge in Washington. Britain pays the company. America taxes the shareholder. Consequently the better your claim performs, the larger the American exposure can become.
That sentence surprises almost every founder who hears it. Furthermore, it is the opposite of what every ranking British guide on the subject says, because those guides are written for British owners with no American filing obligation. They are correct as far as they go. However, they stop precisely where an American shareholder's problem begins.
At TaxYork we act for studio founders, publishers and investors who hold British development companies and carry a US passport. In our experience the claim is nearly always worth making. Nevertheless, it must be modelled on both returns before submission, because video games tax relief interacts with three American rules that no British adviser is asked to consider.
How Video Games Tax Relief Works Before an American Return Touches It
Britain now delivers video games tax relief through the Video Games Expenditure Credit, which replaced the older regime for games entering production from 1 April 2025. The credit is calculated above the line at 34 per cent of qualifying expenditure. Additionally, the credit is itself taxable at the main corporation tax rate, so the net benefit settles at roughly 25.5 per cent.
That net figure matters enormously to the analysis that follows. Specifically, the credit reduces the corporation tax the company actually bears, and the American rules that decide the owner's liability test the tax actually borne rather than the headline rate.
Who Carries This Risk
You carry the video games tax relief risk if you are a US citizen or green card holder who owns ten per cent or more of a British studio, whether you live in London, Guildford, Brighton or Los Angeles. Moreover, the exposure is annual and arises whether or not you take a penny out of the company. Therefore founders who reinvest every pound into the next title are frequently the most exposed of all.
What Video Games Tax Relief Pays in 2026
The mechanics of video games tax relief are precise, and getting them right sets up the American calculation. HMRC guidance requires the claimant to be a video games development company that is directly responsible for designing, producing and testing the game, actively engaged in planning and decision-making, and directly contracting and paying for goods and services.
The Credit, the Cap and the Ten Per Cent Floor
Qualifying expenditure is the lower of eighty per cent of total core costs or the amount of UK core costs. Furthermore, at least ten per cent of core costs must relate to activities carried on in the United Kingdom. Core costs mean what you spend designing, producing and testing the game, measured on a used-or-consumed-in-the-UK basis rather than the old European test.
Certain games are excluded outright. Accordingly, you cannot claim video games tax relief on a title produced for advertising, for promotional purposes, or for gambling. Those exclusions catch more studios than founders expect, particularly where a promotional title sits alongside a commercial catalogue.
British Certification and the Claim Itself
Every game claiming video games tax relief must be certified as British by the British Film Institute, which administers the cultural test for video games on behalf of the relevant department. An interim certificate supports a claim on an unfinished title, and a final certificate follows completion.
The statutory framework sits in Part 14A of the Corporation Tax Act 2009, and the claim runs through the company tax return, supported by an additional information form submitted before the return itself. Additionally, from 6 April 2026 the CT600P creative industries supplementary page must be included. Consequently a procedurally imperfect claim now fails on administration rather than on substance, which is an avoidable and expensive way to lose the money.
The Transition Deadline Studios Keep Missing
Games that entered production before 1 April 2025 may continue under the legacy video games tax relief rules until 31 March 2027. That older regime paid twenty-five per cent of qualifying core expenditure and used a twenty-five per cent European expenditure threshold, as the HMRC manual on minimum European expenditure records. Therefore studios with long-running titles are currently running two regimes side by side, and the American computation differs between them.
Why Video Games Tax Relief Breaks the High-Tax Exclusion
Here is the point about video games tax relief that no British guide makes. A British company owned by an American is a controlled foreign corporation. Consequently its profits can be taxed to the shareholder personally each year under the rules now called net CFC tested income, regardless of any dividend.
The 18.9 Per Cent Test That Decides Everything
An exclusion exists where the foreign profits already bear a high rate of tax, and the threshold is 18.9 per cent, being ninety per cent of the American corporate rate. The British main rate of twenty-five per cent clears that comfortably in the abstract. However, the test measures the effective rate actually borne, not the statutory rate.
That distinction is fatal here. A successful claim for video games tax relief reduces the corporation tax the company actually pays, and a large enough claim drags the effective rate below 18.9 per cent. Therefore the exclusion fails in precisely the years the claim succeeds, and the British subsidy imports an American charge.
What Happens When the Exclusion Fails
Without the exclusion, the shareholder includes the company's tested income personally. For an individual who makes no election, the position is severe: no fifty per cent style deduction applies, no deemed-paid credit is available, and the inclusion is taxed at ordinary rates reaching thirty-seven per cent with no credit for the British corporation tax already suffered on the same profits.
Consequently the same pound of profit can be taxed twice over. Moreover, the studio has usually spent the cash on the next title, so the owner funds an American liability out of personal resources. This is the single most damaging pattern we see in video games tax relief cases.
Section 174 and the Foreign Research Problem
A second American rule compounds the first, and it reaches video games tax relief claims directly. Development spending is research or experimental expenditure. Furthermore, the treatment now depends entirely on where that research is carried out.
Domestic Expensing Did Not Reach British Studios
The One Big Beautiful Bill Act restored immediate expensing of domestic research through section 174A for tax years beginning after 31 December 2024. Studios everywhere celebrated. Nevertheless, the restoration is domestic only. Foreign research or experimental expenditure must still be capitalised and amortised over fifteen years.
A British studio's development team is foreign research by definition. Therefore, when the American computation is prepared, the salaries and contractor costs that Britain deducts in full this year are spread across fifteen years for American purposes. The effect on video games tax relief planning is direct and unpleasant.
The Squeeze This Creates
Consider the combined effect. Britain gives an immediate deduction plus a credit, so British taxable profit is low or negative. America denies the immediate deduction, so American tested income is high. Consequently the owner faces an inclusion on profits that, measured the British way, barely exist.
Additionally, the two rules push in the same direction rather than offsetting. The credit lowers the effective British rate and costs you the exclusion. Meanwhile the fifteen-year amortisation inflates the income the exclusion would have sheltered. Accordingly the worst year for the owner is often the studio's best year commercially.
The Elections That Decide the Outcome
Three elections change the video games tax relief outcome materially, and they must be considered together rather than in isolation. Furthermore, most are annual, so the analysis is repeated every year rather than settled once.
The Section 962 Election
An individual shareholder may elect under section 962 to be taxed as though a domestic corporation held the shares. Consequently the inclusion is taxed at the corporate rate, the statutory deduction applies to bring the effective rate to roughly 12.6 per cent, and a deemed-paid credit for British corporation tax becomes available subject to a ninety per cent limitation.
The election carries a cost. Specifically, the profits are taxed again on eventual distribution to the extent the distribution exceeds the tax paid under the election. Therefore it suits a studio retaining earnings to fund the next title far better than one distributing profit annually. Form 1118 must be attached to support the credit.
Checking the Box and the Timing Question
Alternatively, the company can be treated as transparent for American purposes, so British profits and losses flow through directly. That approach can suit a loss-making early-stage studio. However, it creates a permanent record of the choice, it interacts awkwardly with British corporation tax paid by the entity, and reversing it is restricted for five years.
Timing deserves equal attention. The British accounting period and the American tax year rarely align, and the credit is recognised when the claim is agreed. Consequently a mismatch between the year the credit reduces British tax and the year the American computation tests the rate can create an exclusion failure on paper that careful sequencing would have avoided.
Video Games Tax Relief and the Minority American Investor
Founders are not the only Americans exposed. Studios raise money, and American angels and funds appear on British cap tables constantly. Furthermore, an investor below the ten per cent threshold escapes the controlled foreign corporation rules entirely, which sounds like good news and frequently is not.
Why a Pre-Revenue Studio Can Become a Passive Investment
A foreign company is a passive foreign investment company where most of its income or, more commonly here, most of its assets are passive. A studio that has just closed a funding round holds a large cash balance and an unfinished game. Consequently the balance sheet can look overwhelmingly passive, even though the business is plainly an active trade.
That classification is punitive. Specifically, gains and certain distributions are taxed at the highest ordinary rate for the year concerned, with an interest charge running from each year of the holding period. Therefore an American investor can pay more on an exit than the founder does, purely because the studio banked its raise and spent it slowly. Anyone modelling video games tax relief across a cap table must test this position annually, not at exit.
The Overlap Rule and the Ten Per Cent Line
Where an investor is a ten per cent shareholder in a controlled foreign corporation, the controlled foreign corporation rules take precedence and the passive company rules stand down. Consequently the ten per cent line produces two entirely different regimes on either side of it. Additionally, a qualifying electing fund election can convert the passive treatment into annual inclusions, but it requires information the studio must agree to provide.
That last point is a negotiating matter rather than a tax one. Accordingly, American investors should secure an information undertaking in the subscription documents, because a studio claiming video games tax relief has the accounting data needed and simply has no reason to share it unless asked in advance.
Co-Productions and Multiple Claimant Companies
Larger titles frequently sit across several companies, with a development entity, a publishing entity and sometimes an overseas holding company. However, only one company can be the video games development company for a given title. Therefore the entity that claims video games tax relief is not always the entity the American shareholder holds directly, and the American analysis must follow the corporate chain rather than the claim.
Indirect ownership counts. Moreover, attribution rules can make an American a ten per cent shareholder through a holding company without any direct interest at all. Consequently group structures deserve review before a funding round rather than after one.
Reporting Obligations Beyond the Tax Itself
Filing duties arise independently of any video games tax relief claim or liability, and the penalties are fixed rather than proportionate. Therefore a profitable studio and a dormant one can face identical exposure for an identical oversight.
Form 5471 and the Loan Trap
Any American holding ten per cent or more of the studio will generally file Form 5471, where failure penalties begin at $10,000 per company per year and escalate. Additionally, founders routinely draw money from the company informally between funding rounds. However, a loan from a controlled foreign corporation to its American shareholder can produce a deemed dividend, so the director's account needs monitoring throughout the year rather than at the year end.
Accounts, Wallets and Platform Balances
Studio bank accounts over which you hold signature authority count towards the FBAR threshold of $10,000 in aggregate. Furthermore, balances held with distribution platforms and payment processors are frequently financial accounts in their own right. Our FBAR and FATCA reporting team finds platform balances omitted more often than any other category in this sector.
A Worked Example of Video Games Tax Relief Across Both Returns
Consider a London studio wholly owned by an American founder resident in Britain. In the year to 31 March 2026 the studio incurs £3,200,000 of core costs, of which £2,900,000 is UK expenditure. Revenue from the back catalogue is £4,100,000.
The video games tax relief computation caps qualifying expenditure at eighty per cent of core costs, giving £2,560,000. The credit at thirty-four per cent is £870,400, which is itself taxable, leaving a net benefit of approximately £652,800. British profit after the development deduction and the credit produces a corporation tax charge of roughly £190,000, which represents an effective rate of about 16 per cent once the credit is taken into account.
That effective rate sits below 18.9 per cent. Consequently the high-tax exclusion fails. Meanwhile the American computation capitalises the £2,900,000 of British development spending over fifteen years, allowing roughly £193,000 rather than the full amount. Tested income for American purposes therefore approaches £3,000,000 against British taxable profits of a fraction of that.
Without an election the founder faces an inclusion taxed at up to thirty-seven per cent with no credit for the £190,000 of British tax, producing a charge near $1,400,000 on money the studio has already committed to its next title. With a timely section 962 election the effective rate falls to roughly 12.6 per cent and the deemed-paid credit becomes available, cutting the cash cost by more than a million dollars. The election, not the claim, is what saves the founder.
How TaxYork Can Help
We model the video games tax relief claim and the American consequence together, before the additional information form is submitted rather than after the corporation tax return is filed. Furthermore, we run the effective-rate test each year, because the exclusion is decided annually and a claim that helps in one year can cost more than it pays in another.
Our work covers the controlled foreign corporation analysis, the section 962 and entity classification elections, the foreign research amortisation schedules, Form 5471 and the supporting credit forms, and the full US tax return preparation for founders and investors. Additionally, where the British company has been held for years without American filings, our IRS Streamlined Filing team restores compliance and limits the exposure.
Conclusion
British video games tax relief is worth claiming, and we have never advised a studio to forgo it. Nevertheless, an American owner must treat the claim as a two-country transaction. The credit cuts the effective British rate, the effective rate decides the high-tax exclusion, and the exclusion decides whether the founder pays American tax on profits the company has already spent.
Ultimately the outcome turns on elections made in advance and on sequencing the claim against the American tax year. Founders who model both sides keep most of the subsidy. Those who model only the British side frequently hand a substantial part of it back across the Atlantic.
Contact Us
Speak to our cross-border team before you submit your next claim, not after the corporation tax return has been filed. Email hello@taxyork.com or call 020 3488 8606, and you can book a consultation through our website. We advise studio founders, publishers and investors throughout Britain.
Disclaimer
This article provides general information on video games tax relief and the American rules that interact with it, and does not constitute advice for any particular company or shareholder. Legislation, rates and thresholds change frequently, and outcomes depend on specific facts. Accordingly, obtain professional advice before submitting a claim or making an election. Further guidance is available from the Chartered Institute of Taxation the ICAEW and the American Institute of CPAs, and the full creative sector rules are set out in the HMRC creative industries manual and the gov.uk overview of creative industry tax reliefs.