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Blog // 15/08/2016

Augmented Reality – What will be the next Pokémon GO?

The business potential of augmented reality

Will Sweeney - Menzies AccountantSince its UK launch on the 14th July, Pokémon GO has rarely been out of the headlines; from the apparent health benefits of getting more young (and old – you know who you are!) people walking around outdoors, to the huge surge and equally dramatic slump in Nintendo Co’s share price as investors reacted to the news that the multi-billion dollar game sales would not have the expected impact on the company’s profits.

The whole Pokémon GO phenomenon has perhaps received more attention than its deserves. Some believe that the augmented reality technology used by the game is merely the first global success for a technology that is set to be the next big thing for the tech sector.

What is Augmented Reality Technology?

pokemon-goAugmented Reality, or AR, functions by enhancing perceptions of reality through the addition of computer-generated input, which in the case on Pokémon GO can be video characters, but could also be sounds, graphics, or even GPS data.

So in reality the concept of AR is actually nothing new; we have been adding graphics (such as sports scores or timers) to TV images for years! What has changed however, is that advances in AR technology – such as computer vision or object recognition – have made it possible for the computer generated content to manipulate or interact with the surrounding real-world information in much more useful (or entertaining) ways.

Why is Augmented Reality Technology so important?

As AR has become more useful, the number of applications has ballooned. Early adopters were the well-funded areas of the military, medicine or high-tech industry, but it has not taken long for these advances to migrate to other areas, such as navigation, TV, video games, archaeology, design and the keenly anticipated Google Glass 2. Manufacturing has been another area to benefit, with innovations such as BMW Glasses, enabling technicians and mechanics to effectively superimpose the manual onto assembly and repair tasks, thus increasing productivity and reducing the potential for costly and time–consuming mistakes.

Until recently, the AR market has been relatively small, but high penetration rates are expected to see this increase dynamically over the next 6-8 years. Recent market surveys predicted that the AR market will exceed $115bn by 2022.

Augmented reality revenue growth

Who are the world leaders in this area?

Unexpectedly, the largest share of the AR market is centred in North America and Europe, with Asia-Pacific expected to pass both by the end of the decade. The potential for huge growth has caught the attention of the largest global tech firms with the recent acquisitions of Oculus and Metaio by Facebook and Apple generating headlines.

The success of AR technology in capturing public imagination – only helped by the huge popularity of Pokémon GO – makes it essential for UK companies not to fall behind.


The augmented reality opportunity

What is being done to help UK tech firms?

The government has identified high tech industries, such as AR, as being vital to the UK’s future growth. To encourage investment in these industries, existing technology focussed tax reliefs have been beefed up, while each new budget seems to contain a new relief for the ‘Creative Sector’. Of these, the most relevant to the development of the AR industry in the UK are R&D Tax Relief and Video Games Tax Relief:

R&D Tax Relief

Research and development (R&D) tax reliefs are an established tax relief that offer substantial tax savings or even, in some cases, cash tax credits to companies that are ‘seeking to achieve an advance in overall knowledge in a field of science or technology’.

Different rates apply to different companies, but for most, the SME Scheme will apply. This entitles a company to claim a tax saving of £46 for every £100 spent on qualifying R&D – in effect reducing the cost of the development to only £54 per £100 spent. If the SME is loss-making for the period, they may be able to claim a cash tax credit from HMRC of up to £33.35 per £100 spent.

Video Games Tax Relief

Video Games development tax relief offers tax savings (or potentially cash tax credits) to companies who are responsible for the design, production and testing of video games – including being actively engaged in planning and decision making and negotiating contracts for related rights, goods and services. Only the company that is most directly involved is entitled to claim tax relief in respect of any single video game, so subcontractors responsible for a small part of the game will not qualify.

The development of a particular video game is treated as a separate trade, with the profit or loss for the year calculated by reference to the total estimated development cost and revenues resulting from the game.
A Video Game Development Company (VGDC) is entitled to claim a tax saving of up to £36 for every £100 spent on core expenditure – the costs of designing, producing and testing the game. If the video game development trade is loss-making for the year, the VGDC may be able to claim a cash tax credit from HMRC of up to £20 per £100 of core expenditure.

How can Menzies help?

Menzies’ specialist Innovation and R&D Team works in partnership with clients and other professionals to provide a commercially relevant and effective tax planning service, from concept development through to collating and presenting claims in a format to the process of claiming R&D and Video Games Relief. This includes:

  • Navigating you through the claims process from recording, reporting and final submission
  • Identifying and, improving methods for identifying, qualifying expenditure to maximise effectiveness of the reliefs
  • Specialist knowledge of the Creative Sector tax relief regimes
  • Identifying, and developing systems to identify, qualifying projects
  • Presenting information to minimise exposure to challenges from HMRC
  • Considering other relevant or complementary tax reliefs that may arise from the development process

For further information on the above please contact Will Sweeney on 01483 758926 or email wsweeney@menzies.co.uk.

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