R&D tax credit scheme offers relief to UK fintechs
The British fintech sector is booming with record amounts of investment being pumped into an ever-increasing number of businesses.
More than £7.6 billion was raised by UK-based fintechs between 2014 and 2018. Despite the uncertainty of Brexit, investment within the UK sector more than trebled from £685.3 million in 2014 to almost £2.4 billion in 2018.
In terms of deal activity London sits second only to the Silicon Valley and it has been steadily closing the gap. In broader global terms, the UK’s fintech sector ranks third behind China and the US in investment and leads the way amongst European nations according to Innovate Finance.
One of the attractive propositions of investing in UK-based fintech businesses is the potential for companies to secure generous incentives through the tax relief scheme on some of their innovation expenditure. The UK Government’s research and development (R&D) tax relief scheme offers innovative companies – and there are many within the fintech sector – up to 33p for every pound spent on qualifying R&D (dependant on the company status and its financial position). In a strive to maintain the country’s position as a global leader in science and technology, the scheme offers those investing in product or process improvements significant tax breaks provided they meet the required criteria.
There are, however, a number of assumptions and misconceptions about R&D tax relief, which can lead companies to making erroneous claims, which are likely to be rejected or could raise an enquiry into the claim and/or company.
According to HMRC’s criteria, a company may be eligible if a project “seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty”. Regardless of whether the project is ultimately successful, any expenses for activities involving staff and subcontractor costs, consumables, utilities and computer software could be eligible for R&D tax relief.
While there are specific areas of R&D activity that are eligible for tax relief, it is important to highlight that many innovation-related projects carried out by fintechs will not qualify. Despite the high levels of innovation within fintechs, a lot of this tends to be focused on bringing new products to the marketplace, which is not the same as making advances in science or technology.
Many fintechs are, however, also investing in clever and innovative projects designed to build and perfect their product, which can often qualify for relief. These can include projects focused on improving key aspects of financial services operations, including payments and transactions, mobile banking, peer-to-peer lending and crowdfunding, and retail banking.
Developments in big data is also an area that could secure R&D tax relief. Taking an area like portfolio evaluation and an investment by a fintech company to develop a quicker means of processing such data could, for example, qualify if the project seeks to resolve scientific and technological uncertainties in high-performance computing.
Likewise, projects seeking to make advances in text analytics and language processing, aimed at finding better means of using technology to read documents, are also likely to secure a rebate. Any aspect of a project that is focused on developing the platform for such an application would likely qualify for R&D tax relief.
A focus on projects to enhance areas like security, integration of systems and development of support software are other areas where fintechs can claim against expenditure.
Making a claim for those areas of fintech innovation can deliver significant financial rewards, which can be especially critical for businesses in their early development stages. However, it is however vital to gain an understanding of the scheme and ensure accuracy in the application process.
One fintech business put too much focus on commercial aspects of developing a peer-to-peer lending product in their application and ended up having its entire initial claim rejected. When we were brought in to re-submit the claim for the same project, we focused on the areas of scientific and technological advancement, rather than commercial benefit and helped the company secure a significant tax rebate and avoid possible HMRC penalties from a non-compliant claim.
As the UK fintech sector continues to develop post-Brexit, R&D tax relief could become even more significant in helping fuel further investment and growth. It will be vital for British companies to ensure they have a strong understanding of what activities can qualify for tax relief through the scheme so they can secure maximum benefit as the UK sector seeks to maintain its place among the world’s best.
Mark Westwood, technical analyst, Jumpstart