Adam Kotas, director of R&D tax consultancy ForrestBrown, says more education is required to make sure the FinTech sector is getting R&D tax credits right.
Innovation in the financial services industry has forced the more traditional institutions to wake up and embrace emerging technologies.
The sector is seeing exponential growth with no signs of slowing down as more efficient, secure and consumer friendly software is developed.
The sector remains a hotbed for innovation and, as such, is a prime candidate for research and development (R&D) tax credits.
Despite R&D being integral to the sector’s DNA, the UK’s R&D tax credit scheme remains a largely untapped resource by FinTech firms.
R&D tax credits are still misunderstood and ultimately this means businesses are either missing out entirely on what is potentially a considerable amount of cash funding, or are missing out in part because they are not maximising their claim value.
R&D tax credit scheme explained
The R&D tax credit scheme was first introduced in 2000 by the UK government in order to incentivise businesses with a cash boost, helping to support the cost of innovation.
SMEs, for example, can expect to recoup up to 33p of every £1 invested, and the benefit they receive can help fuel further development and growth.
The tax credits arrive in the form of a cash payment – in most cases within four to six weeks of submitting a claim – which is hugely valuable to businesses, particularly to early stage companies that aren’t yet making much, if any, revenue.
For some, it will mean they can extend the runway between funding rounds to support development and growth.
The government defines R&D as taking place when a project “seeks to achieve an advance in science or technology through the resolution of scientific or technological uncertainty” (Department of Business, Innovation and Skills (BIS) guidelines, 2004).
To many, this definition can be a turnoff as it simply doesn’t seem relevant. It is, however, purposefully broad to encompass all sectors, from e-commerce to oil and gas.
A common misunderstanding is that only those in the sciences, such as pharmaceutical businesses, are eligible for R&D tax credits.
However, the scheme is designed to assist all businesses and applies equally to products, processes and services alike.
It not only applies to new inventions, but also adaptations and improvements to existing products, processes and services.
Getting it right
The R&D guidelines require that a company identifies an R&D project.
For the FinTech industry in particular, it is challenging to identify where a project starts and ends.
Claims often capture everything up to the point where the product gets to market, but miss out the extensive work done post sale when the software is adapted to integrate with the bespoke systems used by large financial institutions.
They might also neglect further work that happens when it is adapted again to meet the individual compliance requirements of each institution for security purposes. This is potentially a big, expensive mistake.
Despite the entrepreneurial spirit of the FinTech industry, when it comes to looking at their own financial management, many companies still rely on their general accountant.
For the majority, a R&D tax credit claim is only a small part of a much wider service they are providing to the firm and as a result they are not 100% focused on its potential to generate cash.
As a minimum, firms should understand how their claim has been put together to maximise cash and, in the best case scenario, they should use a specialist to make sure they are getting the most from it.