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R&D Tax Credits for Fintech Companies
Fintech, or financial technology, businesses produce apps, software, or online platforms that enable consumers or businesses to make financial transactions or digitally manage or monitor their finances. Over the last two decades, these businesses have transformed the way we bank, invest, borrow money, and even save for holidays and split the bill at restaurants.
But advances such as digital wallets, secure mobile banking, cryptocurrencies, peer-to-peer lending, and open banking-powered apps haven’t come cheap. UK finance and insurance companies spent £2.59 billion on research and development (R&D) projects in 2020-21.
If you are one of those finance and insurance companies, you can claim some of that money back, through R&D tax credits. A government scheme to spur innovation, R&D tax credits can reduce a trailblazing business’s tax bill or provide an injection of cash into a company losing money as it pursues a big breakthrough.
If you’re a fintech on the lookout for a specialist R&D partner to assist with your upcoming R&D tax credit claim, EmpowerRD is here to lend a hand.
How can EmpowerRD help with your R&D tax credit claim?
As a fintech disruptor ourselves, we, at EmpowerRD inherently understand innovation, especially fintech’s. Combining specialists, ex-HMRC inspectors and an intuitive platform, we provide a fully supported claims process for companies claiming R&D tax credits.
REDUCED RISK
2.4% enquiry rate, with just only 0.3% adjustment meaning your claim is more likely to go through.
KEEP MORE OF YOUR CLAIM
EmpowerRD’s fees are up to 4x more cost-effective than R&D advisors with only 5% or less of final credit back.
FASTER CLAIM SUBMISSION
EmpowerRD’s innovative claims software ensures the claims process is 2.5x faster than using traditional advisors.
What types of businesses are in the Fintech industry?
The UK is the world’s second-largest destination for fintech investment, after the United States. Here, more than 1,600 companies are disrupting almost every part of the finance industry, from personal banking to payment processing.
Businesses in the fintech sector may work in:
Digital Banking
Tech helps consumers do personal banking tasks, like transfers and account checks, on their devices. Established banks offer digital services, but startups drive innovation. Open banking lets fintech firms access banking data for budgeting apps and finance dashboards.
Payments
Software and apps enabling digital payments and money transfers, from mobile payment services such as PayPal and ApplePay to foreign exchange services.
Personal financial management (PFM or WealthTech)
Tools enabling oversight and management of personal finance, ranging from retail investment platforms to pension consolidation services. Innovative WealthTech businesses may harness advanced analytics, predictive forecasting, and visualisation.
Lending (Lendingtech)
Innovative credit services, ranging from peer-to-peer (P2P) lending platforms to buy now pay later (BNPL) providers to startup mortgage lenders.
Insurance Technology (InsurTech)
The use of technology to reshape the insurance sector, from the development of user-friendly apps for policyholders to the automation of underwriting.
Regulatory Technology (RegTech)
The application of technology to help financial institutions meet their regulatory obligations. RegTech solutions may help financial services firms verify the identity of digital users, automate compliance systems, and perform money laundering checks.
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What fintech projects qualify for R&D tax credit?
Traditionally a conservative sector, finance has been flooded with research and development money recently, as startups reimagine everything from payments to insurance policies and established businesses evolve to compete. In 2020-21, finance and insurance businesses spent 6.8p out of every £1 invested in research and development in the UK.
However, some fintech companies still miss out on R&D tax relief. They may mistakenly think that path-breaking work of developing new financial processes and services doesn’t qualify for relief the way research by, say, a biotech or manufacturing company would. But with the financial services sector accounting for 8% of the UK’s GDP, the government is keen to stimulate innovation in the industry.
Many fintech innovation projects meet the requirements for R&D tax relief: they seek to overcome a technological or scientific uncertainty to achieve an advance in their field.
For accounting periods starting on or after 1 April 2023, projects involving pure mathematics or research into abstract mathematical concepts now qualify for R&D tax credits.
Previously, the requirement that projects seek scientific or technological advances meant mathematical advances were excluded, even when the intended outcome of the research would have use outside of maths, such as in finance. Additionally, because the distinction between applied and pure mathematics is unclear and contested, businesses were often unsure which projects HMRC would deem pure mathematics and exclude. This confusion commonly led to lengthy enquiries and debates between HMRC and claimants.
The inclusion of pure mathematics in the R&D tax credit scheme is particularly relevant for fintech businesses, especially those pursuing advances in cybersecurity, cryptocurrencies, and algorithmic trading systems.
Projects by fintech companies that may qualify for R&D tax credits, provided they’re breaking new ground, include:
Projects by fintech companies that may qualify for R&D tax credits, provided they’re breaking new ground, include:
✔ Use of artificial intelligence (AI) in new and improved processes and products. This may include, for example, the development and refinement of robo advisors to help customers manage their financial portfolios and make investment decisions and the use of predictive analytics and machine learning to anticipate regulatory changes
✔ Hyperautomation, or the automation of as many processes as possible, using AI, machine learning, and robotic process automation (RPA). For example, a fintech company may develop new ways to automate data entry, billing, or the verification of users’ identities.
✔ Development of blockchain, or distributed ledger technology (DLT). A fintech company may find new use cases for blockchain technology or improve existing ones, including in payment processing, contracts, digital identity verification, trading and investing, and even loyalty and rewards programmes.
✔ Creation of new technology and services for open banking, the secure sharing of financial data between banks and third parties through APIs. This may be dashboards that aggregate all of a user’s financial data or applications of variable recurring payments.
✔ Innovation in payments, including changes in payment processing architecture, tools to make payments faster and more secure, and new methods of exchanging money, such as digital wallets and cryptocurrencies
✔ New risk management solutions, such as AI-powered risk assessment tools and enhanced credit risk models
✔ Improved processes for fraud detection and prevention, such as employing machine learning models and quantum computing to detect anomalies in large data sets; using biometrics, including voice biometrics, to verify customer identity; and developing adaptive authentication solutions, which generate risk scores for login attempts
✔ Many others, including advancements in compliance, privacy and data protection, wealth management, insurance underwriting, stress testing, lending, trading and commodities, and customer service
What type of costs are eligible in a fintech R&D claim?
Innovation is expensive, especially on the cutting-edge of technology, in projects involving AI and blockchain. During the 2021-22 financial year, the average claim value for R&D tax relief among financial and insurance businesses was £204,013, the highest of any sector.
Expenditure eligible for R&D tax relief may include:
Staff costs for project employees, covering salaries, wages, bonuses, pension fund, and National Insurance contributions.
Spending on external workers, including agency staff, freelancers, and subcontractors
Purchasing, renting, and developing software.
Proportion of utility costs, such as electricity, gas, and water, that’s related to the project.
Materials and consumables directly used in the project
Data licence costs and cloud computing costs (for accounting periods beginning on or after 1 April 2023).
What are the benefits of R&D tax credits to fintech companies?
R&D tax credits can reduce the tax burden of fintech companies or provide them with a cash credit from HMRC, compensating them for up to 27% of their spending on research and development.
Companies can retrospectively claim R&D tax credits, usually for the two previous financial years.
For accounting periods before 1 April 2024, the UK government runs two R&D tax credit schemes: one for small and medium-sized enterprises (SMEs) and one for larger corporations. However, for accounting periods on or after 1 April 2024, companies will claim through the merged R&D Expenditure Credit (RDEC) and the Enhanced R&D Intensive Support (ERIS).
SME R&D tax relief
Companies qualify as SMEs for R&D tax relief purposes if they and any linked or partner companies have:
- fewer than 500 staff members
- a turnover of under €100m or a balance sheet of under €86m
From 1 April 2023, qualifying companies can:
- If profit-making: deduct an additional 86% of their qualifying R&D costs from their yearly profit, on top of the typical 100% deduction, for a total 186% deduction.
- If loss-making: also claim a payable tax credit worth up to 10% of the surrenderable loss.
- If loss-making R&D intensive SMEs: also claim an increased tax credit of 14.5% of the surrenderable loss.
This means that profit-making SMEs can claim up to 21.5p for every £1 spent on qualifying R&D. Loss-making SMEs can claim up to 18.6p for every £1 spent on qualifying activities, with loss-making R&D-intensive companies able to claim up to 27p for £1 spent.
Businesses qualify as R&D intensive if R&D spending accounts for 40% of their total business expenditure.
In 2020-21, the average R&D tax credit claim made by SMEs was £60,104.
The credit can be received as:
- Cash rebate
- Reduction in corporation tax
- A cash credit from HMRC
- Loss relief
- A compilation of the above
RDEC tax relief for larger companies
Larger companies can claim under the R&D expenditure credit (RDEC) scheme. The scheme is also open to smaller companies that can’t claim on the SME scheme because they’ve received a grant or subsidy for their R&D project or been subcontracted by a larger company for R&D work.
The RDEC is a taxable credit worth a portion of qualifying spending on R&D, set at 20% from 1 April 2023. RDEC claimed above the line, as taxable income, so both profitable and loss-making companies receive the same credit. With the 25% corporation tax applied, the relief is worth 16p for every £1 spent on R&D.
Profitable companies receive the credit as a reduction in their corporation tax bill, while loss-making companies receive it as a cash payment. In 2020-21, the average RDEC claim was £252,000.
Visible as taxable income, RDEC has a positive effect on visible profitability, which can make the company more appealing to investors.
For accounting periods on or after 1 April 2024
New merged RDEC scheme + ERIS
A new merged RDEC scheme for R&D tax relief will be introduced for accounting periods beginning on or after 1 April 2024.
The new programme, sometimes known as the R&D single scheme or simplified scheme, will largely align with the current RDEC scheme, with a headline relief rate of 20%.
As in the RDEC scheme, the credit itself is taxable. For loss-making companies, it will be taxed at the small profits rate of 19%, while for profit-making companies the credit is charged at the standard corporation tax rate of 25%.
This means for loss-making companies, the relief is worth 16.2p for every £1 of qualifying spend, and for profit-making companies, 15p for every £1.
This merged scheme will run alongside the Enhanced R&D Intensive Support (ERIS), which is for R&D-intensive loss-making SMEs. From 1 April 2024, an R&D-intensive SME is a company that invests 30% (40% prior to 1 April 2024) of their expenditure on R&D.
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