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Can FinTech companies claim R&D tax relief?

Fintech company working with accountant to claim research and development tax credits
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    The influx of new technology in the financial services sector is unprecedented and has helped financial businesses to become more efficient and profitable, driving the economy as a whole.

    It has also enhanced customer experience and made access to finance more accessible for the developing world. So it stands to reason that FinTech companies are awarded the same tax breaks as the scientific sector for research and development activities.

    Innovative FinTech companies can claim Research and Development (R&D) tax credits if their activities meet the criteria set by HMRC, e.g. the work undertaken must overcome technological uncertainty. The relief is rewarded in the form of a tax deduction, rebate or credit.

    So if your limited company, large or small, undertakes research and development to advance financial technology, it could be eligible to make valuable R&D tax credit claims. In this article, we’ll cover the benefits, the eligibility criteria and how to go about making a claim.

    At WIS Accountancy, we have a proven track record of assisting FinTech businesses, and our team can offer expert insight into the world of R&D tax credits. For more personalised advice on research and development tax credits, please get in touch.

    Research and Development tax credits for the FinTech sector

    FinTech innovation is changing the global financial landscape with advancements in automation, cybersecurity, AI and disruptive technologies like blockchain, to name but a few. Financial businesses, once reluctant to adopt new technology, have fully embraced the changes in recent years and have become more profitable and efficient as a result.

    FinTech is also touching our everyday lives in positive ways with innovations like cloud computing, mobile banking and contactless payments. Mobile-based payment systems, in particular, are used by over 10 million people in the UK as we move towards becoming a cashless society. This is especially important for the estimated 2% of the country’s population that don’t have a bank account.

    With these enhancements to the global economy and our quality of life, the UK government is keen to reward the FinTech sector by offering valuable tax credits for research and development activities.

    How does it work, and how much can you claim?

    There are two types of R&D tax relief. The RDEC scheme is for large corporations, and the SME R&D scheme is for companies with fewer than 500 staff and a turnover of less than €100m.

    For SMEs, R&D tax credits are calculated as a percentage of qualifying R&D costs, up to 33% per £1. The relief can be claimed in different ways depending on how profitable the business is.

    Profit-making businesses can claim up to 26p per £1 of allowable R&D expenditure to offset their Corporation Tax liability. For claims made after the end of the tax year in which the R&D activity occurred, the business can receive a cash rebate.

    Loss-making companies (i.e. those companies which still make a loss after R&D credit) can carry back the R&D enhanced loss to the prior profitable year, carry it forward to offset against future profits or surrender it for a cash payment. This is particularly beneficial for FinTech companies in need of a cash boost, offering up to 33p for every £1 spent on R&D.

    How do I know if my FinTech company is eligible for R&D Tax relief?

    If the work undertaken by your UK FinTech company aims to make technological advancements or process improvements, then there’s a good chance you’re eligible to claim R&D tax credits. This applies to both new technologies, updates to existing technology or making enhancements to legacy systems.

    Eligible projects must tick the following boxes:

    Technological innovation: The project must be aimed at developing industry firsts.

    Technological uncertainty: You must prove that the project includes resolving technical uncertainties, with evidence of how you went about solving them. Crucially, the outcome is irrelevant, it’s the work undertaken to identify and resolve the issues that count.

    Unique solution: If successful, you must be able to demonstrate that the outcome you reached couldn’t be readily deduced by other FinTech professionals.

    Systematic approach: You must have evidence that the R&D activity follows a systematic approach involving testing, analysis, or experimentation.

    Benefits of claiming R&D tax relief in financial technology

    Claiming R&D (Research and Development) tax credit offers significant benefits for FinTech companies.

    Of course, there is a huge financial incentive. Recovering a portion of R&D expenses helps to improve overall profitability and support sustainable business growth. It can also aid cost management and budgeting, resulting in increased cash flow and funding for future innovation projects.

    R&D tax credits encourage and reward technological advancements, which also helps companies foster a culture of innovation, giving them a competitive edge.

    How should you record R&D activities?

    To ensure a successful R&D tax claim, you should keep detailed records outlining your processes, qualifying costs and solutions.

    Qualifying expenditure includes:

    • Employee salaries, e.g. developers, data scientists, engineers, and project managers.
    • Subcontractor costs (within the UK)
    • Consumables such as fuel and raw materials.
    • Utilities and overheads – note only the portion of utility costs (e.g., electricity, water) and relevant overheads (e.g., rent, rates, insurance) that relate to R&D activities can be claimed.

    It’s important to note that capital expenditure, patents and rent are not allowable costs. In addition, routine data analysis, market research, sales, marketing, and activities that do not directly contribute to technological advancements may not be considered eligible for R&D tax relief.

    How to make an R&D tax credits claim for your FinTech company

    The process of making a claim can be broadly summarised as follows:

    1. Identify qualifying R&D activities that satisfy the core tests set out by HMRC.
    2. Collect detailed records of R&D projects, including eligible costs, technical uncertainties faced, research processes, testing phases and how these activities contribute to technological advancement.
    3. Categorise and calculate eligible costs (see above).
    4. Work with tax professionals or R&D tax advisors to accurately prepare the R&D tax credit claim, ensuring compliance with HMRC guidelines and regulations.
    5. Complete the Corporation Tax Return (CT600) – incorporate the R&D tax credit information into your company’s Corporation Tax Return (CT600), a standard tax form filed with HMRC.
    6. Submit the claim with supporting documentation.
    7. HMRC will review the claim, evaluate its eligibility, and determine the amount of the R&D tax credit to be awarded.
    8. Depending on your company’s tax situation and the options chosen (e.g., carry forward, cash credit), you’ll receive the R&D tax credit as a reduction in tax liability, a cash payment, or another applicable method (see above).

    Contact WIS Accountancy for help claiming R&D tax credits today

    At WIS Accountancy, we are experts in all sorts of tax reliefs, including research and development. Our accounting team has the knowledge and skill set to help your fintech company identify R&D activities and make a successful claim.

    To find out more about how to claim valuable tax credits for fintech innovation, get in touch with us today.

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