Too Early To Call
It would be too early to claim that London’s banking giants have become a shadow of their former selves simply because FinTechs are taking this well-entrenched industry by a disruptive storm.
FinTechs have been leveraging powerful multi-mode communication devices, also known as smartphones, that maybe in your hands right now. Using smartphones, FinTechs have reimagined every customer touchpoint in the industry and in some cases upended industry bottom line models. Real-time payments are a good harbinger of things to come. According to Morgan Stanley, by the end of this year, approximately 97% of the developed world is likely to have access to domestic real-time payment. However, these changes are not limited to FinTech startups. Many banks are fast adopting these changes and turning them into cost efficiency, saving billions in the branch network services and real state costs.
A Global Force to Be Reckoned With
Despite the spectre of Brexit, the UK continues to rock digitally! Over a five-year period considered to be the height of innovation in fintech (2011-2015), UK’s digital tech industries grew annually on average by 22% and attracted more tech investment than Paris, Berlin and Amsterdam combined.
FinTechs in the UK employ a workforce of 61,000, second only to California, which employs 74,000. UK’s FinTech industry is only rivaled by that of Canada with Toronto as its de facto capital.
Though, not the focus of business news and tech coverage, an advanced telecom—including wireless—infrastructure has been the overarching factor in the rise of FinTech and software industry in the UK. Fortunately, today in Britain, nearly one in three UK broadband connections are considered superfast (30 Mbps), up from one in four in November 2013, according to Ofcom research.
Confidence in and adoption of FinTech services remain high in the UK with startups like Transferwise and World Remit preparing for their IPOs. Over the next 12 months, more than a hundred UK FinTechs expect their revenue to more than double. With many FinTechs in the UK profitable, they are expected to raise more than £2.5 billion in their next round of funding, having already raised £3.5 billion to date.
Weaknesses in Leveraging R&D Tax Credits
Despite this rosy picture, many FinTech startups in the UK are in an unadvantageous position as the significant amount of work they do on R&D to develop innovative solutions rely on a steady flow of capital and can face formidable competition from incumbent financial institutions. The latter are able to compete by using their financial backing, exert regulatory influence, adopt new technologies fast and, if they choose, consume promising startups as a measure to stave off competition.
Like many other tech companies in the UK, FinTechs can leverage government funding schemes that can help them offset high costs of product development and market entry. The most significant of them are R&D tax credits. The question is whether FinTechs in the UK are leveraging R&D tax credits and obtain up to 33% cash benefit from them? And the answer is a resounding “No”.
According to HMRC statistics, the number of R&D tax relief claims in 2015 stood at 22,500 with only a quarter of those claims (5,000) coming from tech and digital industries. What this means is that there are significant amounts of uncollected funds for FinTechs on the table that can be used for further innovation or additional reinvestment for business ventures.
Automation is at the forefront of digital transformation and many industries today are pivoting toward new advances in automation. FinTechs are leveraging this by digitally optimizing financial services. They focus on specific segments of financial services by streamlining back-office processes and personalising customer experiences without having to rely on legacy infrastructure.
The role of R&D becomes even more prominent as most FinTechs can be confident that a good portion of their R&D expenditures can be recuperated, which generates confidence in using the R&D tax credit funds for product development and enables businesses to expand on product development with greater peace of mind.
Do You Qualify for It?
While FinTechs more often than not meet HMRC criteria to claim, many UK FinTechs are not aware of their eligibility or the programme itself.
Those FinTechs that are aware and then wish to explore claiming R&D tax credits tend to receive inadequate advice which are limited to verbatim rules of the programme. If you view the link, the verbatim rules do not provide much direction other than a broad view of basic rules which can be confusing for any taxpayer.
There are also so-called “expert” providers who market themselves as such and also lack an understanding of the FinTech industry and/or the technology they develop. This results in getting insufficient and poor advice with equally poor performance in their R&D tax credit claims, thus increasing chances of being subject to HMRC enquiries and penalties. Moreover, with a tech-savvy HMRC scrutinising software and high-tech companies for their R&D tax credit eligibility criteria, it becomes an essential business practice for FinTechs to select a genuinely qualified partner for their R&D tax credit claims.
For a complimentary assessment of your company’s R&D claim, feel free to contact the author. The assessment would include an estimated range of your tax benefits.
A.K. Hajee is RDP’s Director of Technical Services and Business Development for the UK market. He has over 15 years of experience in preparing and educating businesses on R&D tax credits. He can be contacted at:
+44 203 002 0089