Fintech Innovation: how R&D is vital for continued success
Historically, the financial service sector was always slow to embrace change and adopt new technologies. However, the accelerated pace of technological advancement has infiltrated and disrupted the traditional financial services sector, seeing rise to SMEs embracing financial technologies and using them to make significant waves.
The importance of R&D in Fintech
Financial Technologies (Fintech) is a sector that is growing. It is already a key contributor to the UK economy, currently employing 76,500 people and generating yearly revenues of £11billion.
The secret to its success is the high levels of innovation and the investments being made in the development of cutting-edge technologies and new platforms. These activities are not one-off solutions, they are continual strategies that not only increase the growth of the individual company but also advances the technology capabilities for the sector as a whole.
The role of R&D tax credits for future innovation
Innovation was and still is a key element of Government policy, with the Chancellor this month indicating that innovation remains an important factor for future growth plans following the COVID-19 pandemic.
A core part of the government’s support for innovation is R&D tax credits, a form of corporation tax relief available to limited companies. Its purpose is to reward past R&D efforts and incentivise future development work.
A small or medium size company (SME) can receive up to 33.3p for every £1 spent on qualifying development activities. This can translate into a significant cash payment that can be used to boost future projects.
R&D tax credits is vital for stimulating research and development, with past studies showing that if you increase the generosity of the relief, R&D spending rises.
UK Fintech Strategy Review
In 2020, Ron Kalifa OBE was appointed by the Chancellor to conduct an independent review to identify priority areas to support the UK’s fintech sector.
The report, released at the end of February, sets out a series of proposals on how the UK can build on its existing strengths, create the right framework for continued innovation, and support UK Fintech firms to scale. One such proposal is the expansion of R&D tax credits, suggesting that the current qualifying categories of expenditure are not fit for purpose, resulting in many Fintech companies unable to claim for essential R&D costs.
Sarah Williams-Gardener, CEO at Fintech Wales commented:
The recent UK Fintech Strategy review “The Kalifa report” highlighted the UK as being #2 on the global Fintech Stage. The Tech Nation Report 2020 highlights the UK as Europe’s top scaling nation and is increasing its lead in the world.
This is the result of continuous innovation, the drive to increase productivity whilst adopting sustainable forwarding thinking technologies, embracing open finance to bring great solutions to consumers. R&D tax credits have been highly influential to supporting UK FinTech innovators. It was really positive seeing continued support in the latest budget.
The government has a bold target to raise total investment in research and development to 2.4% of UK GDP by 2027. R&D tax credits have a key part to play in incentivising R&D investment by lowering the costs of innovation.
R&D tax credit qualifying expenditure is limited to pre-determined categories. The Kalifia Review rightly identifies the fact that these categories do not fully represent the Fintech industry, failing to capture large amounts of R&D expenditure relating to mainly data purchases.
R&D tax credits were introduced in 2000; since that time, the economic and business landscape has changed, resulting in companies needing to adapt their research and development activities. The Government are aware of this and as such have released two consultations focussing on R&D tax credit relief:
- The scope of qualifying expenditures for R&D Tax Credits – requesting responses from stakeholders as it considers whether to include R&D costs for data and cloud computing
- R&D Tax Reliefs – exploring the nature of private-sector R&D investment in the UK, how this is supported or otherwise influenced by the R&D relief schemes, and where changes may be appropriate.
The decision on whether data and cloud computing costs will be brought into the scope of qualifying expenditure will be taken alongside the wider review of R&D tax credits which is open until 2nd June 2021.
This is a big step forward. With innovation playing such a key role in the country’s economic bounce back from COVID-19, it is only right and just that these consultations have been released to ensure that R&D tax credits reflects the changing reality of research and development, ensuring it remains globally competitive.
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