Tax Talk: Tax relief through R&D: don’t miss out

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For the payment services sector, research & development (R&D) is one of the most beneficial tax incentive reliefs available. Find out if you’re likely to qualify.

There has been significant innovation in the industry, in recent years, in the race for faster and more efficient payments and money transfers across the globe. The ever more remote nature of interaction, fast tracked by the pandemic, is driving constant industry pressure on payment service providers to improve and innovate in areas such as security, device compatibility and reliability.

Many fintech businesses are unaware that the government’s R&D tax relief is designed for and targeted at them, wrongly believing the relief is only for more traditional industries such as healthcare. But fintech companies often use cutting edge technology and advancements, so they are just as likely to qualify for the R&D tax relief as what many would consider ‘traditional R&D industries’.

How might you qualify?

So what are the areas in which the payment services industry is likely to innovate and where it stands a strong chance of qualifying for R&D tax relief? They include, but are not limited to:-

  • algorithms
  • trading and commodities markets
  • mobile banking
  • peer-to-peer lending
  • digital currencies
  • digital wallets
  • big data
  • machine learning
  • AI

What is considered R&D for tax purposes? It’s when a project seeks to achieve an advance in science or technology, and the activities which directly contribute to achieving that advance, through the resolution of scientific or technological uncertainty. But note that the advance in technology must only be sought – and may not necessarily be achieved. This means that failed R&D projects may be as valuable in terms of R&D tax incentives as successful ones.

What kind of expenditure qualifies?

The types of expenditure that may qualify for relief are: directly and externally provided staff; subcontracted R&D; consumables; software; trials; prototyping; and independent research costs. Capital expenditure does not qualify under this scheme, nor does expenditure on the production and distribution of goods and services.

In July 2020, the government launched a consultation inviting views on whether to expand the scope of qualifying expenditure to include data and cloud computing costs and at the recent Autumn 2021 Budget, the chancellor confirmed that data and cloud computing costs are to be included within the scope of qualifying expenditure. However, we are yet to see the specific details of this enhanced scope.

Company size matters

The amount of R&D tax relief available depends on whether the company is defined as an SME or large company for R&D purposes.

HMRC defines a large company as having either more than 500 employees or an annual turnover over €100 million and a balance sheet over €86 million. The staff, turnover and balance sheets of any connected companies should be included in the total.

A loss-making SME could make an effective tax saving of up to 33% on its eligible R&D spend and a profit-making SME could make an effective tax saving of up to 25%. So on £200,000 qualifying R&D expenditure, a loss-making SME could receive £66,700 cash, and a profit-making SME an additional   £49,400 tax saving.

The R&D relief is not quite as favourable for large companies (the RDEC), where their effective tax saving could be up to 10.53% of the eligible R&D spend. So on £200,000 qualifying expenditure a profit-making large company could receive a £21,060 tax credit.

Seek good advice

With so much R&D activity in the payment services sector, all businesses that are innovating, developing, and maintaining their technology at the forefront of their industry, should consider whether there is scope for an R&D tax relief claim. A good tax advisor can navigate the claims process for you, identify all qualifying expenditure, and make a successful claim. This in turn will provide valuable, additional working capital to help drive your business goals and ambitions even further.