Why UK Fintechs Are Failing to Capitalise on Tax Relief
1. What's the most recent HMRC data revealed about firms' failure to capitalise on innovation for tax relief?
Recent HMRC data has revealed that despite finance and insurance providers claiming the greatest value proportion of Patent Box relief in 2021-18, totalling as much as lb350 million, only 10 companies chose to make this claim. Due to the heavily software-based nature from the financial and insurance sector, there is so much opportunity for fintech businesses to reduce corporation tax through Patent Box claims. The space between the large quantities of fintech businesses claiming R&D relief and the low numbers using Patent Box further points towards the untapped potential that's not yet been explored by the majority of the sector.
The failure of SMEs to capitalise on innovation for tax relief is exhibited by the HMRC data: within the financial and insurance sector, 865 claims were made for R&D tax credits when compared with only 10 companies claiming through Patent Box . This is revealing since it is likely that companies who are successful in claiming R&D tax credits will also be successful with Patent Box claims. Why aren't more doing so?
There will be a lot to gain in exploring whether fintech companies have patentable IP within their business, and then taking the steps for the potential further benefits.
2. Why haven't more Fintech businesses been benefiting from innovation for tax relief?
Misunderstandings about patenting in the world of fintech SMEs are likely contributing to the inactivity around Patent Box across the sector. For instance, there's a misconception that patenting is definitely an expensive and time-consuming process, with the only benefit being protection against IP theft. However, in reality the information demonstrates that an effective Patent Box application does a lot more than this: it can reduce an SME's corporation tax on profits by 44% on average.
Another erroneous assumption that circulates in the sector is the fact that patentable innovations should be completely original inventions. This is not the situation – innovative ideas, approaches or processes can qualify as patentable. In addition, based on GovGrant's Innovation Nation campaign, 87% of fintech SMEs consider their activity to become innovative.
These misconceptions feed in to the insufficient fintech businesses taking advantage of the capitalisation opportunities available through innovation tax relief. Furthermore, by 2021, 92% of UK businesses in the fintech sector were operating with under 250 employees, an employee count that qualifies them as SMEs. This emphasises the large number of unexplored opportunity that many businesses have neglected.
3. Would lots of Fintech businesses be eligible for a IP Harvest and Patent Box?
Generally, the key requirements for R&D match up with those for Patent Box, so it is likely that companies who entitled to the former is going to be successful within the latter too. Possessing patentable innovations in software is far from an impossible occurrence – they are being developed every day in SMEs in the form of unique methods to technical problems.
Examples of these in fintech SMEs include data extraction tools, development of communications technologies, security firewalls, improved algorithms, system architecture and interface development. Many companies within the fintech sector are forging these regularly, so patentable innovations are certainly not reserved for the big multinationals alone.
4. How else can Fintech companies who're already claiming R&D tax benefits capitalise further?
The HMRC data suggests that Fintech information mill claiming R&D tax after which halting following this starting point. If a Fintech SME is already claiming R&D tax benefits, then using the steps towards Patent Box claims is only a matter of considering where their business falls into the spectrum of innovation processes.
R&D tax credits really are a starting point, and after that businesses should analyse themselves, and identify intellectual property . Patentable IPs don't have to encompass a whole service or product, because even a more narrow patentable innovation can make positive financial impacts over the business. Once the IP has been identified, the next thing is to obtain a patent after which finally benefit from the financial relief that is born out of a Patent Box claim.
5. How can you suggest Fintech companies should approach identifying whether they are eligible for the Patent Box scheme?
Many innovations are valuable yet hard to identify, and GovGrant is trying to support companies in efficiently and skillfully identifying their patentable assets. We function as a guide from step one right through to the end of the procedure, providing guidance to ensure that businesses don't lose out on substantial tax benefits. Applying for Patent Box could be a swift and hassle-free journey when patentable IP is pinpointed at the outset of the process, often through a detailed R&D tax report. Ultimately, putting time into these areas is abundantly worth it in the long term for fintech companies.
6. What role can lawyers play in bridging the space?
So often, the heavy-lifting when it comes to patenting is technical the creativity and technical prowess of the company and aligning it towards the patent process. Cutting through this noise and often time intensive task is important if customers are thinking about buying in and become prepared to purchase the procedure. Patent attorneys, lawyers and professional advisors have to help drive the conversation in a cost effective, focus way and this can be done though leveraging other experts who can help bridge the space between the legal, tax and technical touchpoints in a single conversation.
