Investment in the Fintech sector dropped by a third in first half of 20201, but if the industry is to maintain its recent pace of investment in innovation (£2.3bn2 during 2018/19), Government funding through the R&D tax credit will be more important than ever in funding innovation in the competitive world of Fintech.
Innovation within financial services has been accelerating as it is evident that companies can no longer rely on legacy monolithic applications to dominate their markets. Blockchain technology has changed the sector and is enabling Fintech businesses to develop new secure solutions for a myriad of payment services. Challenger banks have revolutionised the finance services market by building a finance framework from scratch; leveraging superior technology to reinvent banking. By building a decoupled infrastructure, from the start, challenger banks are able to futureproof their systems to avoid the same fate of traditional banking technology.
Decentralised Finance (DeFi), an emerging branch of blockchain technology, takes the innovation one stage further allowing financial applications with widely different end use cases to be developed on the same underlying architecture. Most new financial services that we use today are being built on the Ethereum protocol. In as little as a few lines of code, developers are able to leverage the Ethereum programming language, Solidity, to write smart contracts that can perform virtually any financial capability, from options contracts to coupon-paying bonds.
The technology underpinning the Ethereum protocol is exceptionally complex, however, they have simplified interfacing with the blockchain to allow developers to get on with building exciting applications on a distributed public blockchain. Using the Ethereum Virtual Machine, a sandboxed virtual stack responsible for executing contract bytecode, developers are able to build distributed apps, with zero downtime, without having to design the underlying infrastructure.
Finding the funding
While there is so much opportunity to innovate, lack of external investment in these difficult times could be holding back Fintech business. Yet we still find many companies not making full use of the one source of funding that is specifically designed to help fund their projects - Research and Development tax credits. The reasons for this are many and varied but include:
- Uncertainty over whether financial institutions can qualify for R&D credits – they can! But some still believe the credits only apply to the more traditional R&D intensive sectors such as pharmaceuticals and engineering,
- Confusion over which costs companies can claim – this is partly the reason behind HMRC’s latest R&D consultation on the scope of R&D qualifying costs.
- Lack of confidence in distinguishing between qualifying R&D activities and routine development which would typically not qualify.
To help Fintech businesses overcome these challenges, BDO uses a dedicated team of qualified software developers and tax professionals. Our experts ‘speak the same language’ as your software developers and can cut through the apparent complexity to identify and clearly articulate to HMRC the qualifying nature of work undertaken.
The R&D tax regime is designed to encourage just the type of software innovation we see in the Fintech and Payments industry at the moment and during 2018/19, companies in the financial services sector claimed £275m in R&D tax relief from HMRC2. The credits generate cash to support growing businesses so, just as you would to develop your software itself, it’s worth getting experts from BDO involved in your R&D claim from the start to make sure you get it right in a smart and streamlined way.
For more information or to speak to one of the BDO innovation and technology team contact Carrie Rutland and Ash Rawson.
1 Data from Innovate Finance
2 ONS data on R&D tax credit expenses and claims