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Innovation remains key to continued success for UK fintech

by uma
Editorial & Advertiser disclosure


David Byrne, Director at ForrestBrown

The UK has faced more than its fair share of economic upheaval in recent times, from Brexit and the pandemic to the turmoil of the mini-Budget. But against this challenging backdrop, fintech has remained a standout success story. The sector has seen rapid growth and now generates an estimated £11bn in revenue (according to the Kalifa Review), making it the second most valuable fintech ecosystem in the world.

From the emergence ofopen banking to the scaling of blockchain and quantum computing, fintech businesses have been at the forefrontof significant technological advances. Whether through online banking’s reinvention of customer service or high-frequency traders shaving microseconds off their communication networks, the ripple effect of this innovation has been felt far beyond fintech. It has influenced the way we live, work, and do business, as well as supporting jobs and growth in the UK economy.

Having transformed the way financial services are created, distributed, and used, fintech businesses must continue to innovate to stay relevant.The recent upheaval in the crypto space and the increasing burden of regulatory complianceunderscores the point:businesses that stand still in today’s fast-moving economic, social and political landscape will inevitably be left behind.

While continuing to innovate might appear challenging in the face of current economic headwinds, ForrestBrown’s research has found that over half (55%) of Chief Innovation Officers expect to increase investment in innovation within the next 6-12 months. This suggests that forward-looking businesses recognise the long-term benefits innovation brings.

In a welcome move, the UK government has reconfirmed its commitment to the growth agenda, albeit with changes to the way support is delivered. Utilising incentives such as R&D tax relief could be a source of funding for fintech businesses, with different types of tax relief available depending on the size of the company. While R&D tax relief is claimed retrospectively, the vital funding it provides helps companies reinvest in innovation to continue developing new products and services.

From next spring, the scope of qualifying expenditure for R&D tax relief is set to be widened to include the costs of data licences and cloud computing. At the same time, an updated definition including pure mathematics also comes into force. These changes further incentivise the use of modern computational approaches in data science and analytics, or quantum computing, artificial intelligence, and machine learning, and could present new opportunities for fintech businesses.  

For example, as many fintech businesses will know from experience, cloud computing isn’t a marginal cost. The sheer power that goes into creating, maintaining, running, and storing machine learning and artificial intelligence solutions, training datasets, models and simulations can be a huge overhead. From April 2023, companies can start to reclaim some of these costs back.This will enable them to redirect funds to other areas of R&D or allocate additional budget to more quickly and effectively develop new solutions.

Similarly, the inclusion of activities seeking advances in pure maths adds clarity. Work in pure maths is likely to be linked to software development but the boundary between the two is not always clear. The disambiguation of the definition should give greater confidence to fintech firms claiming R&D tax relief involving pure maths.

The increase in eligible R&D activities and qualifying expenditure is welcome, however those claiming R&D projects involving overseas activities may need to adjust their budgets, or reconsider overseas relationships, as expenditure related to these no longer qualifies for relief. While some narrow exemptions are proposed, these do not extend to workforce cost or availability, presenting a real challenge for innovative fintech companies facing global competition for specialist talent. 

Taken together with the adjustments to R&D tax relief rates announced in the Autumn Statement, fintech companies need to understand how this raft of changes could affect future claims. While, inevitably, there will be winners and losers, those that plan will put themselves in pole position to lead the next wave of fintech innovation


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