Luke Hamm, CEO of GovGrant, discusses the latest HMRC data and its implications for fintech.
1. What has the latest HMRC data revealed about firms’ failure to capitalise on innovation for tax relief?
Recent HMRC data has revealed that despite finance and insurance companies claiming the highest value proportion of Patent Box relief (34%) in 2017-18, totalling up to £350 million, only 10 companies made this claim. Due to the heavily software-based nature of the financial and insurance sector, there is so much opportunity for fintech businesses to save on corporation tax through Patent Box claims. The gap between the high amount of fintech businesses claiming R&D relief and the low numbers using Patent Box further points towards the untapped potential that is yet to be explored by the majority of the sector.
The failure of SMEs to capitalise on innovation for tax relief is exhibited by the HMRC data: in the financial and insurance sector, 865 claims (totalling £80 million+) were made for R&D tax credits compared to only 10 companies claiming through Patent Box (totalling £350 million). This is revealing because it is likely that companies who are successful in claiming R&D tax credits will also be successful with Patent Box claims. So why aren’t more doing so?
There is a lot to gain in exploring whether fintech companies have patentable IP within their business, and then taking the steps towards the potential further benefits.
2. Why haven’t more Fintech businesses been taking advantage of innovation for tax relief?
Misunderstandings about patenting in the world of fintech SMEs are most likely contributing to the inactivity around Patent Box across the sector. For example, there is a misconception that patenting is an expensive and time-consuming process, with the only benefit being protection against IP theft. However, in reality the data demonstrates that a successful Patent Box application does more than this: it can reduce an SME’s corporation tax on profits by 44% on average.
There is a lot to gain in exploring whether fintech companies have patentable IP within their business
Another erroneous assumption that circulates in the sector is that patentable innovations must be completely original inventions. This is not the case - innovative ideas, approaches or processes can qualify as patentable. In addition, according to GovGrant’s Innovation Nation campaign, 87% of fintech SMEs consider their activity to be innovative.
These misconceptions feed into the lack of fintech businesses taking advantage of the capitalisation opportunities available through innovation tax relief. Furthermore, as of 2019, 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 vast amount of unexplored opportunity that many businesses have neglected.
3. Would a lot of Fintech businesses qualify for IP Harvest and Patent Box?
Generally, the key requirements for R&D match up with those for Patent Box, so it is likely that businesses who qualify for the former will be successful in the latter too. Possessing patentable innovations in software is far from an impossible occurrence - they are being developed on a daily basis in SMEs in the form of unique solutions to technical problems.
Examples of these in fintech SMEs include data extraction tools, development of communications technologies, security firewalls, improved algorithms, system architecture and user interface development. Many businesses in 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 are already claiming R&D tax benefits capitalise further?
The HMRC data suggests that Fintech companies are claiming R&D tax and then halting after this initial step. If a Fintech SME is already claiming R&D tax benefits, then taking the steps towards Patent Box claims is simply a matter of considering where their business falls into the spectrum of innovation processes.
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R&D tax credits are a starting point, and from there businesses should analyse themselves, and identify intellectual property (IP). Patentable IPs do not have to encompass a whole product or service, because even a more narrow patentable innovation can make positive financial impacts across the business. Once the IP has been identified, the next step is to obtain a patent and then finally benefit from the financial relief that is born out of a Patent Box claim.
5. How would you suggest Fintech companies should approach identifying whether they are eligible for the Patent Box scheme?
Many innovations are valuable yet difficult to identify, and GovGrant is working to support companies in efficiently and skillfully identifying their patentable assets. We serve as an aid from step one right through to the end of the process, providing guidance to ensure that businesses don’t miss out on substantial tax benefits. Applying for Patent Box can be a swift and hassle-free journey when patentable IP is pinpointed at the beginning of the process, often through a detailed R&D tax report. Ultimately, putting the time into these areas is abundantly worth it in the long term for fintech companies.
6. What role can lawyers play in bridging the gap?
So often, the heavy lifting when it comes to patenting is technical the creativity and technical prowess of the company and aligning it to the patent process. Cutting through this noise and often time consuming task is essential if clients are going to buy in and be willing to invest in the process. Patent attorneys, lawyers and professional advisors need to help drive the conversation in a cost effective, focus way and this can be done though leveraging other professionals who can help bridge the gap between the legal, tax and technical touchpoints in a single conversation.
