Recent changes to the R&D tax relief regime have caused many Financial Services businesses to rethink their approach. Lower rates of relief, increased HMRC scrutiny and stricter compliance requirements have led some firms to conclude that claiming simply isn’t worth the effort.
While the landscape has changed, R&D tax relief remains a valuable incentive for Financial Services businesses. And recent changes to the rules, particularly around subcontracted R&D, may mean some firms have opportunities where previously there was ambiguity.
Why are businesses stepping back from R&D claims?
Innovation in Financial Services rarely resembles traditional R&D. Instead, it often takes the form of software development, data engineering, modelling, automation and digital transformation.
This can make eligibility harder to identify. Projects often sit at the intersection of technology, regulation and commercial strategy, creating uncertainty over what qualifies and what doesn’t. Combined with increased HMRC scrutiny, many businesses have disregarded claiming, as the perceived administrative burden and risk of becoming embroiled in long running disputes with HMRC over decreasing R&D rebates was not sufficiently attractive.
The opportunity is still there.
However, Financial Services businesses continue to invest heavily in innovation across areas such as:
- Artificial intelligence and machine learning
- Fraud detection and transaction monitoring
- Cybersecurity and operational resilience
- Digital onboarding and customer platforms
- Payments infrastructure
- Data analytics and risk modelling
- Regulatory and compliance technology
The key test isn’t whether a project is commercially innovative. It’s whether the team sought a scientific or technological advance and had to overcome uncertainties that weren’t readily solvable by competent professionals in the field. Not every project will qualify, but many firms underestimate how much of their innovation activity could fall within the scope of the regime.
R&D and modelling: where’s the line?
The eligibility of analytical and quantitative modelling projects is one of the most common areas of uncertainty for Financial Services businesses.
When developing pricing models, assessing risk, improving investment performance or detecting fraud, Financial Services firms increasingly rely on sophisticated modelling techniques. Invariably these projects are difficult, time consuming and expensive, with no guarantees that even marginal gains versus previous models will be achieved. But complexity alone doesn’t make a project eligible for R&D relief.
Qualifying activity arises where teams overcome technological challenges around areas such as scalability, performance, data processing or the implementation of new analytical techniques. Perversely, the actual efficacy of the model, may not be relevant to the R&D argument at all. Importantly, projects can contain both qualifying and non-qualifying activities. Identifying that boundary, and documenting it clearly, is often critical to supporting a robust claim.
Have you revisited your subcontracted R&D position?
The merged R&D regime introduced significant changes to the treatment of subcontracted R&D.
Many Financial Services businesses rely on external technology providers, software developers and specialist consultants to deliver innovation projects. Understanding who initiated the R&D, who carried out the work and who was responsible for resolving the technological uncertainty has never been more important.
Under the new rules, some projects that previously fell outside the regime may now qualify. Businesses should review their contractual arrangements and surrounding circumstances with their suppliers to evaluate which party has the right to claim.
What does increased HMRC scrutiny mean?
Greater scrutiny doesn’t mean software-focused R&D claims are no longer viable. It simply means businesses need to identify and evidence qualifying activity more carefully.
The crucial distinction (and the part most claimants struggle with) is between the commercial goals and the technological objectives of the project.
That’s why engaging technical teams early and maintaining strong project records can be invaluable when preparing and supporting a claim.
Time for a fresh review?
The R&D regime looks very different from a few years ago. Relief may be less generous in some cases, and HMRC’s expectations are undoubtedly higher. Regardless, Financial Services businesses continue to innovate across software, AI, data, modelling, cybersecurity and digital infrastructure. Where this work necessarily improves the fundamental technologies and principles involved, companies should be rewarded for it.
For firms that have paused their claims or ruled themselves out in recent years, now could be the right time for a fresh review. Get in touch with Jack Williams, R&D Director, to find out how HaysMac can support you and your business with R&D relief.
