November 2015

BACK OFFICE VIEW: R&D tax relief: are asset managers missing out?

King and ShewringIt is all too easy to assume that research & development (R&D) and innovation are purely the domain of fintech start-ups that regularly grab the headlines. Many asset management firms overlook the innovative aspects of their own businesses and as a result risk missing out on their share of the sizeable £1.5 billion in the UK, which HMRC has set aside to support innovation in financial services and various other sectors. Asset management firms are now embracing new technology almost as a matter of course to fend off challenges from new market entrants.  Even those firms that might not view themselves as tech disrupters are often investing significant amounts of time and considerable resources to develop new front and back-office tools to give them an edge in the market.  With the widespread use of technology at their core, it is not unusual to come across software developers within asset management businesses who assume their work is routine, when in fact it is not, and who therefore fail to realise that some of their work could be viewed as R&D as far as HMRC is concerned. The first task – and challenge – is to determine precisely which activities would fall under the banner of R&D for tax purposes.  In practical terms, a general rule of thumb is that R&D status cannot be conferred on off-the-shelf solutions; it instead applies solely to the development of products or processes that extend the knowledge in
a field which is not currently available on the open market.  It is not sufficient for a project to involve the automated replication of a standard manual process; instead it must involve new concepts or ideas, such as the development of new or more efficient algorithms.  A project does not have to be ‘new’ in the common sense of the word. Any advance that was already in existence can qualify if the information is not readily and publicly available.  Moreover, projects that package or combine existing products can also be eligible, as long as this results in something genuinely new. A successful project outcome is also not vital when looking to claim R&D tax credit: in fact, failure of a project can often be used as evidence that the project involved genuinely pioneering work. BACK TO ITS ROOTS
Another challenge is gaining clarity on precisely when an R&D project commences and ceases.  There is scope to backdate claims for up to two years, so care needs to be taken to trace back a project to its roots in order to maximise the tax relief.   The current rate of relief for small and medium-sized businesses is 200% in respect of qualifying R&D expenditure and the rate of R&D payable tax credit for loss-making companies of that size is 14.5%, with the relief going against the corporation tax liability.   A claim can be made up to two years from the end of the accounting period in which the R&D qualifying expenditure is incurred.  Currently there is no mechanism from HMRC that allows them to pre-assess if a project will qualify for R&D relief. However, HMRC are in the process of bringing in an advance assurance facility.  The bottom line is that asset management firms would be well advised to examine their eligibility for R&D tax relief.  The Government is keen to promote the funds available and these could offer welcome relief for many companies that may currently be missing out.  Bernadette King is head of financial services and Mark Shewring is business tax director at haysmacintyre ©2015 funds europe

Executive Interviews

INTERVIEW: Put your money where your mouth is

Jun 10, 2016

At Kempen Capital Management, they believe portfolio managers should invest in their own funds. David Stevenson talks to Lars Dijkstra, CIO of the €42 billion manager.

EXECUTIVE INTERVIEW: ‘Volatility is the name of the game’

May 13, 2016

Axa Investment Managers chief executive officer, Andrea Rossi, talks to David Stevenson about bringing all his firm’s subsidiaries under one name and the opportunities that a difficult market...


ROUNDTABLE: Beyond the hype

Oct 13, 2016

The use of smart beta investing continues to grow. Our panel, made up of both providers and users, discusses what the strategy actually means, how it should be used and the kind of pitfalls that may arise when using this innovative investment technique.

MIFID II ROUNDTABLE: Following the direction of travel

Sep 07, 2016

Fund management firms Aberdeen and HSBC Global meet with specialist providers to speak about how the industry is evolving towards MiFID II.