Budget: UK tech and fintech startups face higher bills after tax credit restrictions – CityAM : CityAM

The UK’s burgeoning tech startup and fintech sector will be hit by the new restrictions on the use of R&D tax credits announced in the Budget, industry insiders warn this morning.

From April 2023, businesses will only be able to claim R&D tax credits on research and development work done in the UK.

As UK software developers often outsource this work to workers in countries like Poland, Romania and Ukraine, they are likely to miss out on a powerful tax incentive for innovation. This will push their costs up substantially, according to accountancy group UHY Hacker Young.

“Lots of UK tech start-ups and fintechs will see their corporate tax bills jump as they are locked out of claiming R&D tax credits for work done outside the UK,” Phil Kinzett-Evans, Partner at UHY Hacker Young, explained.

“It is encouraging that the Government recognises the contribution of the UK to global science and technological innovation and is keen to get more R&D work done in the UK. That will take time to ramp up, however,” he added.

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“There is a shortage of developers in the UK, which is why so much work has been outsourced to other countries where the skills are readily available. Restricting a vital tax credit is not going to make those skills appear over the next 18 months,” Kinzett-Evans said.

Not enough developers

Tech firms and startups are unlikely to be in a position to bring all that work back to the UK as there simply aren’t enough developers.

“Even if they could, it would mean huge disruption and backlog, and will create a development bottleneck,” Kinzett-Evans stressed.

“Whilst it is understandable the Government wants as much ‘bang for the buck’ for the UK taxpayer, it is disappointing to see it hit one of the UK’s most innovative industries with what is effectively a tax rise. This sector is key to our post-Brexit and post-Covid growth.”

“This is actually a double whammy effect for SMEs as the cap on how much R&D relief they can claim is also restricted from 1 April 2023 based on the amount they pay in PAYE and NICs. That means many will be able to claim less in R&D tax credits in the first place,” Kinzett-Evans concluded.

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