Insurtech UK recommends broadening entrepreneurs’ relief scope following Spring Budget announcement

Insurtech UK has put forward its recommendations following the announcement in this year’s Spring Budget about a review of research and development (R&D) tax credits, also known as entrepreneurs’ relief.

The government said the purpose of this review is to ensure that the “UK remains a competitive location for cutting edge research”.

The review will be supported by stakeholders, as R&D has a key role in incentivising investment by reducing the cost of innovation – this is vital to the insurtech sector.

Meanwhile trade body Insurtech UK has put forward its recommendations - it plans to contribute to the consultation along with its members and partners.

Although Insurtech UK acknowledges that the consultation presents an opportunity for HM Treasury to understand how businesses use data in and after the R&D process, it advocates that the possible additional commercial value of residual data should not affect relief claims.

In last year’s Spring Budget announcement, entrepreneurs’ relief was slashed. 

Broadening the scope of relief

In a statement, Insurtech UK said that it “wants to highlight that if data is clearly purchased for R&D purposes, then this should demonstrate that the data is intended to be consumed for R&D.

”Although it is unlikely that data sets will be wholly consumed during the R&D process, due to the unique nature of data, this should not disqualify this [type of] R&D from relief”.

Furthermore, Insurtech UK said it “understands the concern about whether this residual data offers commercial value beyond the lifespan of the R&D bubble, but where there is clear intent that the data was purchased for R&D, these claims should be qualifying”.

It explained that for many Insurtech UK members, the primary need for data consumption is for theoretical and mathematical testing, rather than commercial pricing and modelling, and “there should be a lesser concern from HM Treasury about the exploitation of this data for commercial purposes”.

Therefore, Insurtech UK believes that the research phase of R&D should be included within the scope for relief.

This is because for businesses purchasing data sets for R&D purposes, there is a lot of initial analysis and preliminary work to allow R&D intensive activities to take place. And these processes currently do not fall within the scope of an R&D claim, but the trade body said that “this period is essential to allow R&D to take place and therefore should be eligible for relief”.

Extending digital overheads

Finally, Insurtech UK said that HM Treasury should consider extending digital overheads into the scope of relief, to reflect the changing patterns of business practices where more overhead costs are invested in digital infrastructure.

At present, all forms of data used to create and test software does not attract relief, but these are essential to R&D.

Insurtech UK’s members have identified several software costs that do not currently qualify:

• Hosting costs.
• Raw data sets (for example, pricing, search data).
• Social media spend (when used to test algorithms).
• Cloud computing.
• Data storage.
• Customer acquisition tests.

It noted that contractors were only eligible for entrepreneurs’ relief at a reduced rate. For startups who often work with freelancers, this could be an issue.

Insurtech UK suggested that these costs should be treated like any other expenditure, such as energy consumption, which qualifies for R&D relief because it is equally vital to R&D.

A good thing?

Speaking about chancellor of the exchequer Rishi Sunak’s decision to leave entrepreneurs’ relief unchanged, Paul Trail, managing director of Close Brothers Premium Finance, said: “The chancellor has recognised that entrepreneurs (including brokers) are key to driving forward the UK economy after the pandemic and that the current incentive schemes for them to build up their businesses and take value from their life’s work when they come to sell are an important part of that.

“The pace of M&A in broking has been frenetic in recent months, driven partly by fears among brokers of a harsher tax regime.

”I don’t believe [the] decision will bring M&A to a halt, but it will remove the incentive for brokers to sell immediately, giving them more time to weigh up their strategic options, which is a good thing.”