Tax is an emotive word—especially to businesses and business owners. For many, it’s a word loaded with meaning, and not always a positive one. Yet today, it should not be viewed as just a duty and a hindrance to growth, but rather as an incentive and even an opportunity.
In the UK, creative businesses in the thriving film, TV, or gaming industry, companies under the broad umbrella of research and development activities, or those in a VAT refund position, may find themselves due a generous refund from HM Revenue & Customs. Thanks to Making Tax Digital and Open Banking, a raft of innovative new fintechs can leverage this as a financeable asset. Rather than waiting for the end of the tax year or for HMRC to calculate VAT owed, businesses should gain control of this outstanding debt—and access it when they need extra cash.
As high street banks are more hesitant to lend to businesses due to rising inflation and the threat of a potential recession, this alternative financing—"alt-fi"—will become increasingly valuable to chief financial officers and scaling businesses.
The State has Fundamentally Changed
The last few decades have seen the role of the state expand across developed economies; fueled by growing debt and taxes, its list of responsibilities has grown. Firstly, and perhaps more poignantly after recent European heatwaves and forest fires, the ever-encroaching climate crisis necessitates a top-down response. Innovation may provide both resilience and the technologies to transition to a net zero world, but this could not be achieved without state-led guidance and effective policy making.
Secondly, the Covid-19 pandemic was a defining moment in the expansion of the state. Few could argue that an adequate response, from daily limits on interaction to the miracle vaccines, could have happened without the government and bureaucracy expanding—if only in that moment.
Research and Development is Key
Thirdly, the world has become far more complex, interconnected, and smaller in size. Innovations happen daily—and in the last decade, we have developed or achieved totally disruptive technologies, such as artificial intelligence or quantum computing. Economic success for businesses and industries can rely entirely upon developing or mastering new technology, and financial resilience for entire countries can depend on single industries.
It is this third point that is most relevant to tax credits—showing that the state has positive responsibilities as well as negative ones. In a complex, competitive world, the government must incentivize specific industries and innovations to succeed. In the UK, this is done through industry and R&D tax credits.
As the list of responsibilities the government and state must undertake will only grow, so will the importance of tax credits to shape and encourage growth, specialization, and technological adoption.
Tax Credits Work
Over the last decade or so, the British film industry has become a prime example of how tax credits, as an incentive, can encourage growth. British Film Institute figures show that total industry turnover increased by 132%, from 6.4 billion pounds ($7.7 billion) in 2008 to 14.8 billion pounds in 2017. New statistics from ScreenSkills show that the UK’s film and TV industry is likely to grow at an annual average rate of 7.3% between 2022 and 2025. Although this consistent growth is due to many factors, the 25% tax credit on expenditure is a significant contributing factor.
Traditional Finance is Struggling to Keep Up
Parallel to these developments is the recent and concerning trend that banks are becoming more hesitant in financing enterprises, notably smaller businesses. The latest Federation of Small Businesses and the Bank of England data
show the annual growth rate of lending to small to medium-sized enterprises at a record low. Conversely, lending to large corporates has increased significantly.
However, British businesses have a unique advantage in improving their odds and Making Tax Digital and Open Banking provide a vital opportunity for CFOs to regain control of their cash flow. Flexible, cheap, credit-based financing, against only what is due at the end of the year anyway—be it VAT refunds, creative industry tax credits, or R&D tax credits—provides a useful addition to a CFO’s toolbox.
Are Alt-Fi and Fintechs Leading a Tax Revolution?
Accessing end-of-term money early could be the financial support needed to survive, strengthen cashflow, and thrive after a significant investment, or to weather stormy economic waters. However, this alternative-financing method is not just a new source of capital, but also a revolution in how we view tax.
Taxation is no longer static—it is an asset there whenever needed. This completely changes the game for a qualifying business’s finance, adding flexibility, convenience and ultimately taking back control. It is an invaluable but inevitable part of technology’s freedoms to companies and individuals. With a laptop, we were no longer restricted to a desk; with cloud computing, we are no longer tied down to our office or the physical location of data; and with tax credit financing, we are no longer reliant upon HMRC or the business calendar to claim back what can be a significant chunk of cash.
As bank loans become more challenging, costly, and complicated to obtain, fintechs and alternative financiers may thus provide a more flexible and innovative solution for business.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Freddie Digby is Chief Commercial Officer at Adsum.
The author may be contacted at: email@example.com