Freeport tax advantages could boost life sciences investment

Those outcomes would align with the UK government’s ambition for freeports and its vision for the life sciences sector post-Brexit. Given the absence of enhanced research and development (R&D) tax reliefs, freeports may not encourage significant R&D investment and therefore may not help the government achieve its target of increasing total R&D investment to 2.4% of UK GDP by 2027. However, freeports may still present significant opportunities for life sciences businesses to explore.

What are freeports and why are they being introduced?

In his budget announcement on 3 March, UK chancellor Rishi Sunak confirmed the locations of eight English 'freeports' following a competitive bidding process. The freeports are intended to become operational by late 2021.

There is no precise definition of a freeport. Generally, a freeport will be a designated area, commonly situated in and around existing ports, including airports and rail freight hubs that benefit from advantageous customs and tax rules and often reduced regulatory requirements. In the UK, freeports will be distinct customs zones that will operate outside the country’s customs borders, allowing goods to be imported, processed and re-exported without incurring any customs duties. Duties will be levied when goods leave the freeport to enter the wider UK market.

The stated policy objectives behind freeports are:

• to establish national hubs for global trade and investment across the UK;
• promote regeneration and job creation; and
• create hotbeds for innovation.

The freeport tax package

A tax package for freeports was announced by the UK government in October 2020. The freeport tax reliefs are not available to all businesses operating within a freeport; rather they are only accessible in designated freeport tax sites, which will be specific locations within the freeport. Legislation introducing the freeport tax reliefs was included in the UK’s Finance Act 2021. Broadly, the tax reliefs are:

• Stamp duty land tax (SDLT) exemption for non-residential land until 30 September 2026;
• Capital allowances – an enhanced structures and buildings allowance of 10%, rather than 3%, on qualifying capital expenditure on the construction or acquisition of non-residential structures and buildings; and 100% first year deduction for expenditure on qualifying plant and machinery until 30 September 2026;
• Employers’ National Insurance Contributions (NICs) exemption – broadly, no employer’s NICs – usually payable at a rate of 13.8% – for new employees for three years; and
• Business rates relief – up to 100% relief for five years.

Taking these reliefs collectively, they are focused, over a five-year period, on encouraging the purchase of land for commercial purposes, developing the land, acquiring machinery and equipment to use in the newly developed land and hiring new employees to undertake the work. The freeport tax package seems to provide opportunities for innovation through manufacturing rather than through R&D.

R&D tax reliefs within freeports

Although no specific R&D-related tax reliefs are being introduced for freeports, the existing R&D tax credits remain available to businesses operating in a freeport tax site and may be valuable to a life sciences business undertaking R&D within a freeport.

Two tax reliefs are currently available on certain qualifying R&D-related expenditure. Where certain conditions are met, relief is available for SMEs in the form of an effective deduction of 230% on qualifying R&D costs. An R&D expenditure credit (RDEC) may also be available that provides a 13% credit of qualifying R&D expenditure. The “above the line” RDEC is brought into account as a trade receipt, increasing taxable profits, or conversely reducing losses.

The UK government is currently undertaking a wide-ranging review of the R&D tax relief system. A public consultation into possible routes for reform ended in June 2021, with the outcome expected to be published later this year.

The UK’s life sciences vision

Although encouraging innovation by incentivising R&D is traditionally aligned with encouraging growth across the life sciences sector, a focus on innovation through manufacturing is consistent with the UK government’s current strategic objectives for the sector.

The government’s plans for the life sciences sector were detailed in its life sciences vision, published in July 2021, representing a 10-year strategy for development and growth across the sector. The government is seeking to transform the UK into a life sciences superpower and the most attractive location in Europe to start and grow a life sciences business. Central to its vision is a focus on “cultivating a business environment” in which life sciences firms are “incentivised to onshore manufacture” new innovative technologies.

The creation and development of new UK manufacturing centres across the sector is integral to the vision. Creating a “globally competitive environment for life science manufacturing investments” is an overarching ambition. There are currently over 2,000 life science manufacturing sites across the UK. However, the government acknowledges that this represents a significant reduction on the number of sites there were 25 years ago. Most notably, production volumes have fallen by 29% since 2009 with certain technologies and products no longer being developed in the UK.

The government is keen to develop manufacturing clusters across the sector and in different regions across the UK. The vision specifically cites the use of freeports as a tool to support cluster formation, indicating that the government views freeports as creating opportunities for life sciences businesses to innovate through manufacturing.

Life sciences investment programme

Beyond the tax reliefs available to life sciences businesses seeking to establish and develop manufacturing capabilities in a freeport tax site, businesses may also be able to access vital funding through the government’s investment programme.

A total of £1 billion in new funding is being made available to the sector, representing a combination of a £200 million government investment delivered through British Patient Capital, part of the government owned British Business Bank, and a commitment by Abu Dhabi’s Mubdala Investment Company, one of the world’s leading sovereign investors, to invest £800m in the UK life sciences sector in collaboration with UK state-backed British Patient Capital.

Conclusion

Given the current drive to incentivise life science manufacturing and develop manufacturing cluster sites, freeports and their associated tax benefits may offer significant opportunities for life science business to explore.

The availability of designated freeport tax reliefs combined with the existing R&D tax reliefs and increased access to government funding may create a powerful incentive to establish new life science businesses within freeport tax sites that seek to develop and manufacture new products and technologies.

A version of this article was first published in the healthcare and life sciences newsletter produced by International Law Office (ILO).