Out-Law News 2 min. read

Autumn budget 2021: R&D tax relief changes ‘could hit UK life sciences’

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New territoriality restrictions on the availability of research and development (R&D) tax reliefs may have unintended negative consequences for the life sciences sector, a tax expert has said.

Penny Simmons of Pinsent Masons, the law firm behind Out-Law, was commenting after UK chancellor Rishi Sunak’s announcements on R&D in his autumn budget speech.

Sunak announced that the definition of R&D costs that are eligible for tax relief will be extended to include cloud computing and data costs to “support modern research methods”. Changes will also be introduced to ensure that the R&D tax relief rules are targeted and “refocused” towards R&D investment and innovation undertaken in the UK. The changes will be introduced from April 2023 with further details to be published in due course.

Simmons said: “Although it is understandable that the government wants to ensure that tax relief is only available for UK R&D investment, unless properly safeguarded this may have unintended negative consequences for the life sciences sector, particularly businesses in the biotech space focussed on developing the next generation of medicines.”

“Vital elements of UK life sciences R&D are often undertaken outside of the UK and can form an essential part of the development of the R&D itself – for example, when developing critical new drugs or vaccines it can be essential for clinical trials to be undertaken outside the UK to gain the necessary licensing approvals. Without tax relief for such trials or other forms of overseas R&D, the cost of undertaking the R&D may prove prohibitive. An unrestricted territoriality requirement could become an insurmountable stumbling block for some life sciences innovation,” she said.

Currently, there is no requirement that the R&D activity must be undertaken in the UK for companies to be eligible for R&D tax reliefs. UK companies that incur R&D overseas may still be eligible for full tax relief. However, the government has said it wants to ensure that the reliefs incentivise UK innovation and are appropriately targeted in a way that best benefits UK industry.

In its budget papers the government confirmed that it has pushed back the timeframes for achieving its target of increasing public R&D investment to £22 billion from 2024/25 to 2026/27. Simmons said this was disappointing but welcomed the government’s continuing aim of increasing investment to £20bn by 2024 and the fact it remains committed to its target of increasing investment in R&D to 2.4% of GDP by 2027.

Simmons said that it is also positive that the government has confirmed that the definition of R&D will be amended to ensure that tax relief is available for cloud computing and data costs. She said businesses had lobbied hard for this change.

“As with most tax announcements, the devil will be in the detail and a response to the recent government review into the R&D tax relief system is now eagerly awaited,” Simmons said.

“It is hoped that any territoriality restrictions on R&D relief will include appropriate safeguards to ensure that overseas R&D that is integral to the development of the innovation remains eligible for relief. The availability of R&D tax relief for small and medium sized enterprises should continue to be prioritised and safeguarded to ensure that start-ups developing life-saving treatments and efficiency-saving technologies across the life sciences sector, or those looking to develop green technology to combat the global climate crisis, are encouraged to do so,” she said

The government opened a review into the R&D tax relief system in spring 2021 with the aim of ensuring that the UK “remains a competitive location for cutting edge research, that the reliefs continue to be fit for purpose and that taxpayer money is effectively targeted”. Details of the wide-ranging review are contained in a consultation paper that was published in March. Broadly, the scope of the review is to consider whether to expand the definition of R&D; continue to maintain two separate relief systems for larger and smaller businesses; introduce changes to how the system is administered; and introduce territoriality requirements to make the reliefs more targeted. A government response to the review is expected to be published this autumn.

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