Out-Law News 2 min. read

UK Budget 2021: R&D investment and tax reliefs positive for life sciences sector

A commitment to review the R&D tax relief system to ensure that tax reliefs remain competitive and well-targeted and the launch of a new fund targeting R&D intensive companies will be welcomed by the life sciences sector, a tax expert has said.

Penny Simmons of Pinsent Masons, the law firm behind Out-Law, made the comments following the UK chancellor Rishi Sunak’s budget on Wednesday.

The government will review the R&D tax reliefs system "with the objective of ensuring 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", according to Sunak.

Simmons said: "The government has set itself the target of raising total investment in R&D to 2.4% of UK GDP by 2027. Tax reliefs for R&D are widely seen as being a significant incentive to encourage such investment, so it is welcomed that the Treasury now wants to ensure that the reliefs remain effective. The UK life sciences sector invests in more R&D that any other UK sector, so any improvement or widening of tax reliefs will be positively received."

"The review is wide-ranging and will consider a number of aspects, including whether the definition of what qualifies as R&D should be expanded; whether the current rates are effective and whether there should continue to be different rates available for larger and smaller businesses," she said.

There are currently two forms of R&D tax reliefs available to companies on certain qualifying expenditure. A research and development expenditure credit (RDEC) at 13% of qualifying expenditure is available to larger companies. A separate regime for small or medium sized companies (SMEs) allows them to claim an additional deduction of 230% of qualifying R&D costs where certain conditions are met.

There is currently no requirement that to qualify for R&D tax relief expenditure must take place in the UK. The Treasury is now looking to understand when R&D tax reliefs are being claimed, how much of the claim relates to activity undertaken outside the UK and what the benefits of carrying out activity overseas might be.

Simmons said: "The government has been very clear that it wants to maintain the UK’s position as ‘a global leader in science and innovation’ and it wants to ensure that R&D tax reliefs are appropriately targeted in a way that best benefits UK industry, so it will be interesting to see whether jurisdictional limits are imposed as part of the review."

A cap to the available R&D tax reliefs for SMEs to prevent perceived abuse of the system was also confirmed in the budget. The amount of R&D tax relief that can be claimed per year will be capped at £20,000 plus three times the company’s total PAYE and national insurance contributions’ liability and will apply for accounting periods beginning on or after 1 April 2021. 

The chancellor also confirmed the creation of a new funding programme called 'Future Fund: Breakthrough', through which the government will provide £375 million "to support the scale up of the most innovative, R&D intensive businesses". The scheme will be overseen by the British Business Bank which "will take equity in funding rounds of over £20 million led by private investors to ensure these companies can access the capital they need to grow and bring prosperity to communities across the UK", the Treasury said.

A review into the Enterprise Management and Incentive (EMI) scheme, a tax-advantaged employee share scheme was also announced by the chancellor. The review will consider the effectiveness of the scheme in supporting SMEs "to recruit and retain the key talent they may need to grow and scale up".

Simmons said: "The life sciences sector will be relieved that the budget did not include changes to capital gains tax that could have negatively impacted the effectiveness of the EMI scheme. The EMI scheme is seen as a valuable tool for life science businesses to use to attract and retain employees, so the sector is likely to take a keen interest in engaging with the Treasury on future changes."

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