2023 Spring Budget Analysis: Life Sciences
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mars 15, 2023
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In what was another Budget in which life sciences was a key focus, there were a number of positive announcements for the sector including accelerated approvals through the Medicines and Healthcare products Regulatory Agency (“MHRA”). The most significant tax measure is the introduction of an enhanced credit for R&D-intensive loss-making small and medium-sized enterprises (“SMEs”) to mitigate the impact of the falling credit rates for expenditure from 1 April 2023.
Another announcement that will be broadly welcomed is the delay in the introduction of the restriction of overseas R&D, notwithstanding that many will have already invested time in preparing for this change. Here we present an overview of the measures most likely to be of interest to UK life sciences companies, and offer our view on each proposal.
We are anticipating draft legislation early in the summer, and hope that this results in a new regime that puts the UK unquestionably ahead in its competitiveness for being the location of choice for ground-breaking and lifesaving life sciences R&D.
Research and Development Tax Incentives
The Spring Budget covered updates to previously announced changes to the R&D tax relief regimes set to come into effect for accounting periods starting on or after 1 April 2023 and introduced a more generous rate of relief for research intensive companies. There were no updates given in relation to the proposed merging of the SME and R&D Expenditure Credit (“RDEC”) schemes, which is still in consultation phase.
The announcements and changes around R&D tax incentives were as follows:
R&D Intensive Companies
There will be a research intensity threshold brought in to provide an increased rate of relief for loss-making R&D intensive SMEs. For expenditure incurred from 1 April 2023, eligible companies will be able to claim £27 from HMRC for every £100 invested in qualifying R&D. To be eligible for the relief, expenditure on qualifying R&D must represent at least 40 percent of all expenses incurred by the group for the period with adjustments to avoid double counting capitalised R&D. Further details on the calculation may be released and updated in due course.
FTI Consulting Comment:
The Chancellor’s confirmation of additional financial support of up to 27p/£ for research-intensive technology and life sciences companies is very welcome and a vital step forward, but is still less than the 33p/£ they were previously entitled to. The uplift will be implemented through maintaining the payable credit rate at 14.5 percent (where it is 10 percent for non-qualifying companies). The rate of additional deduction will remain at the previously announced 86 percent for both research-intensive companies and those who do not qualify as such.
Restriction on Overseas R&D Activities
The planned restriction for R&D activities undertaken outside the UK has been pushed back a year, and will now come into force for accounting periods starting on or after 1 April 2024 subject to the outcome of the consultation on merging the SME and RDEC schemes. There were no changes to the conditions to be met to claim for qualifying overseas expenditure
FTI Consulting Comment:
We welcome the deferral of the restriction for overseas R&D activities as this provides companies, in particular, SMEs, with greater time to plan and arrange their sourcing of R&D services accordingly. The impact of this restriction will need to be considered for companies expecting to be eligible under the R&D intensity threshold. This measure may also become of greater relevance to RDEC claimants if sub-contract expenditure is brought into a merged regime.
Additional Information Form
The requirement for companies to submit an ‘Additional Information Form’ along with its R&D tax relief claim will now be effective for all claims and amended returns submitted or after 1 August 2023. Previously, this only applied for accounting periods starting on or after 1 April 2023. Companies will now need to provide additional details in relation to the claim which includes, amongst other disclosures:
- The amount claimed as qualifying indirect activities (“QIAs”);
- Number of projects claimed and a written overview of a minimum number depending on the number of projects being undertaken;
- PAYE reference for any externally provided workers included in the claim; and
- Each claim will need to be endorsed by a named senior officer of the company.
First time R&D claimants, or claimants who have not made an R&D claim in any of the previous three calendar years, must make a formal notification within six months after the end of the period of account that includes the relevant accounting period.
FTI Consulting Comment:
The measures announced to counter abuse will be helpful, but fall short of properly tackling the issue of boundary pushing which we hope will be addressed under the new regime currently being consulted on.
Extending Qualifying Expenditure
As announced previously, companies will now be able to include datasets and cloud computing costs in their R&D tax relief claims for accounting periods starting on or after 1 April 2023.
FTI Consulting Comment:
We welcome the inclusion of datasets and cloud computing as qualifying expenditure. It is worth noting that data will only be eligible if it is licensed and not acquired outright. Furthermore, if the claimant has rights to sublicence the data, even if not exercised, the expenditure cannot be included.
Capital Allowances
The Chancellor has announced the introduction of “full expensing” for three years from 1 April 2023, allowing companies to write off the full cost of qualifying plant and machinery expenditure in the year in which the investment is made.
The Budget report suggests that this change “will mean that the UK has the joint most generous capital allowance regime in the OECD with a Net Present Value (NPV) of 100 percent”. The net estimated cost to the Treasury is £27 billion from 2022-23 to 2027-28, or £9 billion per year.
First Year Allowances
The introduction of “full expensing” is essentially a rebranding of the first-year allowances (“FYA”) introduced in Finance Act 2021 within the existing framework in Capital Allowances Act 2001 (“CAA 2001”). A 100 percent FYA will be available for main pool plant and machinery, and a 50 percent FYA will be available for special rate pool plant and machinery, including long-life assets.
- The FYA will be available for expenditure incurred from 1 April 2023 to 31 March 2026, although the Government plans to make the change permanent when it is financially prudent to do so. The Budget publications do not state whether or not the allowances will only be available for expenditure under contracts made on or after 15 March 2023, pending publication of the Finance Bill legislation on 23 March.
- The general exclusions applicable to FYA mean that expenditure on assets for leasing and cars will not qualify, although as in Finance Act 2021, FYA will be available for leases of background plant and machinery.
- Where FYA is claimed and a company sells the asset, a balancing charge must be brought into account equal to the disposal proceeds, again mirroring the Finance Act 2021 provisions.
Annual Investment Allowance
From April 2023, as previously announced, the Annual Investment Allowance (“AIA”) for plant and machinery will be permanently set at £1 million, simplifying the tax treatment of capital expenditure for 99 percent of businesses.
The rules that applied to “straddling periods”, i.e., accounting periods that began before and ended after one of the frequent changes in the amount of AIA and had the potential to cause further complications, will be repealed.
FTI Consulting Comment:
The effective continuation of the FYA regime introduced in 2021 will be welcomed by businesses. Although the super-deduction at 130 percent has been replaced by an FYA at 100 percent, the post-tax saving of £25 per £100 of expenditure remains unchanged because of the increase in the corporation tax rate from 19 percent to 25 percent. Indeed, the post-tax saving for 50 percent FYA expenditure has increased by over 30 percent.
The changes will be of less benefit to loss making businesses, who will have to consider whether to claim FYA in the year the expenditure is incurred, or to treat the expenditure as additions to capital allowance pool and claim allowances over subsequent periods, taking into account the restrictions on carried forward losses .
Whilst the Treasury believes that “Larger businesses will benefit from full expensing for the next three years, simplifying claims and investment decisions”, this does not necessarily stand up to scrutiny. For example, the disposal rules mean that a business will have to track assets on which FYA is claimed and it is not certain that FYA will be available after March 2026.
Share Options
The following changes were announced in relation to share options.
EMI Options – Changes to Grant Process
From 6 April 2023 employers will have a slightly simplified process to follow if they grant Enterprise Management Incentive ("EMI") options to their employees:
- Employers will no longer have to set out the restrictions that apply to the shares under option within the option agreement; and
- Employees will no longer be required to sign a “working time declaration” (although the working time requirements remain).
In addition, from 6 April 2024 it is intended that the 92-day deadline for notifying the grant of EMI options to employees will be extended to the employment related securities annual return deadline of 6 July after the end of the tax year.
FTI Consulting Comment:
This appears to be a genuine simplification measure, which will be very welcome to companies that qualify to issue EMI options. EMI options are aimed at smaller employers and provide significant tax benefits but can be administratively difficult to set up and administer – these improvements will help make access to the EMI scheme more manageable.
These improvements should encourage more qualifying companies to grant EMI options and increase employee share ownership, whilst reducing the number of administrative errors that can cause issues for employers.
Company Share Option Plan (“CSOP”) Options – Previously Announced Changes
From 6 April 2023, and as previously announced, qualifying employers will be able to grant CSOP options over shares worth up to £60,000 per eligible employee (doubled from the current limit of £30,000). There is also a technical change to the type of shares over which options can be granted (removing a so-called “worth having” restriction).
CSOPs allow qualifying employers to provide share options to employees which, in the future, can be exercised without the gain being subject to Income Tax or or National Insurance contributions – representing a potentially significant tax saving for both employees and employers.
FTI Consulting Comment:
The significant increase in the value of shares over which qualifying employers can grant options will encourage companies to consider whether the generous tax benefits on offer make it worth setting up a new scheme or issuing further options under an existing scheme. For companies that previously disregarded CSOPs due to the £30,000 per employee limit, this would be an ideal time to re-visit the decision.
Those companies that faced issues due to their share classes may also want to take another look at whether CSOPs can now work for them.
Venture Capital Reliefs
Seed Enterprise Investment Scheme ("SEIS")
From 6 April 2023, companies will be able to raise up to £250,000 of SEIS investment which is an increase from the current limit of £150,000. Currently, a company raising SEIS funds must have gross assets of no more than £200,000. From 6 April 2023, the gross asset limit will be increased from £250,000 to £350,000. The business being funded by SEIS investment must currently be less than 2 years old and this will be increased to 3 years for share issues on or after 6 April 2023. The annual investor limit will be increased to £200,000 from £100,000.
Enterprise Investment Scheme and Venture Capital Trust ("VCT") Sunset Clause
In the recent Autumn Statement it was confirmed that there was an intention for the EIS and VCT tax reliefs to continue beyond 2025. Further confirmation on this is still awaited.
FTI Consulting Comment:
We welcome these changes which are designed to increase investment into the UK’s small and growing businesses. We will be requesting confirmation of a long term commitment to the venture reliefs.
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2023 Spring Budget Analysis: Corporation Tax
2023 Spring Budget Analysis: Employment Tax and Reward
2023 Spring Budget Analysis: Real Estate
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Date
mars 15, 2023
Contacts
Senior Managing Director