Have you considered the impact of the upcoming R&D changes to your life sciences business?
R&D tax incentives are often an essential source of liquidity for early-stage life sciences businesses, not just a ‘nice to have’. With this in mind, are you aware of the key changes impacting the sector?
1. PAYE cap
HMRC guidance states there are exemptions to the cap if both of the following two criteria are met:
- company employees were creating or managing the IP; and
- no more than 15 per cent of the qualifying expenditure in the period is undertaken by connected parties.
However, the changes may still have an impact on companies with high levels of R&D expenditure but comparatively low payroll costs.
2. Overseas R&D restriction, ‘buy British’ changes
For accounting periods beginning on or after 1 April 2023, relief will not be available for expenditure incurred overseas on subcontracted R&D or payments to workers based outside of the UK.
Limited exemptions will be available, but these will be focussed on circumstances where R&D must take place outside the UK out of necessity, rather than convenience or preference. Payments to clinical trial volunteers will remain eligible for relief.
3. Enhanced compliance demands for information in R&D claims submissions
As anticipated, more mandated guidance on information to be included within R&D claims submission has been included in draft legislation, again to take effect from 1 April 2023, to include: digital submission, added detail regarding the eligible activities, and confirmation of both the agent involved, and the company officer responsible.
4. Early notification for first time claimants
A key change that will impact businesses that are either first time claimants, or haven’t made an R&D claim in the past 3 years, is the requirement to notify HMRC within 6 months of the end of the accounting period of their intention to submit a claim. This means businesses can no longer rely on the traditional 2 year claims window, and must take conscious action much earlier to avoid a claim being invalidated.
Reactions from life sciences businesses
Our recent roundtables series highlighted the following reactions from the sector:
- R&D taxes are seen as an essential source of liquidity for early-stage life sciences businesses.
- Concerns were raised on the changes to overseas R&D, especially where this is necessary for regulatory reasons, such US trials for FDA approval.
- Often all the supporting information needed already exists, albeit in the format of technical papers for the Board, development summaries etc, and has the potential to be repurposed. Future claims submissions then become easier to replicate once the process is in place.
- Despite these changes, there was consensus that the UK is still seen as an attractive base, when combined with the patent box tax regime, favourable treaty network and a generally benign corporate environment.
How can life sciences businesses prepare for the changes?
- Review your existing structure and where there may be scope to optimise for these new rules, within commercial parameters. This may include whether to bring consultants ‘on-payroll’ and a wider assessment of your global supply chain.
- Consider the impact of these changes on your cashflow projections to avoid any unwanted surprises.
- Review your existing claim preparation process, and how this can be enhanced in preparation for the increased disclosure requirements.
- Don’t overlook the wider tax considerations relating to R&D, including transfer pricing policies and documentation, and current or future availability of patent box tax relief.
What’s your view?
Our Innovations Reliefs team is in ongoing dialogue with HMRC about these changes. Get in touch with me to share your views on how this will impact your life sciences business.
James Tetley
Partner, Innovation reliefs
T: +44 (0)23 8064 6406
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