Autumn Budget 2017 analysis
The Chancellor today delivered his first Budget of the current government by saying that “the UK is on the brink of a technological revolution” and promising to “invest to secure a bright future”. Among the announcements is the outcome of the Patient Capital Review, which will deliver a £20bn package over the next 10 years to support investment in innovative UK companies.
Outcome of the Patient Capital Review
The Patient Capital Review was launched by Hammond a year ago and has been looking at how to increase access to finance, and especially long-term investment, for innovative growing companies. The BIA has prepared a background briefing to the review and you can read our full submission here.
The outcome of the review has been hotly anticipated by the bioscience sector. The key announcements, many of which the BIA has called for, are:
Tax relief changes:
- Doubling the annual allowance for people investing in knowledge-intensive companies through the Enterprise Investment Scheme (EIS) to £2 million
- Doubling the annual investment that knowledge-intensive companies can receive through the EIS and Venture Capital Trusts (VCT) to £10 million. Both these changes will be effective as of April 2018 and already have State Aid clearance.
- Introducing further flexibility for these companies over how the 10-year maximum company age test for the first investment is applied
- The Treasury will introduce a test to prevent investments in low-risk companies through these schemes, potentially targeting that money to truly innovative sectors
- The R&D expenditure credit is to be increased to 12% (from 11%), which will benefit companies that have received R&D grants from the government and larger companies (SMEs already enjoy a 33% rate)
- Founding shareholders will be able to keep their relief on capital gains made during the period that they held over 5% of company shares before being diluted during funding rounds. The details will be consulted on next year.
- A £2.5bn fund will be established in the British Business Bank (BBB) to invest in innovative companies, this will be a co-investment fund with private finance and will be floated or sold once it has a proven track record
- A series of funds of funds will be established with a first £500m tranche invested through the BBB and then at least a further two similar investments over the next 10 years
- First-time and emerging fund managers will continue to be supported through the British Business Bank’s existing Enterprise Capital Fund programme
- A new knowledge-intensive EIS approved fund structure will be consulted upon, with further incentives provided to attract investment. This could achieve the ambitions of the BIA’s Citizens’ Innovation Funds
- The government stands “ready to step in to replace EIF funding if necessary”
- The Pensions Regulator will provide clarity around the ability of pension fund managers to invest in venture capital and innovative companies
- The government will address barriers holding back Defined Contribution pension savers from investing in illiquid assets, such as private companies
These announcements reflect many of the calls that the BIA made in its submission to the Patient Capital Review, including targeting investment tax reliefs to Knowledge Intensive Companies – which is a legal definition that works well for the BIA membership – and increasing the fundraising limits. The multi-pronged approach to making government investments in venture capital through the BBB and other routes is also welcome and one that the BIA advocated for, as are efforts to encourage pension fund investment.
The full government response to the Patient Capital Review can be found here and the Treasury has also produced a short summary of the conclusions. The full response suggests a number of other possible further actions that could be taken and the BIA will continue to work closely with the Treasury to explore these.
The Chancellor announced an additional £2.8bn for the NHS “to improve NHS performance and ensure that more patients receive the care they need more quickly.”
Public investment in science and innovation
There was no new announcement of public investment in science and innovation but on Monday the Prime Minster reaffirmed the Conservatives’ Manifesto commitment to raise the UK’s public and private R&D investment to 2.4% of GDP by 2027 with an announcement that the government will spend £2.3bn extra on science and innovation in 2021/22. That cash helps keep the trajectory of public investment roughly on target, but private investment will also have to rise, which is where today’s Budget announcements, and particularly the Patient Capital Review outcome, will have an impact.
Some of the policies announced today will be voted on by MPs in the post-Budget debates over the next few days, while others will be implemented through the Finance Bill 2018, which will be published imminently. The government’s majority is slim but the measures described above should attract cross-party support.
We are also expecting the government’s Industrial Strategy white paper to be published on Monday, which will complement the Patient Capital Review with broader policies to supporting innovative industries through innovation and skills, including potentially more information on how the approx. £1bn Industrial Strategy Challenge Fund will be used.
All Budget documents can be found here. This blog is a quick first roundup of the key announcements and will be analysing all the documents carefully to assess the full implications for our sector and will publish further analysis if necessary. The BIA’s Finance and Tax Advisory Committee will also be discussing the implications and our next steps on 14 December.