BIA analysis of the Spring Statement 2022

The Chancellor made his Spring Statement yesterday announcing a raft of changes across the tax system to address the current economic conditions for people and businesses in the UK. He laid out his vision to grow the economy with a focus on capital, people and ideas, and also provided a useful update on many important areas of tax policy for the life sciences and biotech sector.

Among the key announcements for our sector were:

• R&D tax relief will continue to be claimable for R&D conducted overseas for regulatory and legal reasons (including clinical trials, as called for by the BIA), or for population or other conditions not present in the UK.
• R&D relief will be expanded to allow claims for costs related to the storage of data, supporting data-heavy research such as genomic sequencing, as called for by the BIA
• The Government is considering increasing generosity of RDEC but said nothing to suggest reducing it for SMEs or merging the two
• The Enterprise Management Incentives (EMI) scheme eligibility criteria appears not to be expanded

Below we explore the main announcements in more detail, including how they will impact our sector. 

R&D tax reliefs

We received an update on the ongoing R&D tax reliefs review, which was launched to ensure 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. (Read our submissions to the review here and here.)

The Government will include all cloud storage into the scope of the reliefs alongside other data and cloud computing costs already announced last year. This was called for by the BIA as storage is crucial for all big data R&D such as genomics. They will also allow pure maths research to be within scope of the relief.

At Autumn Budget 21, the Chancellor set out his intention to “more effectively capture the benefits of R&D funded by the reliefs through refocusing support towards innovation in the UK”, raising concerns within our sector that this could impact the many life science companies that must conduct pre-clinical and clinical trials overseas through necessity. We have held several meetings with the Treasury since that announcement and pleased to see they have listened and will allow for some narrow exemptions where it is in some way unavoidable for the R&D activity to undertaken overseas.

The government will therefore legislate so that expenditure on overseas R&D activities can still qualify where there are:

• material factors such as geography, environment, population or other conditions that are not present in the UK and are required for the research, meaning expenditure must take place outside of the UK – for example, deep ocean research.
• regulatory or other legal requirements that activities must take place outside of the UK – for example, clinical trials.

This is really welcome but it’s unclear if pre-clinical work would be covered within these exemptions. Details will be set out in draft legislation published in the summer, ensuring another chance for us to feed in further.  

In addition, the Government will consider increasing the generosity of RDEC to boost R&D investment in the UK. They say this would rebalance the schemes and make RDEC more internationally competitive. This suggests that the Treasury is not considering merging the two schemes, as was suggested in the review and to which the BIA objected, so that is welcome. 

The government is continuing the review on R&D tax credits and further announcements will be made in the autumn.

Capital allowances policy

Ahead of the end of the super-deduction next year, the Government is considering reforms to best support business investment. The Spring Statement set out some illustrations of the types of changes the Government could make to the UK’s existing capital allowances regime and will look at how reforms could best support economic growth, and ensure the UK remains a competitive place to invest.

We will be reviewing these through the lens of pre-revenue and loss-making companies, which are currently very under-incentivised to make capital investments through the tax system. In particular, we have long called for capital expenditure to be brought within the R&D tax relief scheme.

Share schemes

Last year the Treasury launched a review of the Enterprise Management Incentive (EMI) scheme after Budget 2020, to ensure it continues to provide support for high-growth companies to recruit and retain the best talent so they can scale up effectively, and to examine whether more companies should be able to access the scheme. The Government has concluded that the current EMI scheme remains effective and appropriately targeted. This is disappointing as we highlighted in our submission to the review that eligibility requirements for the scheme is unfairly excluding many biotech SMEs and their employees from benefitting. However, the scope of the review will be expanded to consider if the other discretionary tax-advantaged share scheme, the Company Share Option Plan, should be reformed to support companies as they grow beyond the scope of EMI. We will explore what opportunities may lie there.

Skills

The Chancellor said that the Government’s ambition is to encourage greater levels of private sector investment in employee training, both for apprentices and for employees more generally. The UK corporation tax system already allows companies to deduct any costs of staff training fully from taxable profits, where this is relevant to their business. However, even though the UK tax system provides the same level of reward as in most other countries, the amount UK companies spend on training their employee remains relatively low.  The Government will consider whether further intervention is needed to encourage employers to offer the high-quality employee training the UK needs. This will include examining whether the current tax system – including the operation of the Apprenticeship Levy – is doing enough to incentivise businesses to invest in the right kinds of training.

Conclusion

There is much to welcome in the Chancellor’s updates today, especially the recognition of that R&D tax relief should continue to be claimable for activity taking place abroad for ‘regulatory and legal reasons’, and it was heartening to hear the Chancellor mention clinical trials as an example. The sector will also welcome the R&D tax credit scheme keeping a pace with innovation, with the Chancellor explaining how the scheme will now allow for claims for costs related to the storage of data and supporting data-heavy research such as genomic sequencing. The devil will be in the detail and we will be engaging with Treasury on those details drawing on our members’ tax and regulatory expertise, including continuing to push for capital expenditure within the R&D tax reliefs schemes.

The outcome of the EMI review is a more disappointing outcome and not addressing the eligibility requirements is a missed opportunity to support SMEs’ access to talent. We will continue to press for change but also seize the opportunity of the wider skills and training investment incentives review to strengthen the availability of talent for start-ups and scale-ups.

The speech and accompanying documents can be found on the Treasury website.

 

 

Dr Martin Turner
Head of Policy and Public Affairs
BioIndustry Association