Budget 2018 Analysis
For UK life sciences, yesterday’s Budget was short on big announcements but packed full of nuanced measures that could have a significant impact on BIA members. Below is our take on them all.
British Business Bank to work with pension funds to unlock patient capital
The Chancellor announced in the red book accompanying the Budget statement that the government is convening some of the UK’s biggest defined contribution pension schemes to explore options for pooled investment in patient capital. The British Business Bank will lead the work, which includes Aviva, HSBC, L&G, NEST, The People’s Pension, and Tesco Pension Fund.
This follows last year’s Patient Capital Review and is something the BIA has been calling for in conversations with the government and the British Business Bank in the past year. With total assets under management expected to exceed £1 trillion by 2025, defined contribution pension schemes could be significant source of capital for scaling BIA members, which in turn will provide the financial growth pension savers need.
The BIA enjoys a good relationship with the British Business Bank senior leadership and we look forward to working with them on this project in the coming year to ensure our sector is able to access the new capital. We have also engaged investor relations company Radnor to help us engage directly with asset allocators to promote investment opportunities in our sector, which will complement the bank’s work.
The government also provided more detail on planned regulatory consultations to address possible barriers to pensions investment. This includes the Financial Conduct Authority looking at how effectively the UK’s existing fund structure regime enables investment in patient capital.
Update on implementation of the Patient Capital Review
Staying with the Patient Capital Review – which last year provided a £20 billion package of measures to increase long-term investment in innovative firms – the Treasury published a one-year-on update on its implementation. Whilst many of the measures are bedding in, it’s a useful summary and shows welcome action from government on this critical issue for our sector. The BIA’s own finance data shows a shows that £927 million venture capital has been raised to date in 2018, compared to £515 million in 2017.
The Treasury has responded to its consultation on a new Knowledge Intensive EIS Fund structure, committing to implement the measure. Some of the BIA’s proposals have been adopted, including allowing two years for funds to deploy capital, which will allow for better selection of companies. In our view, the new fund structure is welcome and could increase investment into some types of life science companies but will not provide the long-term investment many others need, especially those developing therapeutics.
Proposed changes to R&D Tax Credits
The Chancellor announced that, “to help prevent abuse” of the payable R&D tax credit, from 1 April 2020, the amount of credit that a qualifying loss-making company can receive in any tax year will be restricted to three times the company’s total PAYE and NICs liability for that year.
This is a concern to the BIA as it could mean many small bioscience companies, especially those that outsource R&D, could see their cash credits capped. It reintroduces a cap abolished in 2012 but is three times higher than before, which is a small positive. Companies will still be able to claim payable credit up to the cap with any unused losses carried forward to be set against future profits. The government says it recognises the dangers and will consult on the measure in the spring “to minimise any impact on genuine UK businesses”. The BIA will be engaging with Treasury officials immediately to ensure that the sector is not penalised for the abuse of the system that is occurring in other sectors.
Changes to Entrepreneurs’ Relief
The government has said that it is going ahead with changes to Entrepreneurs’ Relief announced earlier this year. As the Chair of the BIA’s Finance and Tax Committee, Colin Hailey, wrote on our blog recently, the changes will do nothing to address the BIA’s long-argued problems with the regime and may be in fact unworkable. You can read the BIA’s formal submission to the consultation here. In addition to what has previously been announced, from 6 April 2019 the minimum period throughout which the qualifying conditions for relief must be met will be extended from 12 months to 24 months. This is intended to prevent abuse but will have an impact on legitimate founders in our sector and employees with Enterprise Management Incentive (EMI) shares. However, it’s worth noting that for EMI this period will begin once the option is granted to the employee, regardless of when they exercise their right to purchase the shares and sell them.
Furthermore, starting immediately, a new "economic test" has been introduced requiring shareholders to be entitled to at least 5% of distributable profits and net assets of the company (in addition to holding at least 5% of the ordinary share capital when tested by nominal value and 5% of the voting rights). This won’t impact EMI holders but blocks long standing ER planning techniques which involved creating a new class of share with less than 5% economic rights but which still satisfied the tests.
Update to the intangible fixed assets regime
In early 2018, the government conducted a consultation on how the tax treatment of acquired intangible assets could be made more competitive and administrable. The government will seek to introduce targeted relief for the cost of goodwill (the amount paid for a business that exceeds the fair value of its individual assets and liabilities) in the acquisition of businesses with eligible intellectual property from April 2019. With effect from 7 November 2018, the government will also reform the de-grouping charge rules, which apply when a group sells a company that owns intangibles, so that they more closely align with the equivalent rules elsewhere in the tax code. These are both welcome and address issues raised by the BIA in its response to the consultation.
Support for investment in buildings & facilities
The government will increase the Annual Investment Allowance to £1 million for all qualifying investment in plant and machinery made on or after 1 January 2019 until 31 December 2020, to help stimulate business investment during the Brexit period.
Corporation tax reductions still on course
The Chancellor has not changed course on George Osborne’s promise to bring UK Corporation Tax down to 17% by 2020. It’s currently 19%, already very competitive compared to other advanced economies.
More money allocated to the Industrial Strategy Challenge Fund
The government reiterated its commitment to increasing both public and private investment in R&D to 2.4% of GDP. It added £7 billion to the National Productivity Investment Fund to extend it to 2023-24. This designates funding that will likely be used – in part – to continue the upward trajectory of public research and innovation budgets.
Within that upward trajectory, the Budget added another £1.1 billion to the Industrial Strategy Challenge Fund (ISCF), possibly indicating the size of the Wave 3 challenges pot and bringing the total allocated so far to the ISCF to just over £2.8 billion. The BIA has supported a number of bids in Wave 3 and we are expecting the outcome to be announced later this year.
The Budget also confirmed £155 million to be split between the Medicines Discovery Catapult and Digital Catapult, which has centres across the country.
Clarity around the NHS budget boost
In June, the Prime Minister announced £20.5 billion more a year in real terms for the NHS by 2023-24, an average real growth rate in the NHS’s budget of 3.4% a year; taking the NHS budget from £114.6 billion in 2018-19 to £147.8 billion in 2023-24. The Budget sets out that this spending will take the form of an extra £7.3 billion in 2019-20, £11.1 billion in 2020-21, £16 billion in 2021-22, £21.4 billion in 2022-23 and £27.6 billion in 2023-24.
The NHS has agreed to come forward with a new long-term plan by the end of the year, and the government will confirm the final settlement consistent with that plan, and the £20.5 billion real terms increase by 2023-24, by Spending Review 2019.
Help for companies to promote apprenticeships
The government will introduce a package of reforms to strengthen the role of employers in the apprenticeship programme. As part of this the government will enable levy paying employers to transfer up to 25% of their funds to pay for apprenticeship training in their supply chains, which is welcome for our sector where collaboration between large and small life science companies is common. The government will also halve the co-investment rate for apprenticeship training to 5% for smaller companies.
Preparing for Brexit
The Chancellor said that the Budget is based on the assumption of a negotiated Brexit and so he retains the option to hold an emergency Budget should the result of the Brexit negotiations change the economic circumstances. He suggested this would take the form of a Spring Budget.
However, the Budget does go so far as to say that if no future relationship is in place with the European Investment Bank Group before the UK leaves the EU on 29 March 2019, the government will provide the British Business Bank with the resources to enable it to make up to £200 million of additional investment in UK venture capital and growth finance in 2019-20.
The Chancellor has also put an additional £500 million in reserve for 2019-20, meaning the government will have invested over £4 billion in preparing for the EU exit since 2016.
With the Brexit negotiations it is hard to predict what’s next, but the Chancellor and many others hope this was the last Budget before we leave the EU. However, in his Statement, the Chancellor did reserve the right to upgrade the Spring Statement to a full Fiscal event if necessary.
The Spending Review 2019 will start in earnest now, with much of the formal process emerging in the spring. The BIA is already preparing for this and will be making the case for our sector as the government determines it’s spending priorities.
A number of measures in this Budget also require further engagement with government on and responses to consultations, which will be led by the BIA’s Finance and Tax Advisory Committee.
If you have any questions or comments about anything above, please do not hesitate to contact us – [email protected].