Spring Budget analysis: Chancellor delivers a boost for biotech
The Chancellor has revealed an enhanced R&D tax relief rate for “R&D intensive SMEs” and delayed restrictions for claims on overseas activity following the BIA’s campaign. In a Spring Budget designed to show he has a steady hand on the tiller and a plan to put wind in the UK’s sails, the Chancellor’s Spring Budget was packed full of announcements for the life sciences sector, including a funding boost for the medicines regulator and investment zones around the UK. Dr Martin Turner, Head of Policy and Public Affairs at BIA shares his reflections on key announcements in this blog.
A new enhanced R&D tax relief rate for R&D-intensive SMEs
SMEs that are investing over 40% of their total operating costs in R&D and not yet making a profit will receive a cash payment of 27p for each £1 they have invested in R&D. For all other loss-making SMEs and profitable ones, the Autumn Statement rate cut still applies.
The new R&D intensive company category is a highly effective way to incentivise truly innovative businesses taking significant financial risk by investing heavily in R&D. It will target UK taxpayer support to enable life science entrepreneurs to crowd in further private investment allowing them to grow and accelerate innovation in the UK.
The higher rate is the result of an intensive campaign by the BIA since November to ensure policymakers understood the damage the Autumn Statement cut would bring to our sector. Following two ministerial roundtables and a reassuring letter from the Chancellor before Christmas, we have worked closely with the Chancellor’s team since the New Year to inform the policy development for an enhanced rate for companies that are investing heavily in R&D to build innovative industries of the future, such as life sciences and biotech. This collaborative work will continue as the Treasury develops a new R&D tax relief scheme, a public consultation on which recently closed.
The Research & Development Expenditure Credit (RDEC) will still increase from 13% to 20% from 1 April 2023, as announced at the Autumn Statement.
A technical note setting out eligibility for the new enhanced rate was published alongside the Spring Budget. Our press release contains BIA CEO Steve Bates’ reaction to the news along with other leaders from our sector.
Overseas restrictions for R&D claims delayed
The Spring Budget document also announced that the new rules restricting claims for overseas activity will be delayed by a year. They were meant to come into effect on 1 April 2023 and would have hit companies' claims, so this is great news.
Through close engagement with Treasury and HMRC, BIA has secured several exemptions to allow certain overseas expenditure to continue to qualify for R&D relief where it would not be possible to do this activity in the UK. This includes medical factors such as incidence of a disease or availability of volunteers to trial a drug or other medical treatment and the availability of facilities a company may require.
Despite the exemptions, we still had big concerns about the new rules being brought in so quickly and we asked for a delay, so today’s news is very welcome.
New capital allowances to incentivise investment
The main rate of corporation tax will still rise to 25% for financial year 2023, but new capital allowances will be brought in, which will offset that for many profit-making companies.
In 2021, the Government introduced the super-deduction to go further to encourage companies to invest. This was due to end on 31 March 2023. The Government is now introducing full expensing, a 100% First Year Allowance, from 1 April 2023 until 31 March 2026. This means that companies across the UK will be able to write off the full cost of qualifying main rate plant and machinery investment in the year of investment. Companies investing in special rate (including long life) assets will also benefit from a 50% first-year allowance during this period.
This is broadly in line with BIA’s recommendations submitted to Treasury last year. We also continue to call for capital expenditure to be included in the R&D tax relief scheme so that loss-making companies can receive a cash incentive to make capital investments.
MHRA receives budget boost and will fast-track approvals
The Spring Budget provides an extra £10 million funding for the Medicines and Healthcare products Regulatory Agency (MHRA) over the next two years to accelerate patient access to treatments. This was an interim recommendation of Sir Patrick Vallance’s review on pro-innovation regulation.
The Government said MHRA is exploring partnerships with trusted international agencies, such as in the US, Europe and Japan, to provide simple, rapid approvals for medicines and technologies that have received their approval from 2024. The MHRA will also have a fully operational swift approval process in place from 2024 for the most impactful new medicines and technologies - such as cancer vaccines and AI therapeutics for mental health.
The extra budget is very welcome but the agency has a big task ahead in establishing an international recognition framework at the same time as developing a thorough but shortened approval process. To help, the MHRA now needs immediate freedom to recruit, train and inspire world leading regulatory scientists.
Consultation and capital to unlock pension funds
The Spring Budget document provides an update on the Long-Term Investment for Technology and Science (LIFTS) initiative, initially announced at Kwasi Kwarteng’s “mini-budget” to unlock pension funds. The Government has published an invitation to provide feedback on the LIFTS proposals, which include the potential for government investment into successful bids, as well as potential investment collaboration with British Patient Capital, leveraging its investment capabilities and market access.
The Budget also extends the British Patient Capital programme for a further 10 years until 2033-34 and increases its focus on R&D intensive industries, providing at least £3 billion in investment. This extension, and the agreement in principle to recycle BPC’s capital to fund new investments, gives the Bank the certainty to plan for the future and means more high potential companies will be able to access the long-term, patient capital they need to scale up.
A significant barrier to pension funds investing in venture capital is that many are too small to have or build the expertise to allocate to the asset class. Whilst the natural growth of the new generation of Defined Contribution (DC) Pension Funds will in time address this, the UK has too many sub-scale pension schemes. We’re therefore encouraged by the Spring Budget’s announcement that there will be an accelerated transfer of the £364 billion Local Government Pension Scheme assets into pools to support increased investment in innovative companies and other productive assets. The government will shortly come forward with a consultation. The Spring Budget also said there would be more work done to improve the functioning of the London stock market but details will come later this year.
Supporting innovation in key regions
The rail line joining Oxford and Cambridge is rightly highlighted in the Spring Budget as a key piece of infrastructure for life sciences. It says in May the Government will confirm the route for the new Bedford-Cambridge section, and will provide capacity funding to support local authorities to develop their plans for strategic economic growth around new stations.
It also says that, following the recent National Planning Policy Framework consultation, the Government will set out further details for growing the provision of lab space “in due course”. Companies’ and developers’ concerns about the lack of lab space supply has gained traction across government in recent months so we will be watching this with interest.
The Government will also create 12 new investment zones across the UK to supercharge growth in hi-tech industries, including life sciences.
The Government said the scheme, backed by £80m of investment over five years in each of the new high-growth zones based around universities, is designed to accelerate research and development in the UK's "most budding industries".
Eight areas in England have been shortlisted - the East Midlands, Greater Manchester, Liverpool, the North East, South Yorkshire, the Tees Valley, the West Midlands and West Yorkshire.
The Government is also in discussions with the devolved administrations over how investment zones can be established in Scotland, Wales and Northern Ireland. The Chancellor said there would be at least one in each.
EMI share options made easier
The responses to the Treasury’s consultation on Enterprise Management Incentives (EMI) was published alongside the Spring Budget. The Government will legislate in Spring Finance Bill 2023 to make simplifications to the process to grant EMI options. The requirement for a company to set out details of share restrictions within the option agreement and the requirement for a company to declare an employee has signed a working time declaration will be removed.
The Chancellor’s rapid reaction to the collapse of Silicon Valley Bank over the weekend and now his tax relief boost for R&D-intensive SMEs show he is committed to science, innovation and technology as the core of his plan for growth. The creation of a dedicated department further shows we’re at the heart of government strategic thinking. With tight public finances and a cost of living crisis, the Chancellor had a lot of demands to juggle but this Spring Budget delivered in a number of areas for life sciences.
With so much announced – some of which we have probably missed in this blog – it will take some time to unpick and understand the value of all the initiatives. Join our webinar at 4pm on 16 March as we begin that process.
All Spring Budget documents and the Chancellor’s speech are available on the HM Treasury website.