A small win for Life Science companies in the Budget
We know, and the government acknowledges, that the life science sector is one of the UK’s greatest strengths.
In its early stages, a life science company may invest heavily in R&D and generate little or no revenue – it will make losses. Such a loss-making company may be eligible to claim a R&D tax credit in cash. Since 2015, companies that claim under the SME R&D Scheme have been able to access a tax credit in cash worth up to £3,335 for every £10,000 spent on qualifying R&D – a huge boost, helping to drive further investment.
In the most recent Autumn Statement, it was announced that this tax credit would be reduced radically for expenditure from 1 April 2023 – to £1,860 per £10,000 of qualifying R&D. It seems the government has listened to strong representations from us, our profession, and the life science industry – why damage such an important sector? In the Spring Budget there was some good news. While there will still be a reduction, this reduction will be far less severe for “R&D intensive companies”.
All my comments below come with the caveat that the legislation bringing in these changes is not out yet – and will not be until the summer at the earliest. We therefore cannot say with certainty exactly this relief will work.
It has been announced that R&D intensive companies claiming under the SME R&D scheme will be able to access a tax credit worth up to £2,697 per £10,000 of qualifying R&D expenditure – significantly more than the standard rate of £1,860 per £10,000 of qualifying R&D expenditure.
The impact for a loss-making company is summarised in the table below:
|Before 1 April 2023
|After 1 April 2023
|After 1 April 2023 (R&D intensive)
|Qualifying R&D expenditure (SME scheme)
|R&D tax credit cash received
What is a R&D intensive company?
SMEs will qualify for the higher tax credit if they have an R&D intensity of 40% or above in a period.
R&D intensity will be calculated as the ratio of a company’s qualifying R&D (under both the SME and RDEC schemes) for a period to its “total expenditure” for the same period.
Broadly, total expenditure will consist of total revenue expenditure, including revenue expenditure capitalised as an intangible asset, less any expenditure disallowed for corporation tax purposes.
Where a company is in a 51% group, the R&D intensity calculation will be based on the qualifying R&D and total expenditure of the group as a whole – the idea behind this is to prevent manipulation of the intensity ratio.
This won’t help everyone, but it is likely to help a lot of small companies in the life science sector.
An example R&D intensive company, claiming under the SME R&D scheme
At the margins, where a company is near that magical 40% intensity, additional R&D investment may save the company money. I have set out an example below, where you can see additional R&D expenditure of £10,000 in example 2 actually reduces the company’s net expenditure.
|Cash tax credit receivable
|Net total expenditure
A R&D intensive company will only be able to claim the more generous tax credit once legislation is in place. A company will have to either submit a claim at the less generous rate, then an amended claim once the legislation is enacted, or delay making a claim. We are not able to say when the legislation will be enacted.
Another piece of good news – R&D relief for overseas expenditure
Previously, it had been announced that for accounting periods beginning on or after 1 April 2023, R&D relief would only be available, with limited exemptions, for subcontracted R&D and contributions to independent research where these activities take place in the UK, and for payments to externally provided workers where these workers are paid through a UK payroll.
This restriction will now come into effect for accounting periods beginning on or after 1 April 2024.
If you would like further information, please get in touch with our team.
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