An update on changes to R&D tax reliefs

The Government is changing how R&D tax relief can be claimed for activity conducted overseas. Richard Turner, Senior Managing Director of FTI Consulting and member of the BIA Finance and Tax Advisory Committee, provides an update for BIA members on the changes being made to help them plan for the rule changes. 

The Treasury first announced plans to “refocus R&D tax reliefs on innovation in the UK” in autumn 2021 and since that time, BIA has been working to raise concerns about the impact such changes could have on UK life science SMEs and discuss potential mitigations with government officials.

Following the release of the draft legislation, we have been supporting BIA in submitting a detailed response and had a further meeting with HMRC to discuss some of our key questions.  We have set out below our latest understanding but do please note that this is likely to change as HMRC continues to evaluate feedback around the design and application of these new rules. 

What we understand so far

• The bar for qualifying overseas R&D (which you will still be able to claim credits for) has been deliberately set high such that it can only be included if it would be ‘wholly unreasonable’ to replicate it in the UK
• The proportion of R&D undertaken overseas will be relatively much higher in Life Sciences than in other industries. HMRC’s new online R&D submission gateway will require the amount of overseas R&D being claimed to be disclosed. Therefore, the need for good support and evidence will be paramount in the early years until appropriate precedents are established.
• Recent discussions with HMRC suggest that claimants will not, necessarily, need third-party evidence to support the inclusion of overseas R&D. However, this would be recommended for larger and more costly engagements with suppliers. 
• It will be necessary to have knowledge/evidence of where a company’s suppliers have undertaken their activities.
• HMRC had, until recently, developed an understanding that the principal reason that clinical trials are undertaken overseas was because of regulatory requirements. We have explained that the primary reason is more generally the availability of patients and that while regulatory requirements are key, they do not necessarily mandate where the trials are performed. 
• Examples of valid conditions (or the absence in the UK thereof) to support qualifying overseas R&D could include: i) The scientific/technical capability does not exist in the UK or the scientific/technical capability does exist in the UK but there is no capacity within a reasonable timeframe; ii) Lack of patients iii) Regulatory requirements that, if not fulfilled, could compromise the ability to obtain approval. Please note that this is by no means exhaustive but hopefully useful in understanding where boundaries are forming.
• In the BIA’s response to the draft legislation, they have requested:
  • The inclusion of ‘medical’ and ‘technical expertise’ as stated conditions.
  • The removal of the qualification legal and regulatory conditions such that the implication is that these can only be taken into account where they prevent R&D from being undertaken in the UK.
  • The inclusion of a transitionary provision such that contracts entered into before a specified date are not caught by the new rules (see below). 
  • Early release of HMRC guidance supporting the application of the new rules.

A fundamental question in relation to clinical trials is whether companies must first try to recruit patients in the UK to allow the costs relating to the overseas sites to be included. We are exploring whether, alternatively, companies can use hindsight and limit their claim in proportion to the number of patients that could not realistically have been recruited in the UK. In this way, there would be less need to change the approach to trial design and procurement. 

Current procurement

We realise that companies are currently entering into arrangements that will extend into periods caught by the new rules. In order to assist companies in requesting contractual obligations to enable this, we have set out the framework below to be used with service providers. Through BIA, we would be very keen to work with you to develop this further. 

1. For each element of the engagement, we will provide a detailed breakdown of activities that fall within:
   • Category A: Services that will be performed in the UK
   • Category B: Services that must be performed outside the UK (for reasons other than cost or available personnel resource) and cannot be replicated in the UK
   • Category C: Services will be performed outside the UK but cannot be included under Category B
   • Category D: Supply of materials, software, data and payments to trial participants
2. For elements in Category B we will work with the customer to provide objective evidence to support their categorisation.
3. We will implement change management procedures such that any elements moving from Categories A or B to Category C, during the engagement, will be notified in advance and will be discounted by at least [11%].
4. Items under Category D will be provided under a separate contract and invoiced separately.

Next steps and request for information

With the timing of the next fiscal event uncertain, it is not currently clear when the updated legislation and guidance will be published. 

BIA will continue to work with HM Treasury and HMRC to minimise the impact of the changes on the life sciences sector. To help us in this, we are asking members for case studies and questions on how you will apply the rules; HMRC have requested that we share examples where there is a lack of clarity in the application of these new rules. And we are making a case for a transitional provision. For this, we are looking to highlight examples where companies are already locked into or negotiating contracts that will into periods covered by the new rules. We need plenty of examples. 

We would be grateful to BIA members and other life science companies for the following feedback:

• Do you have contracts already in place with suppliers (CROs, CMOs, CDMOs) that are likely to extend into the periods covered by the new rules on overseas R&D? Or are you likely to be entering into such contracts before the end of the year?
• If yes, please can you give a rough estimation of the contractual value?
• Do you expect the supplier to be in a position to provide you with information regarding where the activities have been undertaken and whether those activities could have been reasonably undertaken in the UK?

Please submit any feedback to Martin Turner, Head of Policy and Public Affairs at the BIA.

We will keep BIA members updated as things progress. You can learn more about the proposed changes on BIA’s webinar hosted in July 2022.

The views expressed are those of the author and not necessarily the views of FTI Consulting, its management, its subsidiaries, its affiliates, or its other professionals.