Important R&D tax changes affecting the biotech industry

In this article Andrew Merrison from FI Group shares his knowledge around the new rule changes HMRC has put in place concerning overseas costs in relation to the Biotech Industry. Andrew then shares a strategy for companies that are affected by these changes.

Navigating the New R&D Tax Relief Landscape: Implications for the Biotech Sector

The changes to the R&D tax relief scheme, particularly the restriction of certain overseas R&D costs, significantly affect the biotech sector. As a globally interconnected industry, biotech companies often rely on international collaborations and specialised research environments that are not always available domestically. This article highlights the implications of these changes, how companies can adapt, and how FI Group can assist in navigating this new landscape.

Understanding the New Rule Changes

The UK government has introduced amendments to the R&D tax relief scheme, effective for accounting periods starting on or after 1st April 2024.  This aims to incentivise companies to conduct their R&D activities within the UK, thereby boosting domestic innovation and employment.

The legislation restricts the extent to which contractor payments for R&D and payments for externally provided workers (EPWs) can qualify for R&D relief where the R&D activity takes place overseas.

For contractor payments the restriction in the legislation applies through the location of the activity. For EPWs, it applies through a requirement that the EPW’s earnings are subject to Pay As You Earn (PAYE) and Class 1 National Insurance contributions (NIC).

However, overseas expenditure on contracted out R&D, and payments for the EPWs who are not subject to UK PAYE/NICE may still qualify for relief, if three circumstances are met (CTA09/1138A(2)):

1. The conditions necessary for the R&D are not present in the UK,
2. The conditions are present in the location where the R&D is undertaken,
3. It would be wholly unreasonable for the company to replicate the conditions in the UK – it is noted that time pressure may be relevant to this particular requirement, specifically. 

The key conditions necessary to qualify such overseas costs (applying CTA09/1138A(2)), include but not are limited to: 

• Geographical Conditions: If the R&D requires specific geographical features that are only available overseas.
• Environmental Conditions: If the R&D needs to be conducted in a particular environment that is not available in the UK.
• Social Conditions: If the R&D involves social conditions or populations that are unique to a specific location abroad.
• Legal or Regulatory Requirements: If there are legal or regulatory requirements that mandate the R&D to be conducted in a particular country.

It is critical to note that if either cost or staff availability on their own, or a combination of them, is the main condition that cannot be met for the R&D to take place in the UK, then overseas expenditure will not qualify. But where other factors are significant, the mere existence of cost and/ or staff availability will not in itself disbar the overseas expenditure.

Impact on the Biotech Sector

The biotech sector, known for its reliance on international expertise and facilities, is particularly affected by these changes. Many biotech companies conduct clinical trials, specialised testing, and collaborative research in countries with specific regulatory environments or unique biological conditions. The new restrictions may mean that these companies will need to reassess their R&D strategies and potentially relocate some activities to the UK to continue benefiting from tax reliefs. This could lead to higher operational expenses and impact the overall feasibility of certain projects.

For example, a company looking to undertake pre-clinical research on a new biologic drug candidate in a rare disease. Although there is some knowledge of this disease type in the UK, the pre-eminent specialists are based in Switzerland and are able to conduct the pre-clinical research. The Company is able to provide evidence that the team in Switzerland have a level of technical capability that is not available in the UK. However, availability of workers to carry out the R&D, as in the example, is not a condition that can satisfy CTA09/1138A(2).

Adapting to the New Landscape

Biotech companies must now strategically plan their R&D activities to maximise tax relief benefits. This involves a thorough analysis of which activities can be feasibly relocated to the UK and which must remain overseas due to unavoidable conditions. Companies should document and justify any overseas R&D activities to ensure they meet the stringent criteria set by HMRC.

One approach is to enhance local capabilities by investing in UK-based talent. This not only aligns with the new tax relief rules but also contributes to the growth of the domestic biotech ecosystem. Collaborating with UK universities and research institutions can also provide access to cutting-edge research and development resources.

Claiming R&D Costs Locally

With the new restrictions, it becomes crucial for companies to understand the local R&D tax relief landscape in the countries where they operate. Many countries outside of the UK offer their own R&D tax incentives, which can be leveraged to offset the loss of UK tax relief. For example, companies conducting R&D in countries with favourable tax regimes can still benefit from local incentives, provided they comply with the respective regulations.

How FI Group Can Help

As an internationally present company, FI Group is uniquely positioned to assist biotech firms in navigating these changes. Our expertise in R&D tax relief across multiple jurisdictions allows us to provide tailored advice and support to ensure companies maximise their tax benefits globally.

We offer comprehensive services, including:

• Strategic Planning: Helping companies identify which R&D activities can be relocated to the UK and which must remain overseas, ensuring compliance with the new rules.
• Documentation and Justification: Assisting in the preparation of detailed documentation to justify overseas R&D activities, ensuring they meet HMRC's criteria.
• Local Tax Relief Optimisation: Advising on local R&D tax incentives in other countries, helping companies claim the maximum benefits available.
• Collaboration and Networking: Facilitating partnerships with UK research institutions and universities to enhance local R&D capabilities.

Conclusion

The restriction of overseas EPW and contracted R&D costs from the UK tax relief scheme presents both challenges and opportunities for the biotech sector. By strategically planning their R&D activities and leveraging local tax incentives, biotech companies can continue to innovate while optimising their tax benefits. FI Group is committed to supporting the biotech industry through these changes, ensuring that companies remain competitive and compliant in a rapidly evolving regulatory landscape.

Contact FI Group, the global R&D consultants:

Tel: +44 2030 483 991

Email: [email protected]