Labour can boost growth and cut waste with sector-targeted tax policy in Budget, says BIA

Monday 2 September 2024, London - The Chancellor’s Budget on 30 October is an opportunity to end short-termism, cut waste, and attract long-term investment to the UK economy with a sector-targeted R&D tax relief policy. However, changes should not be rushed and must be based on the best economic evidence, says the UK’s trade association for innovative life sciences and biotech.   

R&D tax reliefs are vital for the UK’s life sciences industry, which Rachel Reeves has already identified as a priority sector for Labour’s economic growth mission, and pledged to take a sector-based approach to support. However, the tax relief schemes have been subject to extensive abuse and fraud by other sectors after being hijacked by “no win, no fee” tax agents making claims on behalf of companies that aren’t conducting genuine R&D.  

Ahead of the Budget, which the Prime Minister has warned will involve “tough decisions”, BIA is publishing a proposal for a robust economic study that the Chancellor should commission as part of her promised business tax roadmap to understand how R&D tax relief can be targeted towards innovative growth sectors of the economy, like life sciences. This will allow Labour to cut the fraudulent waste of taxpayers’ money in ways that do not harm genuine, law-abiding companies that have been hit in the past by rushed policymaking from the previous government.    

Steve Bates OBE, CEO of the BIA, said:

“The Prime Minister has said that growth and wealth creation are the Government’s number one priority, which means every penny of taxpayers’ money must be focused where it will have the most impact. We are calling on the Treasury to evaluate the impact of R&D tax relief on a sector-by-sector basis, starting with the life sciences industry, to identify how taxpayers’ money can be better focused on growing the economy by supporting innovative industries of the future.”  

“With clear thinking, the Chancellor can put the UK on track once again to have a globally competitive R&D tax relief scheme that attracts foreign investment for small and scaling UK companies, whilst cutting the fraud that has arisen as unscrupulous tax advisors have exploited loopholes on a no win, no fee basis.”

With three of the top-ten universities in the world for life sciences research, a third of all European life science start-ups, and third place globally for life sciences venture capital investment, the UK’s life sciences sector is truly world-class and a great British growth opportunity.

However, businesses in the sector have many unique characteristics that policymakers must consider:

• They are funded by successive venture capital rounds involving investors who can invest anywhere in the world
• They are highly R&D intensive, employ a higher proportion of highly skilled, well-paid workers, and support an equally high-value supply chain of local jobs
• It takes 10 to 15 years to develop a medicine. R&D spending and job creation increase exponentially as projects scale up, and multiple projects must be supported as there’s a high risk of failure in individual clinical trials
• Most other developed countries are competing to attract life science businesses and investment in order to improve their resilience to pandemics and grow their economy

Existing studies commissioned by HMRC show that R&D tax reliefs deliver £3 of private R&D investment for every £1 of tax foregone, which is already a positive return on investment. However, it is likely that the current evidence base significantly underestimates their impact in cutting-edge sectors like life sciences because the above characteristics were not taken into account.  

Working with London Economics (LE), who conducted one of the existing studies, the BIA has published a report, and corresponding methodology, outlining how to improve current evidence and take those sector-specific differences into account. This work will ensure that R&D tax reliefs remain appropriately valued, and will allow the government to make more informed policy decisions about the best use of taxpayer money when public finances are under pressure.

Dano Meiske, Principal Consultant at London Economics, said:

Attracting and retaining innovative firms is crucial for driving the UK’s economic recovery. Effectively designed R&D tax relief can contribute significantly to this recovery.

It is essential to understand the importance and added value of R&D tax relief across different sectors and for the economy more widely. This understanding is key to maximising the value-for-money of public spending and maintaining the UK as an attractive hub for innovative businesses.

Improving the existing evidence base, as outlined in our proposal, is the first critical step to ensuring that R&D tax relief policies are highly effective and deliver maximum economic value.

The Labour Party confirmed its intention to conduct such a review in its pre-election plan for the sector, ‘A Prescription for Growth’. The BIA welcomes this commitment, and urges government to embed this evidence in its plans for a more targeted and effective R&D tax relief scheme in order to secure the future of the sector and continue supporting the delivery of UK innovation and economic growth.

Notes to editors:

• See our report Improving the evidence base for R&D tax relief in the life sciences sector
• Read the proposed methodology for a new economics evidence base from BIA and LE
• The Labour Party Manifesto committed to publish a roadmap for business taxation for the parliamentary term if elected, which it said will allow businesses to plan investments with confidence.
• HMRC’s most recent assessment of R&D tax relief fraud and non-compliance shows that sectors delivering 'Professional, Scientific, and Technical Activities' and 'Manufacturing – in which life science businesses are classified - have some of the lowest levels of fraud. Only 17% of claim value in Manufacturing, and 9% in Professional, Scientific, and Technical Activities was 'non-compliant' (a descriptor that also includes unintentional error in addition to fraud). This is in stark contrast to the education sector, which has the highest value of non-compliance at 87%.
• For more information on recent changes to R&D tax relief policy.
• Please contact Albert Maguire-King for further information on 07874 617351 or [email protected]