R&Dtaxcreds_AS2014_600_335Chancellor George Osborne presented his Autumn Statement to Parliament today. In the last Autumn Statement before the next General Election he was keen to demonstrate the efficacy of the coalition’s approach to economic recovery and highlighted that the UK economy is expected to grow faster than any G7 country this year. He was keen to assert that this 2014 Autumn Statement aims to boost UK productivity and create the right conditions for continued, balanced growth by addressing innovation, infrastructure and high level skills.

The below aims to give a summary of announcements of relevance to BIA members and the wider life science community. Our initial take is that there is much to welcome:

  • Increases in R&D tax credits (from 1 April 2015 the rate of above the line credit will increase from 10% to 11% and for SMEs the rate of credit will increase from 225% to 230%)
  • Investment of £5.9 billion into UK research infrastructure over next 5 years
  • New investments in high value manufacturing (additional £61 million funding for the High Value Manufacturing Catapult)
  • New processes to make the administration of tax-advantaged venture capital schemes more effective and straightforward.

In the context of additional funding for frontline NHS services, this Statement underlines the importance our sector has and is perceived to have in terms of growth and innovation. Further details are likely to emerge in the coming days and weeks, most pertinently the Science and Innovation Strategy which we anticipate will be published shortly.

In the interim, we hope this is helpful and do get in touch with questions or thoughts. Full documentation from today’s Statement can be found here.

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Supporting the science base: investment in science and manufacturing facilities

At the 2013 Spending Review the government made a long term commitment to science capital infrastructure – £1.1 billion a year rising with inflation from 2016 to 2021. To ensure the UK continues to have world-class science facilities and remains the best place in the world for research intensive businesses to invest, today’s statement revealed that the government will invest £5.9 billion into the UK’s research infrastructure over 2016-21 – ‘the longest-term commitment to investment in science facilities in any Parliament’, to include:

  • a £2.9 billion Grand Challenges fund (and a further £900 million for future Grand Challenges) which will enable the UK to invest in major research facilities of national significance (over 2016-17 to 2020-21);
    • a £235 million Sir Henry Royce Institute for advanced materials research and innovation in Manchester
    • a £113 million investment in big data at Daresbury
    • and £20 million for an innovation centre on ageing, in Newcastle.

Other commitments confirmed include:

  • The £42 million Alan Turing Centre in London, which will undertake new research into ways of collecting, organising and analysing big data
  • An additional £61 million funding for the High Value Manufacturing Catapult centres to meet increasing demand and provide outreach and technical support to SMEs. The government will also provide an additional £28 million for a Formulation Centre in Sedgefield to design new products across numerous sectors
  • £3 billion for ‘world class labs’, to ensure existing facilities remain world class. An additional £200 million will also be allocated through the Research Partnership Investment Fund competition over the next Parliament, drawing on industry co-funding.

The government also announced that it will introduce income-contingent loans of up to £10,000, planned to be available from 2016-17, for under-30s to undertake a postgraduate taught masters course.

 

The tax and fiscal environment for biotech: R&D tax credits, Patent Box and more

Today’s Autumn Statement recognises that “public expenditure on R&D delivers large, persistent private and social returns, while innovative businesses grow faster, attract inward investment, and create new jobs, products and markets”. It therefore sets out that:

  • For R&D tax credits, from 1 April 2015 the rate of above the line credit will increase from 10% to 11% and for SMEs the rate of credit will increase from 225% to 230%. Also from 1 April 2015 the government will restrict qualifying expenditure for R&D tax credits so that the costs of material incorporated in products that are sold are not eligible. The government has also pledged to introduce measures to streamline the application process for smaller companies and will issue a consultation in January 2015 on the issues faced by smaller businesses when claiming R&D tax credits (we’ll provide details on how to engage in due course).

As anticipated, much focus was given by the Chancellor to tackling tax evasion as well as bolstering measures in support of growth and entrepreneurialism. Announcements made today include:

  • An introduction of a ‘diverted profits tax’ in April 2015. The tax will apply to a company’s profits that have been diverted from the UK through complex arrangements. For example where a company may seek to avoid paying corporation tax on activity undertaken in the UK (e.g. sales) by moving UK-generated profits to other countries through manipulation of international tax rules, the UK will now be able to tax those profits at a rate of 25%. Other elements of the OECD Base Erosion and Profit Shifting (BEPS) initiative were also cited in today’s Statement, including the publication of a consultation on plans to implement OECD rules for addressing hybrid mismatch arrangements and a statement of intent to introduce legislation to implement the OECD model for country-by-country reporting.
  • Extension of the Funding for Lending scheme by a further year and focussing it exclusively on small firms alongside expansion of the British Business Bank schemes: the Enterprise Finance Guarantee (further funding to facilitate up to £500 million of new lending in 2015-16) and the Enterprise Capital Funds (a further £400 million to support venture capital).
  • For transfers on or after 3 December 2014, the government will prevent individuals from claiming Entrepreneurs’ Relief (ER) on the disposals of the reputation and customer relationships associated with a business (goodwill) when they transfer the business to a related close company. The government will also allow gains which are eligible for ER, but which are instead deferred into investments which qualify for Enterprise Investment Scheme (EIS) or Social Investment Tax Relief (SITR) to remain eligible for ER when the gain is realised. The government will also increase the annual investment limit for SITR to £5m per annum, up to a total of £15m from April 2015.
  • Companies benefiting from government support for the generation of renewable energy will be excluded from benefiting from tax-advantaged venture capital schemes.
  • A new digital process for tax-advantaged venture capital schemes will be launched in 2016. A new format for VCT returns will also be developed.

The Patent Box was cited in the statement as one of the tools the government had introduced to bolster science and innovation. Recent developments regarding the future of the Patent Box were not tackled directly in the Statement but were instead handled in a separate Ministerial Statement put before the Houses of Parliament yesterday. This Statement confirms previous advice that the BIA has issued to members and reflects a meeting we held with HM Treasury last week. Next steps will be engagement with the OECD when officials visit London in the New Year and continued engagement with HM Treasury at it prepares to consult on changes in the New Year.

Many announcements made today also formed part of the Statement’s focus on supporting growth in the north and establishing a northern ‘powerhouse’. Another interesting proposal included today was for a new long-term investment fund (like the sovereign fund idea for biosciences as mentioned by Lord Drayson at the BIA’s UK Bioscience Forum) established from tax revenues from shale gas extraction in the north, to ensure that revenues are invested in the long-term economic health of the north to create jobs and investment.

 

Devolution and corporation tax

Another relevant fiscal announcement regards the devolution of corporation tax setting powers to Northern Ireland. The Chancellor today announced that the government recognises the argument for this and will introduce legislation to effect this before the General Election if ongoing discussions show that the Northern Ireland Executive can manage the financial implications. In relation to Scotland, the Chancellor confirmed that the Scottish Parliament will be given the power to set rates of Income Tax and increased powers over welfare provision. These moves stem from the work of the Smith Commission which confirmed in its report last week that corporation tax would remain a reserved power. This reflected BIA input to the Smith Commission on this issue.