Collaborative arrangements - optimise your position

As companies around the world continue to announce the effectiveness of their vaccines in trying to overcome the Covid-19 disease, we have observed increased collaboration across the pharmaceutical and life sciences industries. In the UK, for example, AstraZeneca successfully worked with Oxford University and has started joint ventures with numerous partners to manufacture its Covid-19 vaccine. GSK announced in February 2021 that it is working in collaboration with CureVac NV to develop the next generation of vaccines to deal with new mutated variants. The World Health Organisation continues to encourage greater global collaboration to defeat the virus. 

Whilst addressing an urgent and critical medical need is the primary driver to this collaboration, the tax consequences of increased collaboration, particularly with regards to Intellectual Property (IP), Research and Development (R&D) and Patent Box reliefs should not be forgotten when agreeing the commercial aspects of these deals, given how beneficial UK innovation reliefs are to UK pharmaceuticals and life science companies of all sizes.

R&D

Understanding which party could benefit most from claiming any R&D relief available could be an important factor when shaping the terms of any collaboration agreement and the initial contract.  A key consideration would be whether the contract is drafted as the provision of staff to undertake R&D activities or as a sub-contracted R&D arrangement (where an element of the overall project is passed to a third party to complete). There are subtle differences in the R&D legislation between subcontracted arrangements and the provision of staff and the legal form of a contract could be important in determining whether an entity can claim the R&D allowances on the costs incurred. A poorly worded contract may not help the claimant company justify their position to tax authorities and if the contract is altered after the fact to deliver a better tax outcome it is rarely looked on favourably.

In addition to this, collaboration with not-for-profit organisations, such as universities, adds a further layer of complexity, and any arrangement with these institutions should be reviewed in advance by an expert to ensure that there is no tax credit leakage.

Patent Box

UK law, as in many other territories, allows patents to be jointly owned and filed by more than one entity and the UK Patent Box regime specifically includes rules in relation to the treatment of cost-sharing arrangements. From our experience, collaboration and contractual agreements can vary significantly. However, provided each company is explicitly entitled to their share of the income from the qualifying IP rights then each party may be eligible to make a separate Patent Box claim. Understanding how the underlying patent rights are to be exploited in the joint venture arrangement, and what rights have already been licensed internally and externally, is important in ensuring future profitable sales deriving from the new drug or discovery can benefit from the 10% Patent Box regime. Again, getting this right at the outset saves considerable time, and can avoid potentially damaging efforts to re-characterise contracts that were not quite ‘right’ at the outset.

IP de-grouping charges

Collaborative R&D may result in some IP being transferred to a Special Purchase Vehicle (SPV) to give all parties comfort that the IP has been ring-fenced. Provided certain conditions are met, the IP may be able to transfer to the SPV without triggering any upfront UK corporation tax liabilities. However, careful planning is crucial to ensure that a de-grouping charge does not arise from a dilution of the original IP owner’s share in the SPV, and the premature exercises of equity warrants and options by third parties could result in unexpected tax charges. Additional tax risk arises from the ‘new’ Patent Box rules which limit the relief if the development has not been undertaken by the company claiming relief.

The above issues are multiplied in an international context, with transfer pricing, hybrid rules, mandatory disclosure and DAC 6 reporting, VAT and Customs duties all needing to be taken care of. Whilst clearly not as complex as the underlying science behind the innovations, it is often not straightforward and you may need to work closely in collaboration with your Mazars tax team to get this right.

As stated from the beginning, all of this needs to be considered in the context of the scientific advances and commercial drivers behind the collaboration and how any successes in these areas are to be shared between the collaborating partners.

We use our extensive experience to deliver practical advice, along with commercial experience, helping life science and pharmaceutical companies safely navigate the complexities of the UK and international tax systems.

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