Why pharma and life sciences businesses shouldn’t just focus on the science

Pharma and life sciences businesses, understandably, tend to focus on the science and development of ideas and the groundbreaking therapies this might lead to. However, leveraging all available resources, such as allowances and tax reliefs, is also something these companies should be considering. While leading pharmaceutical companies have large departments dedicated to this, smaller businesses in their early stages may be missing out on valuable opportunities.

With the high costs of research, product development, talent acquisition, sales, distribution, and regulatory compliance, it is crucial for companies in these sectors to have a comprehensive understanding of all available resources.

Claiming available tax relief on eligible R&D activity should be a priority for most pharma and life sciences companies, but other innovation incentives such as Patent Box – a relief that rewards your intellectual property (IP) investment by helping to reduce your Corporation Tax rate on qualifying IP income to 10% – are less well-known, and thus less frequently utilised. With the increase in UK Corporation tax rate rising to 25% (assuming companies have profits more than £250,000) from 1 April 2023, the benefits obtained from making a Patent Box claim have increased further, making this more appealing to companies going forwards.

Tax reliefs can significantly offset the costs of new projects. However, pharma and life sciences businesses need to take specific steps to access this tax relief. Requirements introduced for accounting periods beginning on / after 1 April 2023 mean any business looking to claim R&D tax relief for the first time, or who have not made claims in a three-year period, has just six months from the end of its financial year to act.

For example, life sciences businesses with a year-end of 31 March 2024 that have not made any R&D tax relief claims in the three years ended 30 September 2024, have only until the end of September 2024 to notify HMRC of their intention to claim. Otherwise, they lose the right to claim for the financial year in question. In addition, for all submissions made on / after 8 August 2023, all R&D claims need to be supplemented by the Addition Information Form (AIF), a mandatory part of the R&D tax claim process with HMRC.

On top of this, pharma and life sciences businesses also need to estimate which activities meet the qualifying criteria, something they can underestimate as they see the activities as ‘just what they do every day’ and not innovative. Companies should consider an R&D claim if they are working on projects to resolve scientific or technological uncertainty, or if the solution is not easily found by someone particularly competent in that field.

The criteria for claiming R&D tax relief are much broader than many companies realise and extend beyond developing new products. R&D tax relief can even be claimed on unsuccessful projects as long as they meet the qualifying criteria.

In relation to other new changes, pharma and life sciences businesses may not be impacted in respect of overseas R&D restrictions (from April 2024) provided the expenditure incurred meets the definition of qualifying overseas expenditure. This definition includes:

Where it is unreasonable to undertake the R&D in the UK due to geographical, environmental, or social factors (e.g. clinical trials where global participation is required); or
Where legal or regulatory requirements require the activity to take place in a specific territory; or
Certain SME businesses registered in Northern Island (subject to certain conditions being satisfied).

Some businesses may be hesitant to submit a claim or change their approach, perhaps due to the current HMRC enquiry landscape, a lack of time to compile the necessary information, the recent changes and additional reporting requirements, or the belief that they have already claimed everything. As a result, life sciences businesses might feel that their time or resources are better spent elsewhere. However, by not doing so, they could be missing out on vital funds. Any business working on innovative projects in pharma, science, or technology should look to maximise their tax efficiencies where possible to enhance their success in the short and long term.

*This article was first published on Accountancy Age on 11 June 2024. Link to the article here: Exploring Tax Relief for Pharma and Life Sciences Companies (accountancyage.com)