What the Spring Budget 2023 means for the life sciences sector

Clearly, Jeremy Hunt was wanting to champion the importance of the life sciences sector to the UK’s economy. It was probably singled out more times in his speech than any other sector and a few of the reforms announced today go some way to address criticism around the competitiveness of the UK corporation tax system for this sector, particularly in advance of the rise of the headline rate to 25% from 1 April.

It was only in February this year, that Astra Zeneca criticised the UK’s corporation tax system citing the lack of manufacturing incentives as one reason they chose Ireland for their $360m manufacturing facility and not the UK. There has also been criticism that the reforms to the SME R&D tax credit regime would also encourage smaller life science companies to conduct their research outside of the UK.

Below are the key measures announced in the Budget that are particularly relevant to life science and pharmaceutical sector were.

Enhancement to R&D regimes

The target enhancement to SME R&D credits for R&D intensive businesses. The rate of SME R&D credit was to significantly reduce from 1 April 2023 falling from a potential cash back of 33.35% for every £1 spent on qualifying R&D to 18.6%. However, for those companies which are R&D intensive (i.e. who spent 40% of their total expenditure on R&D) then the cash benefit is 27%.

Larger companies under the Research and Development Expenditure Credit (“RDEC”) regime will benefit from the uplift to a 20p taxable credit for every £1 spent from 1 April 2023

There will be ongoing consultation on whether the two UK R&D schemes should be merged, and as part of those continuing consultations, the planned restriction of R&D tax credits to UK based research is being deferred by a year until 1 April 2024.

Changes to capital allowances

The proposed changes to capital allowances will benefit companies of all sizes, the £1 million annual investment allowance will be permanent from 1 April 2023 which will mean most capital expenditure will be relieved in the year in which that is incurred. In addition, there will be a 100% first year allowance for main pool capital allowance expenditure and 50% first year allowance for special rate pool expenditure for the next three years and potentially beyond.

Renewed commitment towards innovation

The announcements of enhancing the powers of the UK medicines regulator, allowing for a significant speed up of the approval process of new drugs where they have been approved in comparator regimes, such as the US, EU and Japanese regimes.

Amongst the detail in Budget documents that didn’t make the speech was the continued commitment to the Oxford to Cambridge innovation corridor with the view to improving travel infrastructure and increasing the amount of lab space available.

Childcare and pension reforms

Finally, the measures to get back to work around childcare reforms and pensions reforms (no lifetime allowance and the annual limit increased to £60K may alleviate work force issues that have been impacting the UK economy as a whole. Indirectly, the abolition of the pensions lifetime allowance which was specifically aimed at the retention of senior NHS doctors and consultants may make working with a stretched NHS easier in the future. The changes will also benefit non-NHS workers.

Other highlights to note

The simplification of the administration of Enterprise Management Incentive (“EMI”) schemes will be welcome for early-stage life science companies who have issued share options under this scheme.

Down the line larger companies (those which are part of groups which have more than €750m of turnover) will be impacted by the new transfer pricing documentation requirements coming into effect for accounting periods starting after 1 April 2023. This will require the UK company to retain a master file, local file in accordance with OECD guidelines and prepare a Summary Audit Trail (“SAT”). Further consultation will be undertaken on the SAT.

Those same larger companies will also need to prepare for the implementation of the Pillar 2 framework seeking to ensure a minimum CT rate of 15%. In the UK this will come into effect for accounting periods starting after 31 December 2023 and legislation will be contained in Finance Bill 2023.