Some of the announcements in the Budget will have a particular impact on the life sciences sector.
R&D tax incentives
In particular, early stage SMEs in the life sciences sector that undertake core R&D activities for their own account are often reliant on the cash they can claim under the R&D tax credits regime. Changes to this regime will almost halve this cash from the current level of 33.35% of spend, to 18.6% of spend. This clearly will leave a hole in the cashflow forecasts for these businesses from 1 April 2023 that will need addressing.
On the flip side, those life sciences businesses that are subcontracted by a large company to undertake R&D on their behalf should be better off. They can only claim under the large company RDEC scheme with the net benefit increasing from around 10.5% to 15%.
It is clear that the government remains committed to ensuring innovative firms have access to finance to invest and grow. Early stage life sciences businesses should benefit from the previously announced changes to the Seed EIS regime. The government has indicated that the EIS and VCT regimes could be extended in future which should benefit the Live Sciences sector. The government has also confirmed that it will provide increased funding for the UK’s nine Catapults, which support innovation.
Capital Gains Tax
There has been speculation of significant changes to Capital Gains Tax rates, but no such announcements were forthcoming. There is still a good level of M&A activity within the sector, so this is good news for those businesses that could look to sell in the near term. However, it is still possible that capital gains tax rates could increase, or other changes could be announced, at a later date, and it will be interesting to see if this possibility stimulates transactional activity over the coming months.
The Chancellor did announce that the exemption for CGT would be halved in 2023/24.
Minimum tax rates
Lastly, for the very largest businesses only, it was confirmed today that the OECD “Pillar 2” framework will be incorporated into UK law for accounting periods beginning on or after 31 December 2023. These rules will introduce a minimum 15% rate of tax. Those life sciences businesses both large enough to fall within Pillar 2, and which claim an effective 10% rate of tax on profits under the UK’s Patent Box regime, will need to consider if these rules will increase their total tax payable.
However, in practice, the vast majority of Patent Box claimants do not have all their profits taxed within the Patent Box. While work may be required to analyse the rules, we would not expect significant tax increases on Patent Box claimants from these changes.