Thinking About Setting Up a Biotech Company in the UK?
As a global leader in life sciences, one of the reasons the UK is such a popular place for biotech and life sciences companies is the unrivalled pool of talent. The UK has some of the world’s top universities which have produced a staggering number of Nobel prize winners; Cambridge University alone lays claim to 121 affiliates who have been honored with a Nobel prize. The sector employs more than 280,000 people and was worth over £94 billion to the UK economy in 2021. In recent years, successive governments have committed to supporting the life sciences sector to drive more economic growth, create more jobs and advance the health benefits to public with the goal of developing the UK as a knowledge intensive economy. A key objective within this strategy is to attract inward investment and encourage overseas companies to set up in the UK.
In this article, we look at some of the fiscal measures the UK government is using to attract overseas investment. We also highlight the main tax and accounting considerations when setting up a subsidiary in the UK.
Incentivising Research & Development
R&D tax credit regimes were first established in the UK over 20 years ago. Whilst different governments have fine-tuned the rules over the years, there have never been any moves to repeal the rules altogether and they are now considered a mainstay of the UK tax landscape. The rules offer particularly valuable subsidies for loss-making companies, helping to fund the early stages of R&D activity. At present, there are two R&D tax credit regimes in operation in the UK. The more generous regime only applies to groups that are SMEs and is only available where the UK entity has a reasonable degree of autonomy and control over the R&D activities (it will not be available if the UK company is just carrying out subcontracted R&D). For a loss-making company, the value of the credit will be either 18.6% or 26.97% of the qualifying expenditure incurred (depending on whether the company meets the new definition of an “R&D intensive company”). If the company doesn’t qualify for the SME regime, then it may still qualify for the R&D Expenditure Credit (RDEC) regime. This provides an above the line credit of 20% of the expenditure incurred, equating to a net benefit of 15% after applying UK corporation tax to the gross profit.
At the time of writing, the government is considering merging the two R&D incentives into one unified regime with implementation of the new rules as early as 2024.
As you might imagine, there is a lot of complexity in the rules and it is easy for the unwary to trip up. Changes implemented in late 2022 and early 2023 have resulted in additional hurdles to overcome, extra detail to be provided to the authorities and enhanced scrutiny of claims by tax inspectors. HMRC has also been known to get confused by the rules; in recent months we have pointed out errors in two separate official guidelines from HMRC on how the rules work. Thankfully, the tax authorities are generally happy to engage with taxpayers and their advisors and quick to admit to their rare mistakes.
At FD, we advise to engage early with specialist R&D advisors if you think your company could qualify for R&D credits in the UK. Do not wait until you submit your tax return for the year, as by then it could be too late to benefit from a claim.
Patent box: Corporate Tax at 10%
If you are developing intellectual property in the life sciences sector, there is a good chance you will be registering a patent to protect the IP (Intellectual Property). To the extent that the patented IP has been developed in the UK, then future profits linked to the patent could benefit from a reduced rate of tax under the UK’s patent box regime. The benefit is that profits are taxed at 10% compared to the normal UK tax rate of 25%. The patent box regime isn’t for everyone and generally not something to be considered while the company is still loss-making. Taxpayers who want to benefit from the regime also need to ensure their record-keeping is in good order so they can produce the information to support the “nexus ratio” calculation. This requires you to look at the ratio of UK vs non-UK costs incurred in developing the patent over the course of the development phase.
Basic Compliance Requirements
Of course, the UK has compliance requirements as well as incentives. All companies are required to produce annual accounts which are filed at Companies House. This is a useful repository of information for potential lenders, suppliers and customers and can also be accessed by the general public.
It sometimes comes as a surprise that UK subsidiaries may need to be audited even when they are very small; the thresholds for audits of UK companies are based on the size of the worldwide group.
Tax returns need to be filed within 12 months of the end of the accounting period and must be accompanied by a set of accounts that has been tagged using iXBRL tagging software.
Despite Brexit, the UK has retained its VAT regime. Registration is compulsory for businesses once turnover thresholds are exceeded. For businesses with little or no income (quite common in the biotech sector), it may still be advantageous to register for VAT as it will allow you to recover the input VAT on business costs. It can be challenging to persuade HMRC that you are eligible where there are limited prospects of revenue in the near future. It pays to think carefully about how you fill in the forms!
The UK has a long tradition of providing tax-efficient incentives to employees. It is common for employers to offer share option plans and the “approved” incentive plans provide significant tax benefits to employees. It is worth noting that there are annual reporting requirements for notification of options granted or exercised for both approved and unapproved plans. It is also advisable to get the input of an employment tax specialist on the range of other benefits which can be provided to employees. The tax efficiency of these benefits can make a company significantly more appealing to prospective employees.
Accessing UK Investors
If you are looking to have the UK as your HQ then you should consider some of the tax incentives for business angel investors. The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) have proved very effective at attracting angel investors into early-stage companies. Not only are the investors eligible for significant income tax refunds, but their exits are also tax free.
These reliefs can apply to investments in non-UK companies provided there is a UK business activity and the other conditions are met.
The UK has a hugely attractive and competitive grant funding landscape with recent budgets promising increased funding for research and innovation. In May 2023, the Chancellor of the Exchequer, Jeremy Hunt, announced further support of £650 million to the UK’s life sciences sector.
In addition to grants from central Government, many regional authorities are also awarding grants, often linked to local job creation. Given the complex nature of devolved government in the UK, together with the levels of competition for the grants it often pays to seek professional support both with the identification of the grants and the writing of the applications.
The UK’s large amount of talent, strong ecosystem to support early-stage companies, good funding options and supportive government make it a great place for biotech companies. To help navigate the system, it pays to build relationships with good advisors who can look after the details while you concentrate on the core parts of your business.
For further information please contact:
Malcolm Joy, Tax Partner | email@example.com
Thomas Wells, Senior Tax Manager | firstname.lastname@example.org
Asma Aslam, Senior Tax Manager | email@example.com
Christopher Evans, Tax Manager | firstname.lastname@example.org