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Tax credit changes could put a ‘hard brake’ on UK biotech

Anti-fraud measures will hit genuine firms, fears BIA

UK biotech

The UK biotech industry association says proposed changes to the country's current R&D tax credits system could hit the sector’s small-to-medium sized companies.

The UK government has been operating its R&D tax credits system since 2000, and says it has helped stimulate investment in research and development in the country.

However, the Treasury says the cost of the scheme is rising, and is particularly concerned by fraudulent abuse of the system by a small number of companies.

In some cases, companies have created financial structures to claim the credit despite there being little employment or activity in the UK, and some were even set up purely to claim the UK tax credits.

Her Majesty’s Revenues and Customs (HMRC) says it has identified and prevented fraudulent attempts to claim the SME scheme payable tax credit totalling over £300m.

Meanwhile, the overall cost of the scheme rose 33% to £1.8bn between 2014-15 and 2015-16, while interim figures for 2016-17 suggest a further rise.

The government says the scheme supports its goal of seeing UK spending on R&D reach 2.4% of GDP by 2027; however the BIA says the proposed changes will make it unlikely to achieve this goal.

Intended to deter this abuse, the cap will limit the amount of payable tax credit that a qualifying loss-making business can receive in any one year. The cap will be three times the company’s total employee salary costs (PAYE and NICs liability) for that year, and will come into force from April 2020.

But today the BioIndustry Association (BIA) is calling for the government to think again on proposals, and is asking companies in the sector to add their voice to the consultation before it closes, on 24 May.

The BIA says these payments are a “valuable source of finance for young companies trying to get from one venture capital fundraise to the next” and that genuine companies will inevitably suffer in the crackdown.

The government is looking at ways to limit the impact on legitimate enterprises, but the BIA says its analysis shows the measure will nevertheless affect as many as 50-60% of genuine SMEs.

It says these will include start-ups and those funding clinical trials via a high level of R&D outsourcing, a common practice in the sector.

This approach creates a high R&D spend and a small PAYE/NIC liability and so they will see their cash payments capped if the proposals are introduced.

The BIA predicts that many companies won’t have the capital or option to change their outsourcing business model, and will either need to scale back R&D or will not be viable at all.

It says this will endanger the government’s R&D spending target, and is urging it to take a different approach.

Steve Bates

Steve Bates

“The UK life sciences sector is an economic success story, creating highly skilled jobs and providing a platform for the UK to be at forefront of innovative science and treatments that will benefit patients now and going into the future,” said Steve Bates OBE, chief executive of the BIA.

“While the government’s consultation was done with the best of intentions, if these proposals are introduced, it could put a hard brake on the UK’s rapidly expanding biotech start-up and scale-up community and affect other tech sectors in similar ways. It will also have knock-on effects for hundreds of service and supply SMEs across the UK who will see a loss of business, as well as universities and hospitals that receive significant funding from industry and conduct clinical research."

Bates concluded by calling on all companies likely to be impacted by the plans to respond to the public consultation (which can be found here).

The proposals come against a background of a thriving UK biotech sector, which is seeing historically high level s of investment, despite the huge uncertainty created by Brexit.

Article by
Andrew McConaghie

13th May 2019

From: Research

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