Autumn Budget 2021 and a new age of optimism: changes to the UK’s R&D tax relief regime

A broad range of measures was announced, and it was clearly a political priority to support those sectors that have particularly suffered from the impact of COVID restrictions and national lockdowns.


First published in our Biotech Review of the year – issue 9.

In an effort to boost those industries, the Chancellor announced enhanced cultural tax reliefs for theatres, orchestras, museums and galleries, changes to Air Passenger Duty and a major overhaul of the UK’s outdated alcohol duty regime. Some of the general business tax measures may be of interest to the life sciences sector: an extension to the temporary increase of the Annual Investment Allowance, and the introduction of the requirement for large businesses to notify HMRC of uncertain tax positions.

However, given the increase in the corporation tax rate to 25% from 2023 that was announced in the Spring Budget 2021, it’s not surprising that no drastic new business tax measures were announced this time round. Many life sciences companies benefit, at least to some extent, from the UK’s patent box regime: an elective regime providing for an effective 10% rate of corporation tax on profits attributable to certain patents and IP rights. The life sciences sector is therefore unlikely to be impacted by the corporation tax rate increase in the same way as companies in other sectors.

Notable in its absence was any change to the Capital Gains Tax (CGT) regime. The Office of Tax Simplification’s review of the current CGT regime hit the headlines towards the end of 2020, and sparked speculation as to potential future changes to the rates and reliefs available. However, as was the case with the Spring Budget 2021, this speculation amounted to nothing, and it remains to be seen whether the Government is serious about a reform to the UK’s CGT regime.

One of the key themes of the Autumn Budget was the Government’s investment in innovation. To quote the Chancellor: “We need to do what the people of this country have always done… invent, discover and create the ideas and technologies that will change the world”. He went on to say that in order to encourage private sector innovation, the UK’s R&D tax reliefs needed to be fit for purpose. It is worth noting that whilst the UK has the second highest spending on R&D tax reliefs in the OECD, UK business investment in R&D is less than half the OECD average. In an attempt to “fix” these issues, two key changes to the R&D tax relief regime were announced.

The first is an attempt to ensure that the reliefs reflect the way in which businesses conduct research in the modern world: an expansion of the scope of the reliefs to include (where they relate directly to a qualifying R&D project) licence payments for datasets and cloud computing costs that can be attributed to computation, data processing, analytics and software. This is a welcome announcement, as many businesses and industries have lobbied hard for their inclusion. It is a logical and fair expansion to the relief’s scope given the ever growing reliance on technology and the Government intends the changes to provide a better incentive to cutting edge R&D.

The second change is more substantial and is in response to the fact that UK business investment is currently around half of the amount of UK tax relief claimed by companies on R&D spending. The Chancellor stated that it is unfair on British taxpayers to subsidise billions of pounds of R&D that isn’t even happening here in the UK. On that basis, changes have been proposed to ensure that the tax reliefs are “refocused” towards R&D activity that actually takes place in the UK.

The Chancellor stated that the current regime puts the UK “out of step” with other jurisdictions such as Australia, Canada, Hong Kong, Singapore, Switzerland and the US, who have all focused their R&D tax reliefs on domestic activity. However, many in the life sciences industry have criticised a move in this direction, with the UK BioIndustry Association saying in its response to the Budget that supporting overseas R&D activity “has enabled UK companies to develop therapies for rare diseases, attract significant inward investment and retain intellectual property in the UK.”

Following the Chancellor’s initial announcement, there were understandable concerns as to how these new restrictions might affect those claiming R&D tax relief, especially those in the life sciences industry. The existing R&D tax relief rules do not include any requirement in relation to the location of the R&D activity itself: as long as the expenditure is deductible for tax purposes in the UK, and the other relevant conditions are met, then UK tax relief will still be available on R&D activity carried out overseas. Many were concerned that the introduction of a broad overseas restriction could present a significant hurdle for life sciences companies, and could therefore have negative consequences for the very innovation that the Chancellor intends to encourage. In particular, concerns were raised in relation to clinical trials undertaken outside the UK in order to gain certain licensing approvals. Under the current rules, supporting this overseas activity with the UK tax relief has enabled UK-based life sciences companies to develop life changing medicines and therapies which have attracted investment on a global scale, all with UK expertise and whilst within the UK tax net.

As part of HMRC’s Tax Administration and Maintenance Day on 30 November 2021, a report into the UK’s R&D tax reliefs was published and life sciences businesses will find its contents reassuring. The report sets out an intention to limit R&D claims so that where companies subcontract R&D activity to a third party, they will only be able to claim the enhanced relief for that expenditure where the third party performs the work within the UK. However, the report also refers to the Government’s intention to include exemptions from the new territoriality requirements for the costs of software and consumables sourced overseas, as well as payments for clinical trials volunteers overseas and payments for data and cloud sourced overseas, as these are considered as inputs to activity in the UK. The Government is interested in views from stakeholders on whether there are cases for other narrow exceptions, and so we could see further exemptions to the territoriality requirement announced in the future.

Until we have sight of the draft legislation and related guidance, the extent of the proposed exemptions and exactly what they will protect is unclear. The impact on the life sciences sector, or indeed any other sector, therefore remains to be seen; however, the Government’s commitments in its report to exemptions for particular activities (especially clinical trials) goes a long way towards reassuring those who were concerned by the announcement in the Autumn Budget.

New measures to address the abuse of R&D tax reliefs were also covered in the report, as a result of concerns over abuse and boundary[1]pushing involving the R&D tax reliefs having grown significantly in recent years. These measures include requirements for more detail in claims (including details of any agents who have advised the claiming company), for all claims to be made digitally, for each claim to be endorsed by a named senior officer of the company and for companies to inform HMRC, in advance, if they plan to make a claim.

These announcements and the report form part of the Government’s review of the R&D tax relief system which was announced in Spring 2021. This review remains ongoing, and we expect to see draft legislation on the new measures next summer, with the changes taking effect from April 2023. In the meantime, it will be a relief to many that the proposed restriction to the UK’s R&D tax relief regime is not intended to be quite as drastic as many first feared and the report is hopefully an indication that the Government intends to include appropriate safeguards in the legislation to protect innovation and R&D across all sectors.