Uncertain times: Changes to the UK’s tax regime

2020 was an unusual year, and the Budget delivered in March was no exception. For a start, when the Chancellor stepped up to the dispatch box, he was actually presenting a delayed November 2019 Budget and, secondly, it took place at one of the most uncertain times in recent history: the week before the UK’s first national lockdown.


First published in our Biotech Review of the year – issue 8.

Just as Harold Macmillan had proclaimed over a half century earlier, events of the day ultimately shaped the contents of the Budget. Thus, the Budget was focused on addressing the COVID-19 pandemic, a political priority that would remain fixed as the year drew on and various measures were introduced in an effort to prop up the UK economy. It is no surprise that the Budget that should subsequently have taken place in November 2020 was replaced by the delivery of the shorter-term Winter Economy Plan, with the Chancellor explaining that it was ‘not the right time to outline long term plans.’

With the 2021 Budget in March rapidly approaching, now is the time to reflect on what we might see within the Chancellor’s red briefcase. Any upcoming tax changes will be aimed at recouping the costs of the pandemic, and so it is unlikely that those changes will be announced until the end is firmly in sight. That being said, there are a few measures looming on the horizon that may impact the biotech industry.

Potential future changes to Capital Gains Tax (CGT)

The Office of Tax Simplification’s review of the current CGT tax regime hit the headlines in November 2020 and sparked speculation as to the potential changes coming down the track. However, the Government is yet to release anything confirming that CGT reform is in fact on the cards.

The review found that funds in the region of £14bn could be raised by limiting the existing CGT exemptions and raising the rates. Clearly, this would impact the wealthy, which remains the media’s preferred focus.

However, the current CGT regime also includes various reliefs and schemes aimed at encouraging innovation, and so the effects of any reform could have a significant impact on the biotech industry. In the months ahead we could, for example, see a reform of Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), which reduces CGT for founders and certain other employee shareholders on the disposal of shares and certain other business assets, from 20% to 10%, subject to various qualifying conditions.

It has already seen a fair amount of reform over recent years, with more stringent conditions introduced and a reduction of the lifetime limit from £10 million to £1 million, and so it is possible that the gradual tapering of the relief could be paving the way for its abolition. However, many are understandably concerned that doing so will act as a deterrent to small business start-ups.

Of course, this is not the only scheme that could be affected by changes to CGT. The Enterprise Investment Scheme (EIS) is one such candidate, which currently provides significant personal tax breaks to UK tax paying individuals who subscribe for shares in EIS qualifying companies, making access to funding much easier for those companies.

One of those tax breaks is a CGT exemption on any gains when the individual sells the EIS shares. If this relief were to be pared back, or even removed, then this may impact investment into small and growing life science companies.

It is also possible that Enterprise Management Incentive (EMI) Schemes, which are used to remunerate employees using share options rather than salaries, could be affected. The tax advantage of a qualifying EMI scheme is that the employee will pay CGT rather than income tax on their gain (or at least a portion of the gain) on the ultimate sale of their shares. Raising CGT rates would therefore significantly limit the benefits of such schemes.

Whilst the Government is yet to set out any actual indicators as to the extent of any reform, it is unlikely that the various CGT reliefs and schemes will be abolished in their entirety, as the impact on growing companies would be too severe. However, if the regime is reformed, then it is likely that at least some of those reliefs and schemes will be impacted.

Exactly how, and to what extent, biotech companies will be affected remains to be seen, but it would be prudent to bear these potential upcoming changes in mind when implementing structures or schemes that are currently attractive due to a CGT benefit, as that benefit may not be available in the near future.

The biotech market is burgeoning and will only get bigger. The global biotech market’s value was expected to reach $727.1bn by 2025. Meanwhile, employment in the sector is expected to grow by 5% between 2019 and 2020.

R&D Tax Credit restrictions

The historic R&D tax credit restriction relating to a company’s PAYE and NICs liabilities was removed in 2012, but it is being re-introduced from the 1st April 2021. This will impose a cap on repayment claims of £20,000 plus three times the total PAYE and NICs liabilities of the claiming company.

The purpose of the reintroduction is to target avoidance-driven set ups where a company with little employment or activity in the UK attempts to claim credit under the R&D regime. The £20,000 threshold within the cap was introduced to limit the effect of the restriction on genuine businesses with no avoidance motive (eg. start-ups with few, if any, employees). There will also be an exemption from the cap if employees are creating, preparing to create, or managing intellectual property, and less than 15% of the company’s overall R&D is spent with connected persons. This is aimed at companies with low PAYE and NICs liabilities, but who are nevertheless themselves engaged in genuine and substantial R&D. The cap calculation can also include related party PAYE and NICs liabilities attributable to the relevant project.

It is said that tax is one of life’s two certainties. At the moment, however, it is still uncertain exactly how the UK’s tax regime will be adjusted in light of the COVID-19 pandemic. In what might be called the age of uncertainty, this is one aspect of the political arena that the biotech sector should certainly be keeping a close eye on in the months ahead.