11th April 2013

Expert Advice from Hugh James: Tax changes continue to support innovation

The success of a company in the life science sector is wholly dependent on its ability to innovate, develop products and gain competitive advantage. Although R&D is fundamental to any life science company’s business plan, as a tax lawyer I am frequently surprised by how many businesses are unaware of the tax reliefs and credits available to them to support product development and ultimately help them to grow.

HMRC has two Research & Development Relief schemes for claiming Corporation Tax relief relevant to life science companies of all sizes. They are:

• The Small or Medium-sized Enterprise (SME) Scheme
• The Large Company Scheme

It is very important to understand how these schemes can help your business and ensure you are claiming any appropriate tax relief and tax credits. I have set out a number of points below summarising key points about the schemes. Following the recent budget I have also included a few notes which summarise HMRC’s approach to supporting life science companies the future.

Research & Development Relief

1. An SME (defined as having fewer than 500 employees and an annual turnover not exceeding €100m)can claim tax relief equivalent to 225% of its R&D spend. For example, if a company incurs eligible expenditure of £100,000 on R&D activities it can claim Corporation Tax relief of £225,000.

2. A loss making SME still has the option to claim a tax free cash sum from HMRC. This cash option can provide an invaluable source of funding, with approximately 25% of eligible expenditure claimable (i.e. up to £25,000 of actual tax free cash could be claimed from HMRC for an R&D spend of £100,000).

3. In the 2012 Budget the Government reconfirmed its commitment to introduce an “above the line” R&D tax credit for large companies. Loss making large companies are able to claim a tax free cash receipt (as with the SME scheme) with effect from April 2013. This change is also likely to benefit many SMEs. Currently SMEs in receipt of funding (be it through grants or customer funding), or those carrying out R&D activities on behalf of others, face restrictions in claiming R&D tax relief under the SME scheme. However, they are generally able to claim under the large company scheme. This entitles the company to claim a 130% tax deduction (even for the expenditure that has been funded) but with no cash option where the company is loss making. With effect from April 2013 these loss making SMEs will have the option to claim a tax free cash sum from HMRC.

Impact of the 2013 Budget

1. The Government is lowering corporation tax to 20% from 2015 and is lifting the rate of the above-the-line research and development tax credit to 10%, in order to boost the country’s attractiveness as a destination for investment

2. A proportion of the £1.6 billion of funding being made available to support the government’s Industrial Strategy will be directed towards implementing the Life Sciences Strategy

3. Stamp duty on shares traded on the London Stock Exchange’s Alternative Investment Market (AIM) will be scrapped

4. Capital gains tax relief for the Seed Enterprise Investment Scheme has been extended.

If you are unsure about how these reliefs and credits could benefit your business or you need expert guidance on tax related matters please get in touch.

Stephen Williams, Head of Tax at Hugh James

E: stephen.williams@hughjames.com

T: 029 2039 1029