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Karen Southern

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Significant R&D changes could threaten growth of life sciences sector

The UK’s life sciences are thriving, as evidenced in this latest issue.

However, I thought I would draw attention to a couple of issues which could have far-reaching implications for our much-lauded R&D sector. The first is a warning from RSM UK about ‘significant’ changes to R&D tax relief. Their recent press release states: ‘Life science businesses need to act now to avoid missing out on research and development (R&D) tax reliefs. The most significant changes to R&D tax relief since its introduction in 2000 are imminent and could impact the sector’s growth. Start-ups and fledgling businesses that rely on R&D activity overseas should review their tax position and business model now to prepare for the changes. ‘The life sciences sector views the R&D tax relief as a well-established, reliable tax incentive that encourages innovation. Start-ups often rely on the relief to support cashflow in the early stages of their lifecycle. However, over the past year, the government has expressed increasing concerns over the regime’s susceptibility to abuse, prompting a rethink. ‘A further driver behind the changes is to encourage businesses to ‘buy British’ and invest in UK businesses. The government has proposed that from April 2023, R&D relief is withdrawn for expenditure incurred overseas, including subcontracted R&D and payments to overseas workers, with some limited exemptions.’ Find out more here. Another potential spanner in the works, as highlighted by Arnold & Porter (London) is the new National Security and Investment Act. Their lawyers have spent months assessing its first months in operation, and say the Act’s ‘burden’ could actually discourage investors in our life sciences.

The team advises that 20% of investments subject to mandatory reporting under the new Act related to Artificial Intelligence investments, heavily used via health-tech in the life sciences sector; for example, in monitoring subjects in clinical trials to capture data. The law firm says that the regime is likely to cause increased burden, costs, uncertainty and timing for deals in life sciences.

A spokesman pointed out that: “Companies in the life sciences sector are often small start-ups with potentially very valuable pipelines and need quick access to cash to carry forward expensive R&D projects - often raised on multiple rounds. The potential need for multiple filings at each stage, as well as in general the review and assessment process under the NSIA might delay how quickly they can be funded, or discourage investors all together.” Arnold & Porter adds that the first few months of the regime has also illustrated a lack of transparency in the Department of Business, Energy and Industrial Strategy (BEIS) in its decision making in giving clearance to deals makes it harder for investors and businesses to understand the reasoning for a decision on a particular transaction and make representations as to why national security concerns would not arise in that specific case. Read more here.