The Budget 2018 included a number of important measures for Life Sciences on a range of areas including R&D tax credits, Entrepreneurs’ Relief and the taxation of intangible assets.  The significant points of relevance are set out below.


In order to counter perceived avoidance, a PAYE/NI cap will be reintroduced for SME R&D tax credits from April 2020. This will be set at three times the company’s total PAYE and National Insurance contribution payment for the accounting period. Losses which cannot be surrendered for the payable credit can be carried forward and used against profits in future periods. This measure will be introduced for from April 2020* following a consultation.


Companies working on a virtual/outsourced model and those in clinical development where significant sums are paid to CROs could be impacted. It will also be important to understand how this will apply in group structures where there is a single employing company.

FTI will endeavour to establish the details around the nature of the avoidance that has given rise to this measure.  We will work closely with the BIA and other parties in preparing a response to the consultation in order to try and ensure that genuinely commercial arrangements are not impacted. 

*The exact implementation date is unclear as different budget documents contradict each other. It will either apply for expenditure from 1 April 2020 or accounting periods beginning after the same date.


While the Chancellor announced that the relief will be maintained in the face of some pressure to abolish it, the minimum qualifying period in which certain conditions need to be met will be extended from one year to two years.

Secondly, in addition to the current requirements on share capital and voting rights, from 29 October 2018 shareholders must also be entitled to at least 5% of the distributable profits and net assets of a company in order to claim the relief.

These changes are in addition to the previously announced changes to the rules around dilution below the 5% threshold. This will allow an election when an individual’s shareholding is reduced below 5% after fundraising such that there is a deemed disposal and reacquisition of the shares while ER is still available. A second election can then defer the gain until the shares are sold.


We would not anticipate the newly announced measures to have a significant impact on the sector given that the qualifying conditions would already normally be met for well in excess of the new two-year minimum except for recently issued EMI options. Whilst the measure is effective from 29 October 2018, the government estimate that fewer than 1,000 individuals will be impacted overall with an extra £50m generated for the exchequer over five years.

The dilution issue is particularly acute in Life Science where founders soon get diluted below the 5% threshold after Series B or C fundraising despite investing at a point where they are clearly an intended target of this incentive. This mechanism, therefore, doesn’t allow for significant value inflexion points such that the majority of the gain would consequently be taxed at marginal rates.


A decade on from the announcement of the withdrawal of industrial building allowances, the Chancellor announced the introduction of a new Structures and Buildings Allowance (“SBA”) for new non-residential structures and buildings.

Business and real estate groups have long lobbied for closure of this gap in the UK capital allowances system and was one of the issues highlighted in the recent OTS review of accounting depreciation and capital allowances.

Companies that incur capital expenditure on or after 29 October 2018, on new administration of manufacturing structures or buildings (including conversions and renovations) will be able to claim a deduction at an annual rate of 2% on a straight-line basis over fifty years.

The AIA for investment in plant and machinery will be temporarily increased from £200,000 to £1m from 1 January 2019 to 31 December 2020.

Other measures include the removal of ECAs (for energy efficient assets) from April 2020 and the reduction in special rate allowances (integral features and long life assets) from April 2019.


The withdrawal of industrial buildings allowances had created an uncompetitive anomaly in the UK tax system for investment in manufacturing and the sector have long been campaigning for much greater stimulus for in this area.  SBAs do remove the anomaly but are likely to fall short of tipping an investment decision. The UK’s capital allowance framework will continue to rank relatively low against other G20 members but this is offset, in part, by its low corporation tax rate which will reduce to 17% in 2020. 

There had also been a call for RDA credits and it is disappointing that this had not been included given that it was proposed in the Life Sciences Industrial Strategy. The existing regime of R&D allowances (RDAs) for capital equipment (inc investment in clinical manufacture) allows 100% tax relief but cannot be surrendered for a tax credit. As many UK SMEs are pre-revenue and have tax losses already, accelerated tax relief is of little benefit. The system is therefore in need of reform to incentivise SMEs to invest in new buildings and equipment, which will promote clinical manufacture in the UK but also have much wider benefits for UK innovation and productivity.   Unfortunately, the new SBA and AIA will only serve to accelerate tax losses in many cases.


The Government has announced degrouping charges on intangible assets will be reformed to align with the existing rules for tangible assets. A degrouping tax charge arises where assets have been transferred intra-group to a company which then leaves the group, within 6 years of the transfer, while it still holds the asset. Unlike the degrouping of tangible assets, where the degrouping gain is added to the proceeds eligible for relief in accordance with the Substantial Shareholdings Exemption (“SSE”), degrouping charges on intangible assets currently arise even if the disposal of the company is eligible for SSE.  The new rules will apply to any degrouping on or after 7 November 2018.


This is a welcome relaxation following a consultation earlier in the year.  It should remove the need for companies to create asset structures ahead of a potential divestment.  The full details are yet to be released and it will be important to understand if there could be any exclusions where an exemption may not apply. 

One consideration that will be of greater importance is the interpretation of the definition of a trading company which is a requirement for SSE. This topic comes under review from time to time given early-stage life science business model where IP is licensed or sold a long time before a product is approved. It may, therefore, be advisable to seek clearance that SSE applies before a transaction where this could be in question.

Prior to this change, out-licensing offered advantages over an asset sale under the patent box. Transferring IP assets into a new company and selling the shares may now be the preferred option in many cases.  


Following the consultation held in Spring 2018, the Government will introduce a specific relief for the acquisition of businesses goodwill alongside eligible intellectual property. The relief will take effect from April 2019.  We expect more detailed proposals to be published at a later date.


It appears this measure will look to reinstate, in part, reliefs removed in Finance Act 2015 which removed corporation tax relief for companies who write off the cost of purchased goodwill and certain customer-related intangible assets.


As announced in the Autumn Budget 2017, legislation will be introduced in the Finance Bill 2018-19 to tax income from intangible property held in low-tax jurisdictions to the extent that it is referable to UK sales. The rules target large multinational groups by taxing a proportion of their income received in low tax jurisdictions where the intangible property is held and where there is UK nexus by virtue of the income being referable to the sale of goods or services in the UK.

Key changes to the original announcement are that the tax will be collected by directly taxing offshore entities rather than applying a withholding tax and a broadening of the income in scope to include embedded royalties and income from the indirect exploitation of intangible property in the UK market through unrelated parties.

A de minimis UK sales threshold of £10 million will apply as well as an exemption for income that is taxed at more than 50% of the UK tax that would apply under these rules, and an exemption for income relating to intangible property that is supported by sufficient local substance.


These rules are not anticipated to widely affect the sector given they won’t apply to UK-based life sciences companies who hold their IP in the UK. It will also only apply to countries where there is no full double tax treaty.

The measure will take effect from 6 April 2019, with an anti-avoidance rule that applies from 29 October 2018. Guidance from HMRC should be available by April 2019.


Companies, organisations or agencies will be required to determine if the rules apply to their individual engagements with contractors. Such entities will be responsible for determining if, “but for the existence of the contractor’s personal service company”, the contractor would be considered to be an employee using the key status indicators derived from the extensive case law on the subject.

Where the contractor is considered to be a would-be employee the “employer” will be responsible for deducting the resulting tax and national insurance as if the individual was an employee.

Small organisations will be exempt from the new rules, with the intention that there is no undue burden applied to small businesses.

HMRC has an online tool – the Employment Status Service tool – to help those potentially affected by these changes to confirm their status. The tool provides guidance on HMRC’s opinion as to the employment status of an individual, however, this is not necessarily the same conclusion that either a more detailed review or a tribunal/ court would agree upon.


As has been widely expected, the government has finally announced the expansion of the off-payroll working rules, commonly referred to as IR35 to the private sector, following their implementation to the public sector from April 2017.

Companies in the life sciences sector regularly use contractors and it is recommended that they are identified at an early stage and their status is reviewed and kept under review with them being transferred to payroll as appropriate.

The rules will come into effect from April 2020, in order to give businesses time to prepare.


In response to the Patient Capital Review, there was a consultation earlier in the year on the introduction of a new knowledge-intensive Enterprise (EIS) Investment Scheme fund structure. The proposition was to allow funds to have flexibility to deploy capital raised over a longer period.

The EIS rules allow for investment through, amongst other sources, approved investment funds. Funds are not obliged to become approved but the status provides certain advantages over non-approved funds including investors potentially being able to claim relief sooner and decreased administration for investors.

Finance Bill 2019-20 will require approved funds to focus on investments in knowledge-intensive companies (‘KICs’) by ensuring they invest at least 80% of funds raised in KICs. It will allow a longer investment period with 50% of funds raised to be invested within 12 months and it all to be invested in two years. Finally, it will allow investors in approved funds to set their income tax relief against liabilities in the year before the fund closes where previously this was only permitted in the same year the fund closes.


These changes will be broadly welcomed and whilst not going as far as some of the measures suggested in the consultation, a balance has been sought between simplicity, stability and the aim to ensure that knowledge-intensive companies are able to attract the capital they need.

Qualifying for KIC status is nuanced for life sciences companies and care should be taken to ensure that the conditions are met. The range of benefits for qualifying as such are significant and these changes continue to ensure that capital is being directed at KICs.

Draft legislation is expected in the summer of 2019 with the changes effective from 6 April 2020.

For other tax measures of a more general nature, you can access FTI Consulting’s commentary here.

For further information please contact Linda Bertolissio or Riina Rintanen.