Expanding to the UK: Biotech & Life Sciences

Thinking About Setting Up a Biotech Company in the UK? As a global leader in life sciences, the UK is a popular destination for biotech and life sciences companies due to its unrivalled pool of talent. The country boasts world-class universities, including Cambridge University, which alone has produced 121 Nobel Prize affiliates. The sector employs over 280,000 people and contributed more than £94 billion to the UK economy in 2021.

Successive UK governments have prioritized supporting the life sciences sector to drive economic growth, create jobs, and advance public health. A key strategy within this effort is attracting inward investment and encouraging overseas companies to establish themselves in the UK.

In this article, we’ll explore the fiscal measures the UK government is leveraging to attract overseas biotech investment and highlight the key tax and accounting considerations for setting up a UK subsidiary.

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Incentivising Research & Development

The UK’s R&D tax credit regime, established over 20 years ago, provides significant subsidies for loss-making companies, particularly in the early stages of R&D activity. Currently, there are two R&D tax credit regimes:

• SME Regime: For qualifying small and medium-sized enterprises, the regime provides credits worth 18.6% or 26.97% of qualifying expenditure, depending on whether the company meets the definition of an "R&D intensive company."
• RDEC Regime: For non-SME groups, the Research & Development Expenditure Credit (RDEC) offers a credit worth 20% of qualifying expenditure, equating to a net benefit of 15% after tax.

The government is considering merging these regimes into a unified system as early as 2024. However, navigating the rules can be complex, especially after recent changes in 2022 and 2023 that introduced new hurdles, additional documentation requirements, and increased scrutiny. Seeking specialist advice early can maximize the benefits and ensure compliance.

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Patent Box: Corporate Tax at 10%

Biotech companies developing intellectual property (IP) in the UK can benefit from the patent box regime, which reduces corporate tax on profits linked to UK-developed patents to 10%, compared to the standard 25%. While the regime is less relevant for loss-making companies, it offers a valuable tax advantage for profit-generating businesses. Proper record-keeping is critical to calculate the "nexus ratio," which compares UK and non-UK costs over the development phase.

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Basic Compliance Requirements

UK subsidiaries must meet various compliance obligations, including:

• Annual Accounts: Filed with Companies House and accessible to the public, providing valuable information for lenders, suppliers, and customers.
• Audits: Small UK subsidiaries may require audits if their worldwide group exceeds size thresholds.
• Tax Returns: Filed within 12 months of the accounting period's end and accompanied by iXBRL-tagged accounts.
• VAT Registration: Required once turnover thresholds are exceeded. Even for low-revenue biotech businesses, VAT registration may be beneficial to recover input VAT, though proving eligibility to HMRC can be challenging.

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Employee Incentives

The UK offers tax-efficient employee incentives, including share option plans that provide significant tax benefits. Both "approved" and "unapproved" plans have annual reporting requirements. Employers should consult employment tax specialists to maximize the tax efficiency of other employee benefits, enhancing the company’s appeal to prospective hires.

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Accessing UK Investors

The UK provides tax incentives for business angel investors through the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS). These schemes offer income tax refunds and tax-free exits, attracting early-stage investment. Non-UK companies with UK business activity may also qualify if they meet other conditions.

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Grants

The UK has a highly competitive grant funding landscape, with recent budgets allocating increased funding for research and innovation. In 2023, the Chancellor announced £650 million in additional support for the life sciences sector. Regional authorities also provide grants, often tied to local job creation. Given the competitive and complex nature of grant applications, seeking professional assistance is highly recommended.

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Conclusion

The UK’s strong talent pool, robust support ecosystem for early-stage companies, ample funding opportunities, and government incentives make it an ideal destination for biotech businesses. Building relationships with skilled advisors can help you navigate the regulatory landscape and focus on growing your business.