As we step into 2025, the effects of the Autumn Budget 2024 will start to take shape, leaving businesses in the Pharma and Life Sciences sector grappling with its implications. Was it a step forward or a setback? Only time will tell as the changes take effect.
The Budget brought a mix of opportunities and challenges. While significant investments and tax incentives aim to boost innovation, new tax measures and higher employment costs could put pressure on growth and hiring.
Chancellor Rachel Reeves spotlighted the sector, welcoming Prologis’ £500M expansion of the Cambridge Biomedical Campus, calling it a vote of confidence in the Government’s economic plans for the UK. Beyond this, the Treasury pledged additional funding for housing, infrastructure and increased lab space in Cambridge life-sciences cluster, alongside a £520M Life Sciences Innovation Manufacturing Fund and new support for the National Institute for Health and Care research.
On the tax front, the retention of R&D tax reliefs and the Patent Box regime was a standout positive. Businesses can continue to benefit from a 20% tax credit for qualifying R&D spending and a 10% corporate tax rate on profits from qualifying patents. Coupled with a relatively competitive 25% corporate tax rate, the UK retains an edge, though US tax reforms may pose future competition.
Tucked away in the numerous budget documents was a publication highlighting HMRC’s tougher approach to R&D claims. HMRC has reacted to a perceived abuse of this regime by increasing the volume and intensity of its enquiries – moving from 1 in 200 claims being reviewed to 1 in 4. As a result, the number of SMEs making claims in 2023/24 has fallen by 23% in a year, though the value of the total claims has increased by 28%, suggesting that higher-quality and larger companies are benefiting from these claims. Whilst there is increased effort by HMRC to tackle perceived fraud, the life sciences and pharma sector is probably not considered a high-risk sector in this regard. However, in our experience, there is a need to maintain comprehensive documentation to support R&D tax relief claims, especially for smaller claims, which have been the focus of HMRC’s scrutiny.
HMRC will view the reduction in fraud within the R&D regime as a success, and as a result, is increasing the number of HMRC personnel as well as investing in debt management systems to tackle the tax gap and under-collection of taxes. Our expectation is that there will be a significant increase in the number of general and specific tax enquiries as HRMC seeks to recoup its investment in staff and systems.
The Government’s decision to increase employer National Insurance Contributions (NIC) by 1.2% to 15%, alongside reducing the threshold from £9,100 to £5,000 per year, is expected to significantly impact personnel costs. Given the life sciences sector’s reliance on skilled professionals, with personnel typically receiving larger remuneration packages, these changes may lead companies to defer recruitment drives and, potentially, consider redundancy processes, negatively affecting the sector, as noted by the Office for Budget Responsibility.
Despite the government’s assurances of no tax increases for working people, it is widely recognised that these measures are likely to have long-term effects, ultimately shifting the burden to employees through smaller pay raises or to consumers through higher prices for medicines and other products.
Attracting global talent and investment becomes harder
Changes to rules for non-domiciled individuals could hurt the sector’s ability to attract international talent. Life sciences is a global industry, and the UK has long been a destination for top innovators, entrepreneurs and investors alike. Moving to a residence-based tax system risks discouraging long-term investment by these individuals by taxing worldwide income and foreign assets, including making them subject to UK inheritance tax earlier than under the regime operating under the pre-Budget rules.
Adding to these challenges are increases in capital gains tax rates and reductions in inheritance tax reliefs. Entrepreneurs investing in the life sciences sector will face an increased capital gains tax rate, rising to 24% at the highest level. The Business Asset Disposal Relief on the first £1m of gain remains at 10% for the rest of the tax year, increases to 14% next year, and will settle at 18% the following year. Furthermore, the inheritance tax benefits of holding AIM shares are being reduced from a 100% exemption to a 50% exemption, making the UK’s secondary stock market even less attractive for fast-growing life sciences companies.
Perhaps the biggest disappointment is that increased tax raising and spending has not meaningfully impacted UK’s projected growth figures, which are slightly lower than those forecast in the last Conservative Budget. It may take several years to determine how successful -or unsuccessful- this budget has been.
