All businesses face
tax challenges but within certain sectors there are specific issues that are very common across many firms. The
bio-tech sector is one in which there are a number of such common themes including the need to raise funds, the options for tax losses in the early years, tax efficient schemes relating to research and development and tax benefits for patent income.
Fund Raising
With the need to invest, many bio tech businesses are looking for investment. There are a number of tax efficient investment schemes available, but the most suitable being the Enterprise Investment Scheme (EIS).
EIS is a HMRC approved investment scheme, in place to encourage individuals to invest in small ‘higher risk’ businesses. Individuals can benefit from a saving on the investment in the form of income tax savings of 30% of the amount invested. In addition, if the relevant conditions are met, the eventual sale of the shares can even be tax free.
Capital gains tax deferral relief is also available to many individuals, offering the chance to put off paying the tax on a previous capital gain, to the extent that a further EIS qualifying investment is made.
This can be particularly suited to bio-tech businesses that may be set up with the intention of an eventual exit in the form of a private equity or trade sale.
EIS is suitable for businesses with gross assets of £15m and up to 250 employees. SEIS is a similar relief although is for very small businesses looking to raise up to £150,000, but comes with more generous reliefs as a result.
Tax Losses
Many businesses in the sector incur losses in the early years. There is highly beneficial relief in the form of R&D (see below). Besides this, companies still continue to benefit from the same relief loss relief as other companies.
Losses incurred can either be offset against income of the tax year, carried back one year, or carried forward. More complex rules exist for circumstances when in the final years of trading (known as terminal loss relief) or in the case that there is a change in ownership.
The rules for tax losses were changed in the 2016 budget to offer greater flexibility on the use of losses, whilst restricting the relief in case of businesses with profits in excess of £5m.
R&D Relief
Where a business does have qualifying spend on research and development, enhanced allowances are available. This comes in the form of:
- An uplift in the tax deduction for such spend, increasing the deduction to 225%of the amount spent. This effectively means additional tax deductions of 125%of the spend.
- For companies with trading losses that have not been used (called unrelieved losses), these may be surrendered for a repayable tax credit up to 14.5% of the amount surrendered.
The above represent the rules for small and medium sized businesses. Large businesses benefit but to a lesser extent, under the large business scheme. Small and medium sized businesses are broadly defined as those with fewer than 500 employees and a turnover of less than €100m and/or assets of not more than €86m.
Large companies can also benefit from further relief for qualifying R&D spend related to vaccines and medicines for TB, malaria, HIV and AIDS.
In order to qualify for R&D relief, businesses need to be able to demonstrate that they are undertaking a project in the field of science or technology where an overall advance is sought, where there are uncertainties to overcome and where the work undertaken will directly contribute to resolving these uncertainties.
As such, the relief may even be due if the end result does not successfully produce the advance hoped for.
Costs that qualify include employee costs, provision of staff by certain staff providers, materials, software, utilities and payments to clinical trial volunteers. Reduced rates of relief are even available where the R&D is subcontracted to a third party t undertake on the company’s behalf.
Patent Income
The Patent Box refers to an incentive introduced to offer a reduced rate of Corporation Tax to businesses that receive income attributable to patents. Such businesses can elect to apply a 10% rate of tax to profits from this enterprise, affected by giving a deduction equivalent to bring the rate down to 10%.
The beneficial deduction has been phased n from 13/14 to 17/18.
There are detailed requirements for this and relevant elections that must be made in within a given timescale.
Conclusion
With tax law become more complex, it has never been more important to work with expert in your sector, aware of the issues and changes in legislation that can affect your business and helping you to benefit from all reliefs and opportunities available. For more information on Wisteria’s expertise and services for bio-tech companies, contact us.