Freeport Tax Sites – An Opportunity for Life Sciences Companies to Explore? – Remark

introduction
What are free ports and why are they introduced?
Free port tax package
Tax breaks for R&D in free ports
The UK’s vision for life sciences
Life Sciences Investment Program
Comment

introduction

Boosting innovation is a key objective for the UK government and is at the center of its post-Brexit and post-covid-19 recovery strategy. Freeports are intended to support the UK’s innovation momentum. The government envisions that they will be “hotbeds of innovation” benefiting from customs and tax breaks and incentives to help boost the economy.

Encouraging innovation is often synonymous with increasing investment in research and development (R&D). Tax breaks for R&D are seen as an important incentive to encourage investment in R&D. Given the government’s goal of increasing total R&D investment to 2.4% of UK GDP by 2027 (an increase of over 40% since 2017), it might even be reasonable to assume that the Improving tax breaks for R&D would be part of any new innovation stimulation plan. tax package. Therefore, many commentators were surprised that improved tax breaks for R&D were missing from the final freeport tax package announced in October 2020, which broadly provides tax breaks within a freeport tax site for companies that acquire and develop commercial land, acquire equipment and employ individuals.

Across the life sciences industry, the availability of R&D tax breaks is often seen as vital for R&D investments by life science companies, especially start-ups which may depend on R&D tax credits as a source of funding. Growth within the sector is actively encouraged and is seen as a key innovation driver in the UK. As the UK life sciences sector invests more in R&D than any other sector, continued growth will also be essential for the government to meet its R&D investment targets.

Without improved tax breaks for R&D, it may appear that free ports offer limited investment opportunities for life science companies and will fail to spur innovation across the industry. Indeed, within the industry, enthusiasm for the designated tax breaks for free ports was initially subdued. However, on reflection, free ports can present significant opportunities for innovation and investment in the life sciences sector.

Before considering how the sector can benefit from the free port tax package, it is helpful to describe the nature of a free port, the government’s stated policy objectives for introducing them, and the enhanced tax breaks available at free ports.

What are free ports and why are they introduced?

In the budget of March 3, 2021, the Chancellor of the Exchequer announced the location of eight free ports across England, intended to become operational by the end of 2021. There is no precise definition of a “Free port”. Typically, a free port will be a designated area, typically located in and around existing ports, including airports and rail freight hubs, which benefits from favorable customs and tax rules and often reduced regulatory requirements. In the UK, free ports will be separate customs areas that will operate outside the country’s customs borders, allowing goods to be imported, processed and re-exported without incurring customs duties. Duties will be levied when goods leave the free port to enter the wider UK market.

The declared political objectives of the free ports are as follows:

  • establish national hubs for global trade and investment across the UK;
  • promote regeneration and job creation; and
  • create centers of innovation.

Free port tax package

Freeport tax breaks are not available to all businesses operating in a free port; on the contrary, they are only accessible in the designated free port fiscal sites, which will be specific locations within the free port. The legislation introducing the free port tax breaks was included in the 2021 finance law. In general, the tax breaks are as follows:

  • exemption from stamp duty for non-residential land until September 30, 2026;
  • capital deductions – an enhanced deduction for structures and buildings of 10% (instead of 3%) on eligible capital expenditures for the construction or acquisition of structures and non-residential buildings and a deduction of 100% on first year for eligible plant and machinery expenses until September 30, 2026;
  • National Insurance Employer Contribution (NIC) exemption – basically no employer NIC (usually payable at the rate of 13.8%) for new employees for three years; and
  • commercial tariff relief – up to 100% relief for five years.

By taking these reliefs collectively, they aim – over a five-year period – to encourage:

  • the purchase of land for commercial purposes;
  • territory planning ;
  • the acquisition of machinery and equipment to be used in the new developed land; and
  • hiring new employees to carry out the work.

The free port tax package appears to offer opportunities for innovation through manufacturing rather than R&D.

Tax breaks for R&D in free ports

Although no specific R&D related tax relief is introduced for free ports, existing R&D tax credits remain available for companies operating in a free port tax site and may be useful for life science companies. undertaking R&D in a free port.

Two tax breaks are currently available on certain eligible expenditure linked to R&D. When certain conditions are met, relief is available for small or medium-sized enterprises in the form of an effective deduction of 230% on eligible R&D costs. A research and development expenditure credit (RDEC) which provides a credit of 13% of eligible R&D expenditure may also be available. The RDEC “above the line” is taken into account as a commercial revenue, increasing taxable profits (or, conversely, reducing losses).

The government is currently undertaking a broad review of the R&D tax relief system (for details, please see “Review of the R&D Tax Relief System – a welcome development for the life sciences sector?”) A public consultation on possible reform paths ended in June 2021, and the results are expected to be published later this year.

The UK’s vision for life sciences

While encouraging innovation by encouraging R&D has traditionally been aligned with encouraging growth in the life sciences sector, the focus on innovation through manufacturing is in line with current UK government policy objectives. for the sector.

The government’s plans for the life sciences sector were detailed in its Life Sciences Vision report, released in July 2021, representing a ten-year strategy for development and growth in the sector (for more details, please see “UK Government’s vision for the life sciences sector – lessons learned from the covid-19 pandemic and green initiatives”). The government seeks to transform the UK into a life sciences superpower and most attractive place in Europe to start and grow a life sciences business At the heart of the vision is the emphasis on ‘cultivating a business environment’ in which life science companies are “Encouraged to manufacture on site” new innovative technologies.

The creation and development of new UK manufacturing centers across the industry is an integral part of the vision. Creating a “globally competitive environment for investment in life science manufacturing” is a primary ambition. There are currently over 2,000 life science manufacturing sites in the UK. However, the government recognizes that there has been a significant reduction over the past 25 years. In particular, production volumes have fallen by 29% since 2009, with certain technologies and products no longer being developed in the United Kingdom.

The government wants to develop manufacturing clusters across the industry and in different parts of the UK. The vision specifically cites the use of free ports as a tool to support cluster formation, indicating that the government views free ports as creating opportunities for life science companies to innovate through manufacturing.

Life Sciences Investment Program

Beyond the tax breaks available to life science companies looking to establish and develop manufacturing capabilities in a free port tax site, companies can also access vital financing through the government’s investment program. . A total of £ 1bn of new funding is being made available to the sector, which is a combination of a government investment of £ 200m through British Patient Capital, which is part of the British Business Bank owned by the government, and a pledge from Mubdala of Abu Dhabi. Investment Company, one of the world’s leading sovereign investors, will invest £ 800million in the UK life sciences sector in collaboration with British Patient Capital.

Comment

Given the current drive to encourage life science manufacturing and to develop manufacturing cluster sites, free ports and their associated tax benefits may offer significant opportunities for life science companies to explore. The availability of designated tax breaks for free ports, combined with existing tax breaks for R&D and increased access to government funding, can create a powerful incentive to establish new life science companies in tax sites for ports. franks who seek to develop and manufacture new products and technologies.

Free ports can indeed help give the desired impetus to innovation in the life sciences sector. Increased tax breaks for R&D remain an important tool to encourage investment in R&D and innovation for life science companies. Despite the introduction of free ports as a means of encouraging innovation, given recent statistics released by the Office for National Statistics indicating that the UK may struggle to meet its R&D investment targets, there is hopes the government will continue to ensure that tax breaks for R&D remain effective and continue to encourage innovation through investment in R&D.

For more information on this topic, please contact Penny simmons at Pinsent Masons by phone (+44 20 7418 8250) or by e-mail ([email protected]). The Pinsent Masons website can be accessed at www.pinsentmasons.com.

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