Spring Budget 2023: a spring forward for tech and life sciences?
26 April 2023 | Applicable law: England and Wales | 10 minute read
In the Spring Budget 2023 (the 'Spring Budget'), the government reiterated its aim to increase the UK's global market share in, amongst others, digital technologies and life sciences. The government also noted that there are 'opportunities to accelerate the progress of the technologies that will define this century by encouraging investment and smarter regulation'. As a result, new measures were introduced to further strengthen the UK's tech and life sciences sectors. These include increased tax reliefs for R&D intensive companies, additional financial investment into these sectors and various changes to increase the attractiveness of investing in UK companies.
We dive deeper into the government's support for the digital technologies and life sciences sectors, and summarise the Spring Budget's key changes and new measures below.
1. Additional support for R&D intensive small and medium size enterprises ('SMEs')
In the Autumn Statement 2022, the government announced that the rate of the Research & Development Expenditure Credit would be increased from 13% to 20% from 1 April 2023. In the Spring Budget, the government doubled down on its support for R&D intensive SMEs by introducing an increased relief for loss-making R&D intensive SMEs. As a result, eligible companies, i.e. where R&D accounts for at least 40% of the company's total expenditure, will receive £27 from HMRC for every £100 of R&D investment. The increased tax relief will therefore incentivise companies to further invest in their R&D capabilities.
2. Unlocking defined contribution pension fund investment
The government recognises that unlocking defined contribution ('DC') pension fund investment into the UK's technology sector will be key to developing the UK's next generation of globally competitive companies. To help with this, the government introduced the following initial package of incentives:
• increased support for the UK's most innovative companies by extending the British Patient Capital programme for an additional 10 years until 2033-34 and increasing its focus on R&D intensive industries, providing at least £3bn in investment;
• spurring the creation of new investment vehicles into tech and science companies that are tailored to UK DC pension scheme requirements through the Long-term Investment for Technology and Science initiative; and
• pursuing an accelerated transfer of the £364 billion Local Government Pension Scheme assets into pools to support increased investment in innovative companies and other productive assets.
3. Digital technologies
At Autumn Statement 2022, the government asked Sir Patrick Vallance to lead the Pro-Innovation Regulation of Technologies Review to support innovation in key growth sectors. Sir Patrick published his report on 15 March 2023 and the government accepted all of its recommendations in an effort to ensure that the UK's regulatory environment better regulates, amongst others, the applications of AI and promotes openness of public data.
AI contributing £3.7bn to the UK economy in 2022, ChatGPT's injection into the mainstream and the announcement of Google Bard are all just the tip of the AI iceberg. These technologies are based upon foundation models, including large language models. To ensure regulation keeps pace with AI advancement, the government will establish a taskforce that advances UK sovereign capability in foundation models and provide direct advice to ministers. Regulation of AI will certainly be an interesting space for the foreseeable future, especially given the Italian Data Protection Authority's recent limitation on ChatGPT processing Italian user data and the increased adoption of AI in consumer-facing products and services, discovery of new drugs and general proliferation into mainstream society.
Additionally, the government recognised that further investment is needed in the country's infrastructure for research and innovation. With increasing discussion of reaching artificial general intelligence, AI is expected to be a key driver of UK tech and life sciences, but powerful computing is required for the UK to achieve its ambition of being a science superpower and for AI research. Independent reports suggest that the UK is not maximising its competitiveness and that the UK's most powerful computer ranks only 28th in the world and that the UK's AI community has immediate requirements for large-scale, accelerator-driven compute to remain competitive . Scientists will need access to cutting edge computer power in order to maintain the UK's scientific edge. The government will therefore invest up to approximately £900m to build an exascale supercomputer and will establish a new AI Research Resource, with initial investments being made in 2023. Benefits are expected to include a better understanding of climate change, the discovery of new drugs and general maximisation of our potential in AI. This coincides with the introduction of the government's introduction of an annual £1m prize for the next 10 years to researchers that drive AI progress.
The government also recognised the transformative impacts of quantum technologies, such as the development of new types of computers, secure communications and improvements to sensing, imaging and timing. As a result, the government's Quantum Strategy sets out a new quantum research and innovation programme, and the government is committed to investing up to £2.5bn over 10 years to: (i) ensure that the UK is home to world-leaders in quantum science and engineering; (ii) support businesses through innovation funding opportunities and provide access to world-leading R&D facilities; (iii) drive the use of quantum technologies in the UK; and (iv) creating a national and international regulatory framework.
4. Life sciences
The significant R&D hubs in Cambridge and Oxford are key reasons why the UK is a world-leader in life sciences. With improved transport links between Cambridge and Oxford due to the East West Rail joining the two cities, the UK is expected to experience further growth in life sciences. Additionally, the supply of commercial development, especially lab space, is key to supporting R&D needs and driving investment into life sciences in the Oxford-Cambridge corridor. The government recognises the importance of this supply and will set out further details for supporting growth following the National Planning Policy Framework consultation.
Sir Patrick's report included interim recommendations following a regulatory review of life sciences. Acting on these recommendations, the government is supporting the Medicines and Healthcare products Regulatory Agency ('MHRA') with £10m extra funding over the next two years. This will allow the MHRA to accelerate patient access to treatments, as well as allow the MHRA to explore partnerships with international agencies in the US, Europe and Japan to provide simple and rapid approvals for medicines and technologies that have received their approval from 2024. It is also intended that the MHRA will have a fully operational swift approval process from 2024 for the most impactful new medicines and technologies.
Furthermore, the government allocated £100m funding for the Innovation Accelerators programme to 26 transformative R&D projects. It is expected that this will accelerate growth of three high potential innovation clusters, including the University of Manchester's Manchester Turing Innovation Hub, two quantum projects led by the University of Glasgow and M-Squared Lasers Limited in Glasgow, and a project to accelerate new health and medical technologies led by the University of Birmingham.
With generative AI expected to become even more part of the life sciences lexicon, the discovery of new drugs is likely to accelerate alongside the continued development of medical devices (both hardware and software). No doubt a quicker route to market via a swift approval process will be welcomed by the life sciences community and also potentially increase the attractiveness of UK life sciences companies.
5. Increasing the limits of the Seed Enterprise Investment Scheme ('SEIS')
SEIS is a tax-advantaged investment scheme that allows investors and directors to claim initial tax relief of 50% on investments up to £100,000 and capital gains tax exemption for any gains on the SEIS shares.
Announced as part of the Spring Finance Bill 2023 (the 'Finance Bill'), the government widened access to the SEIS on 6 April 2023 to further drive investment into early stage companies by increasing:
• the ceiling that applies to the investment that a company can raise in the relevant period and on which investors can claim relief, from £150,000 to £250,000;
• the limit that applies at the date of investment on the 'gross assets' a company can have, from £200,000 to £350,000;
• the age limit that applies to the definition of a company's 'new qualifying trade' at the date of investment, from two years to three years; and
• the annual limits that apply to the investment amount on which individuals can claim income tax and capital gains tax re-investment reliefs, from £100,000 to £200,000.
However, it is important to note that the Finance Bill is only expected to receive Royal Assent in July 2023. As a result, HMRC will continue to provide Advance Assurance and SEIS Compliance under the previous rules until the Finance Bill receives Royal Assent, after which HMRC will give Advance Assurance and SEIS Compliance in connection with the above changes for shares issued on or after 6 April 2023. In other words, Advance Assurance can be provided for up to £150,000 SEIS not but Advance Assurance for £250,000 SEIS can only be obtained post-Royal Assent. This is certainly something to be mindful if your company is currently trying to raise funds under the above new SEIS rules.
6. Company share option plans ('CSOPs')
While not announced in the Spring Budget, it is important to be aware of the new measures that were implemented on 6 April 2023 that widen the number of companies that can benefit from a CSOP.
An alternative to EMI, a CSOP is a share incentive arrangement that qualifying companies can use to grant tax-advantaged options to their employees, provided that, amongst other requirements, the relevant shares must either be listed on a recognised stock exchange or in a company not controlled by another company. Provided that certain other requirements are met, tax benefits include no income tax or national insurance contributions on exercise, the employee will only pay capital gains tax on the sale of the shares and the company may be able to claim a statutory corporation tax deduction for any gains earned from the option post-exercise.
To be eligible for a CSOP, no employee can hold CSOP options over shares that have a total market value of over £30,000 on grant and, if there are multiple classes of shares, the majority of the relevant class of shares over which options are granted must be either 'open market shares' or 'employee-controlled shares'. These requirements have often made it difficult for companies to qualify for a CSOP.
However, to broaden the applicability of CSOPs and to attract more talent into UK innovation, the £30,000 threshold has been increased to £60,000 and the requirement for shares to be 'open market shares' or 'employee-controlled shares' has been removed. This widening of CSOP-eligibility has already received applause from investors with early reports indicating that this has propelled the UK to being a top destination for tech and scientific talent.
7. Tax and incentives
Finally, the Government also announced numerous changes to the UK's tax regime. Read more from Christopher Groves, Rachel Hawkins, Charlie Tee, Ceri Vokes and Ed Cubitt on the tax changes here.
The government also introduced slight changes to the rules under the enterprise management incentives ('EMI') legislation, which should improve the process for granting EMI options by removing the requirements to specify in detail the restrictions on the shares over which the EMI option is being granted and to make a written declaration about working time, as well as increasing the deadline for notifying the grant of EMI options. Read more from Paul McGrath and Siraj Mahmood on the EMI changes here.
With news of decreased VC investment, tech company layoffs and the collapse of Silicon Valley Bank ('SVB') , public confidence in tech and life sciences has been shaken recently. However, the government clearly demonstrated its support for UK tech and life sciences by facilitating the sale of SVB to HSBC. The Spring Budget only further illustrates the government's support of UK tech and life sciences with further investment into these sectors and increasing the attractiveness of UK innovation for investors.
Please contact our tech and life sciences teams to discuss more about the Spring Budget and how it might impact you.