Introduction
What are freeports and why are they being introduced?
Freeport tax package
R&D tax reliefs within freeports
United Kingdom's life sciences vision
Life sciences investment programme
Comment
Boosting innovation is a key focus for the UK government and is at the centre of its post-Brexit and post-covid-19 recovery strategy. Freeports are intended to support the United Kingdom's innovation drive. The government envisages that they will be "hotbeds of innovation" benefitting from customs and tax reliefs and incentives to help energise the economy.
Encouraging innovation is often seen as synonymous with increasing research and development (R&D) investment. R&D tax reliefs are viewed as a significant incentive to encourage investment in R&D. Given the government's target 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 a reasonable assumption that enhancing tax reliefs for R&D would form part of any new innovation-boosting tax package. Consequently, many commentators were surprised that enhanced R&D tax reliefs were absent from the final freeport tax package announced in October 2020, which broadly provides tax relief within a freeport tax site for businesses acquiring and developing commercial land, acquiring equipment and employing individuals.
Across the life sciences sector, the availability of R&D tax reliefs is often considered vital to R&D investment by life sciences businesses, particularly start-ups that may be reliant on R&D tax credits as a source of finance. Growth within the sector is being actively encouraged and is considered a key UK innovation driver. Given that the UK life sciences sector invests more in R&D than any other sector, continued growth will also be pivotal to the government meeting its R&D investment targets.
Without enhanced R&D tax reliefs, it may seem that freeports provide limited investment opportunities for life sciences businesses and will fail to boost innovation across the sector. Indeed, within the sector, enthusiasm for the designated freeport tax reliefs was initially subdued. However, on reflection, freeports may present significant opportunities for innovation and investment across the life sciences sector.
Before considering how the sector may benefit from the freeport tax package, it is useful to outline the nature of a freeport, the government's stated policy objectives for introducing them and the enhanced tax reliefs available within freeports.
What are freeports and why are they being introduced?
At the Budget on 3 March 2021, the Chancellor of the Exchequer announced the location of eight freeports across England, intended to become operational by late 2021. There is no precise definition of a "freeport". Generally, a freeport will be a designated area, commonly situated in and around existing ports, including airports and rail freight hubs, that benefit from advantageous customs and tax rules and often reduced regulatory requirements. In the United Kingdom, freeports will be distinct customs zones that will operate outside the country's customs borders, allowing goods to be imported, processed and re-exported without incurring any customs duties. Duties will be levied when goods leave the freeport to enter the wider UK market.
The stated policy objectives behind freeports are to:
- establish national hubs for global trade and investment across the United Kingdom;
- promote regeneration and job creation; and
- create hotbeds for innovation.
Freeport tax reliefs are not available to all businesses operating within a freeport; rather, they are accessible only in designated freeport tax sites, which will be specific locations within the freeport. Legislation introducing the freeport tax reliefs was included in the Finance Act 2021. Broadly, the tax reliefs are:
- stamp duty land tax exemption for non-residential land until 30 September 2026;
- capital allowances – an enhanced structures and buildings allowance of 10% (rather than 3%) on qualifying capital expenditure on the construction or acquisition of non-residential structures and buildings and a 100% first year deduction for expenditure on qualifying plant and machinery until 30 September 2026;
- employers' national insurance contributions (NICs) exemption – broadly, no employer's NICs (usually payable at a rate of 13.8%) for new employees for three years; and
- business rates relief – up to 100% relief for five years.
Taking these reliefs collectively, they are focused – over a five-year period – on encouraging:
- the purchase of land for commercial purposes;
- the development of land;
- the acquisition of machinery and equipment to use in the newly developed land; and
- the hiring of new employees to undertake the work.
The freeport tax package seems to provide opportunities for innovation through manufacturing rather than through R&D.
R&D tax reliefs within freeports
Although no specific R&D-related tax reliefs are being introduced for freeports, the existing R&D tax credits remain available to businesses operating in a freeport tax site and may be valuable to life sciences businesses undertaking R&D within a freeport.
Two tax reliefs are currently available on certain qualifying R&D-related expenditure. Where certain conditions are met, relief is available for small or medium-sized companies in the form of an effective deduction of 230% on qualifying R&D costs. A research and development expenditure credit (RDEC) that provides a 13% credit of qualifying R&D expenditure may also be available. The "above the line" RDEC is brought into account as a trade receipt, increasing taxable profits (or, conversely, reducing losses).
The government is currently undertaking a wide-ranging review of the R&D tax relief system (for further details please see "Review into R&D tax relief system – welcome development for life sciences sector?"). A public consultation into possible routes for reform ended in June 2021, with the outcome expected to be published later this year.
United Kingdom's life sciences vision
Although encouraging innovation by incentivising R&D is traditionally aligned with encouraging growth across the life sciences sector, a focus on innovation through manufacturing is consistent with the UK government's current strategic objectives for the sector.
The government's plans for the life sciences sector were detailed in its Life Sciences Vision report (the vision), published in July 2021, representing a 10-year strategy for development and growth across the sector (for further details please see "UK government's vision for life sciences sector – lessons learnt from covid-19 pandemic and green initiatives"). The government is seeking to transform the United Kingdom into a life sciences superpower and the most attractive location in Europe to start and grow a life sciences business. Central to the vision is a focus on "cultivating a business environment" in which life sciences firms are "incentivised to onshore manufacture" new innovative technologies.
The creation and development of new UK manufacturing centres across the sector is integral to the vision. Creating a "globally competitive environment for life science manufacturing investments" is an overarching ambition. There are currently over 2,000 life science manufacturing sites around the United Kingdom. However, the government acknowledges that there has been a significant reduction over the past 25 years. Most notably, production volumes have fallen by 29% since 2009, with certain technologies and products no longer being developed in the United Kingdom.
The government is keen to develop manufacturing clusters across the sector and in different regions in the United Kingdom. The vision specifically cites the use of freeports as a tool to support cluster formation, indicating that the government views freeports as creating opportunities for life sciences businesses to innovate through manufacturing.
Life sciences investment programme
Beyond the tax reliefs available to life sciences businesses seeking to establish and develop manufacturing capabilities in a freeport tax site, businesses may also be able to access vital funding through the government's investment programme. A total of £1 billion in new funding is being made available to the sector, representing a combination of a £200 million government investment delivered through British Patient Capital, part of the government-owned British Business Bank, and a commitment by Abu Dhabi's Mubdala Investment Company, one of the world's leading sovereign investors, to invest £800 million in the UK life sciences sector in collaboration with British Patient Capital.
Given the current drive to incentivise life science manufacturing and develop manufacturing cluster sites, freeports and their associated tax benefits may offer significant opportunities for life science businesses to explore. The availability of designated freeport tax reliefs combined with existing R&D tax reliefs and increased access to government funding may create a powerful incentive to establish new life science businesses within freeport tax sites that seek to develop and manufacture new products and technologies.
Freeports may indeed help to provide the desired boost to innovation across the life sciences sector. Enhanced R&D tax reliefs remain an important tool to encourage R&D investment and innovation for life sciences businesses. Notwithstanding the introduction of freeports as a means of encouraging innovation, given recent statistics published by the Office for National Statistics indicating that the United Kingdom may struggle to meet its R&D investment targets, it is hoped that the government will continue to ensure that R&D tax reliefs remain effective and continue to incentivise innovation through R&D investment.
For further information on this topic please contact Penny Simmons at Pinsent Masons by telephone (+44 20 7418 8250) or email ([email protected]). The Pinsent Masons website can be accessed at www.pinsentmasons.com.