2021 Budget: Life Sciences

2021 Budget

A year on from the Chancellor’s first ‘COVID-19 Budget’, Budget 2021 provides plenty for the Life Sciences sector to digest. The ‘super-deduction’ for capital expenditure will be broadly welcomed, particularly by those in pharmaceutical manufacturing. Whilst HM Treasury and HM Revenue & Customs launch a bottom-up review of both the SME scheme R&D Expenditure Credit (‘RDEC’), the more immediate changes will be the implementation of the SME R&D tax credit cap for accounting periods beginning on or after 1 April 2021.

Non-tax measures that should benefit the sector include an overhaul of the visa system to enable highly skilled individuals to come to the UK more easily, and a review of the pensions regulations to assess pension schemes’ ability to invest in a broader range of assets including in high-growth companies.

The Chancellor confirmed that to fund the unprecedented national effort of the vaccine rollout across the whole of the UK, the Government has made available more than £6 billion in total to develop and procure COVID-19 vaccines.

Corporation Tax Rates

The rate of corporation tax will increase from April 2023 to 25% on profits over £250,000. The rate for small profits under £50,000 will remain at 19% and there will be relief for businesses with profits under £250,000 so that they pay less than the main rate. In line with the increase in the main rate, the Diverted Profits Tax rate will rise to 31% from April 2023 so that it remains an effective deterrent against diverting profits from the UK.


Despite the increase in corporation tax in 2023, the UK’s competitiveness is expected to be maintained globally and in the G7. However, this will depend on whether other countries seek to increase or lower their own rates in response.

Super-deduction on qualifying plant and machinery

The Government is seeking to stimulate business investment by introducing a “super-deduction” for qualifying expenditure on plant and machinery from 1 April 2021 to 31 March 2023. The temporary tax reliefs will be available to companies in the form of enhanced capital allowances:

  • A super-deduction in the form of an enhanced first-year allowance of 130% on assets that ordinarily qualify for 18% main rate writing down allowances
  • A first-year allowance of 50% on assets that ordinarily qualify for 6% special rate writing down allowances

Multiple conditions and exclusions apply, including:

  • The expenditure is incurred from 1 April 2021 to 31 March 2023
  • Expenditure is excluded if incurred under a contract made before 3 March 2021
  • A reduced super deduction applies in a period straddling but ending on or after 1 April 2023
  • A clawback of all or some of the relief (in the form of a balancing charge) can arise, depending on the date of the disposal
  • Any tax advantage obtained as the result of “relevant arrangements” can be counteracted by the making of adjustments


An additional tax saving of up to £25 per £100 invested will be welcomed by businesses in the current environment, but like all first-year allowances, these enhanced allowances are only available in the period of investment. For many this may simply create additional tax losses to carry forward and, as the use of losses is restricted against profits in excess of £5 million on a group basis, some modelling may be required to see whether the overall result will be beneficial.

Other factors to consider will be the interaction with the annual investment allowance, which remains at £1 million until 1 January 2022, and any additional compliance requirements arising in consequence of the balancing charge on a future disposal.

The government has used the existing FYA regime (which is now otherwise limited in its scope) as the framework to deliver the super deduction for expenditure on plant and machinery. The FYA regime includes a number of general exclusions which don’t apply to AIAs, for example. In particular, there is an exclusion for plant and machinery provided for leasing, which means that expenditure incurred by property investors on assets in properties that are let out is excluded from benefitting from the new allowance. It is unclear at this stage whether the Government may be minded to reconsider, given that an exception from the leasing exclusion applied to certain plant and machinery in buildings under the ECA scheme until it was withdrawn last year.

Loss carry back relief

The trading loss carry back rule will be temporarily extended from the existing one year to three years. Companies will be able to obtain relief for up to £2 million of losses in each relevant accounting period ending between 1 April 2020 and 31 March 2021 and between 1 April 2021 and 31 March 2022 subject to a group level limit of £2 million.

The amount of trading losses that can be carried back to the preceding year remains unlimited for companies. After carry back to the preceding year, a maximum of £2 million of unused losses will be available for carry back against total profits in the earlier 2 years. This £2 million limit applies separately to the unused losses of each 12-month period within the duration of the extension.

The £2 million cap will be subject to a group-level limit.


This measure is likely to benefit companies making taxable profits in periods prior to the pandemic. It is disappointing the 50% corporate loss restriction will not be relaxed temporarily and so denies companies the ability to fully offset losses made during the pandemic period against profits in the following period.

R&D tax reliefs Consultation

The Government is to carry out a review of R&D tax reliefs, with a consultation published alongside the Budget. This review will consider all elements of the two R&D tax relief schemes, with the stated objective of ensuring the UK remains a competitive location for innovative research, that the reliefs continue to be fit for purpose and that taxpayer money is effectively targeted.


It has been well-known for some time that HMRC are keeping the R&D tax credit schemes under review and so this broad consultation does not come as a surprise, particularly given the recent consultation on qualifying expenditure. This consultation poses 17 questions and so will provide a comprehensive review of the schemes. It will cover:

  • Definitions, eligibility and scope of the reliefs, to ensure they are up to date and competitive and that they reflect how R&D activity is conducted now
  • How well the reliefs are operating for businesses and HMRC and whether this could be improved
  • Targeting of the reliefs to ensure that for every pound of taxpayer support the value of the beneficial R&D activity is maximised for the UK economy.

Given the breadth of the consultation it is certain that changes will be implemented in future years. There are some interesting points coming under consideration including:

  • Merging the SME and R&D Expenditure Credit (RDEC) schemes
  • Widening the definition of R&D
  • Reviewing rates of relief as the SME is much more generous than the RDEC
  • Separating claims from the ordinary Corporation Tax self-assessment system which may result in more standardised documentation being required
  • Differential rates for different areas of research
  • Quality of supporting information
  • Results based fee structures with those who advise on R&D tax credit claims
  • The case for continued inclusion of sub-contract R&D for SMEs where this is undertaken overseas
  • Limiting the eligibility of Qualifying Indirect Activities
  • The inclusion of capital expenditure. This was another area, in addition to data costs, that FTI Consulting initiated the lobbying for in 2016.

Deterring abuse: The SME R&D Cap

For accounting periods beginning on or after 1 April 2021, the amount of SME payable R&D tax credit that a business can receive in any one year will be capped at £20,000 plus three times the company’s total PAYE and NICs liability. The legislation is intended to prevent abuse of R&D relief. The draft legislation for the SME R&D cap has been refined and will be published in the forthcoming Finance Bill.


FTI Consulting have been deeply involved in representing the sector to HM Treasury and HMRC and we are pleased to see a reversion to the starting date of accounting periods beginning on or after April 2021 . The measures to try and ensure the cap does not impact genuine commercial business are expected to be largely effective although there remains no doubt that some genuine companies will find themselves adversely affected.

Consultation on the scope of qualifying expenditure: Publication of responses

The Government has published the summary of responses of the recent consultation on the scope of qualifying expenditures for R&D tax credits. The Government agrees there is a strong case for the inclusion of data and cloud computing costs and will now consider bringing them into the scope of the relief.


We have long lobbied for the inclusion of data and cloud computing costs in R&D claims and are pleased that the Government now recognises the importance of these costs. We hope to see these costs being included in the scope of relief sooner rather than later. Going forward, we welcome further review and consultation on the qualifying costs included in R&D claims.

Future Fund: Breakthrough

Building on the Government’s Future Fund, the Government will commit £375 million to introduce Future Fund: Breakthrough, a new direct co-investment product to support the scale up of the most innovative, R&D-intensive businesses. The British Business Bank will take equity in funding rounds of over £20 million led by private investors to ensure these companies can access the capital they need to grow and bring prosperity to communities across the UK.


Now closed to new applicants, the original Future Fund was introduced last Budget and made available an initial £250m for investment. The scheme sought to support innovative UK companies that relied on equity investment that were impacted by COVID-19 and, due to the apparent success of the scheme, it has now been extended. Whilst the amount of capital made available under the original scheme was considered modest by many, the commitment is now 50% more. Against that stands the fact that it is only to be available to significant fundraising rounds which will exclude many from eligibility. Alternative sources of capital are always welcome, and this may plug gaps for companies seeking investment with the life sciences sector being a particular target of the measure.

Enterprise Management Incentives (“EMI”) consultation

At last year’s Budget the Government announced a review of the EMI share options scheme, with particular consideration on whether access should be broadened to help support high growth companies to attract and retain talent. The Government has now announced a call for evidence to look at whether, and how, to expand the scheme.

The call for evidence has been published here, and will close on 26 May 2021.


Currently the ability to grant EMI options is available only to businesses with less than £30million of assets, and fewer than 250 (full time equivalent) employees on a group basis.

Any potential to widen the scope is likely to be welcomed by small, start-up and fast-growing businesses. The use of EMI options is often a critical method of retaining and incentivising key individuals, especially where there may not be sufficient cash to provide bonuses and other market rate remuneration as businesses focus on growth.

Coronavirus Job Retention Scheme

The Government is extending the Coronavirus Job Retention Scheme (CJRS) until the end of September 2021. Employees will continue to receive 80% of their current salary for hours not worked. There will be no employer contributions beyond National Insurance Contributions (NICs) and pensions required in April, May and June. From July, the Government will introduce an employer contribution towards the cost of unworked hours of 10% in July and 20% in August and September.


The package of COVID-19 measures will provide a degree of flexibility to businesses in how and when they restart their business operations as the economy reopens over the coming months. These measures are welcomed.

About FTI Consulting

FTI Consulting is an independent global business advisory firm dedicated to helping organisations manage change, mitigate risk and resolve disputes: financial, legal, operational, political & regulatory, reputational and transactional. FTI Consulting professionals, located in all major business centres throughout the world, work closely with clients to anticipate, illuminate and overcome complex business challenges and opportunities. The views expressed in any of the articles or other content hosted on this site are those of the author(s) and not necessarily the views of FTI Consulting, its management, its subsidiaries, its affiliates, or its other professionals.

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