Jeremy “Hunting” for growth: Autumn Statement 2023

British Chancellor of the Exchequer Jeremy Hunt continues “hunting” for growth in the Autumn Statement 2023. The budget contained a number of announcements designed to support early-stage, high-growth, innovative businesses, such as those in the life sciences sector. 

This may be the last Autumn Statement before the next general election. Although a number of the announcements relate to private capital (and not new government funding), as a package they represent the Chancellor’s clear attempt to present himself as pro-innovation. This follows the recent Labour Party conference, at which it also tried to occupy the same ground. 

Increasing equity investments

• Pension reforms

Following the Mansion House agreement this summer (which sought to encourage the re-allocation of pension fund investments towards unlisted equities) and the “Venture Capital Investment Compact” (the VC industry’s voluntary commitment to attracting UK pension funds as LPs), the UK Government has announced proposed pension reforms. 

It is estimated that these proposals could result in an additional £75 billion in available financing for unlisted equity investments, helping bridge the “equity gap” for smaller companies in the UK. Broadly the reforms aim to allow greater aggregation of pension funds and so greater opportunities to invest in high performing private equity and venture capital funds. 

• LIFTS programme

In support of pension scheme investment into innovative UK companies, the UK Government will commit £250 million to two successful bidders in the Long-Term Investment for Technology and Science (LIFTS) initiative. This will create two new investment vehicles that are accessible to pension fund capital, potentially unlocking over £1 billion to support innovative companies from private investors.

• University spin-outs and the British Business Bank

As discussed, the Autumn Statement also coincided with the release of an independent report on promoting British university spin-outs. 

The UK Government has confirmed its intention to establish a Growth Fund within the British Business Bank (BBB). This will provide additional government funding to support the private pension fund vehicles. 

Additionally, the BBB’s £375 million Future Fund: Breakthrough programme is being extended with at least £50 million in additional capital to invest in innovative companies. This programme makes equity co-investments with private sector investors in growth stage R&D intensive companies. 

• EIS/VCT relief

In the UK, many venture capital funds are structured in accordance with the Enterprise Investment Scheme (EIS) or Venture Capital Trusts (VCTs) tax regimes. These offer tax benefits to (often) retail investors in high-growth companies. The sunset clause of these schemes will be extended from 2025 to 2035 with the intention of continuing to support start-ups and SMEs.

• ISA reform

The UK Government will allow Long-Term Asset Funds to be permitted investments for the purposes of the expanded Innovative Finance ISA (a popular tax-free retail savings product) from April 2024, likewise potentially increasing the pool of capital investing into alternative investment structures.

• Compute for AI

The UK Government will invest a further £500 million in computing for AI over the next two financial years bringing the total planned investment to £1.5 billion. The purpose of this investment is to provide AI researchers with access to cutting-edge computing power necessary for processing complicated tasks. This is in addition to the UK Government’s £100 million AI Life Sciences Accelerator Mission, which will use health data and AI to address pressing health challenges faced by the UK.

Supporting innovative businesses

• Full expensing

Full expensing, which was introduced in the Spring Budget 2023 for a period of three years, will now be made permanent (so continuing past 1 April 2026). This enables companies to write off the full cost of qualifying main rate plant and machinery investment (in the year of investment) against taxable profits as well as 50% of the cost of special rate assets (integral features and long-life assets). For high-growth, capital intensive, early-stage life sciences businesses this may be a valuable cashflow cost-saving (up to 25p off their tax bill for every £1 they invest) set to continue for the long-term. The UK Government will also consult on expanding the applicability of full expensing to include leased assets (currently excluded). 

• R&D tax credit reform

The Autumn Statement seeks to simplify R&D tax relief by merging the current RDEC and SME R&D schemes.  This will officially close the Government’s R&D tax relief review. The new regime will also retain a modified version of the existing scheme for R&D intensive SMEs.  

The new consolidated scheme largely follows the existing RDEC scheme in that it is an ‘above-the-line’ credit (at a confirmed rate of 20% of qualifying R&D expenditure) and will result in a net payable credit of (i) 16.2% for loss-making businesses (applying the small profit rate of 19%); and (ii) 15% for profitable businesses.  

A further key aspect of the consolidated scheme is the ability for contracting companies to claim the qualifying costs for outsourced work connected with their R&D projects.  This is likely to be beneficial for life science companies which often outsource work to contracted researchers and manufacturers.  

The Autumn Statement confirms a previously-announced limitation for overseas expenditure, the precise form of which is yet to take shape. 

In relation to the R&D-intensive SMEs scheme, which offers more generous credits, a company’s expenditure will need to be at least 30% on R&D, down from 40%, thereby expanding the pool of potential beneficiaries (by 5,000 extra SMEs on the Government’s figures).  The rules also provide a one-year grace period for companies that fail to consistently meet the intensity threshold thereby preventing uncertainty caused by companies shifting from one R&D scheme to another.

• Life sciences specific investment

In order to improve resilience to future health emergencies and to capitalise on the UK’s R&D prowess, £520 million is being provided from 2025-26 to support “transformational manufacturing investments” in the life sciences sector.