R&D tax incentives for life sciences

Pharmaceutical, biotechnology and medical device development is close to the paradigm of R&D in all seven schemes: a hypothesis, a protocol, an experiment and a result that could not be known in advance. Eligibility of the science is rarely the problem. What decides life sciences claims is structure: where each piece of work was physically performed, who paid for it and on what terms, and who owns the results. A company that outsources most of its development to contract organisations in several countries can find much of its spend excluded or limited, not because the work was not R&D, but because of where and how it was bought.

This guide follows the shape of the manufacturers guide and ends with each scheme's rule on work done overseas.

What this guide covers

• Where the qualifying work sits across discovery, formulation, process development, clinical development and devices.
• The activities to exclude, especially routine testing, validation and regulatory work.
• The evidence a life sciences company already produces and how to keep it claim-ready.
• Contract research, university payments and materials.
• The overseas work rule in each of the seven countries.

Where to look

Map the pipeline and ask, for each phase, what was unknown at the start and what work was done to find out. The table gives the usual pattern.

Digital health software also follows each country's software rules; the industry examples module shows how that boundary is drawn.

What to exclude

• Routine quality control and release testing of batches against a fixed specification.
• Validation testing against established requirements and regulatory testing to a known standard, as distinct from verification testing that resolves a design uncertainty.
• Regulatory submissions and work to comply with statutory requirements or standards.
• Legal and administrative work on patents, licensing and litigation.
• Market research, pricing studies and post-approval studies whose purpose is commercial.
• Commercial manufacture once the process is established.

The boundary inside a clinical programme matters too. Trial design, protocol development, conduct, data management and statistical analysis directed at the hypothesis are part of the work; recruitment advertising and launch planning are not.

Evidence in life sciences

Life sciences companies keep records made at the time because regulation requires them. The task is to make those records answer a reviewer's questions as well as a regulator's:

• Protocols that state the hypothesis and acceptance criteria before the work starts, so the uncertainty is on record at the outset.
• Laboratory notebooks or electronic records, signed and dated, with the failed runs kept.
• Development batch records and stability pull data, distinguished from commercial batch records.
• Method development reports kept separately from method validation reports, because the first is R&D and the second usually is not.
• Trial protocols, amendments, analysis plans and study reports, with the sites and countries where each part of the work was done.
• Contracts and invoices from contract organisations showing what was done, where, and whether payment depended on the result.
• Grant and sponsorship agreements, read for who bears the risk and who owns the results.
• Time by scientist by project, including scientists whose titles do not say research.

Costs often missed

Three categories cause most of the errors.

Contract research

Every scheme treats work bought from a contract research organisation differently from work done by employees, through a reduced percentage, a cap, a location condition or a rule that the payer rather than the performer claims. In the United States 65 percent of amounts paid for research performed for you counts, and only where the research is conducted within the United States. In Canada 80 percent of arm's length contract payments count. In the United Kingdom 65 percent of payments to an unconnected subcontractor qualify. Ireland caps expenditure on R&D carried on by an unconnected person at the greater of 15 percent of the company's own qualifying expenditure and €100,000. Singapore treats a fixed portion of the fee for R&D outsourced to an R&D organisation in Singapore as qualifying staff costs and consumables. Model these rules before signing, because the choice of site and contract terms changes the claim.

Universities and hospitals

Collaborations are often paid as contributions rather than contracts. Ireland allows expenditure paid to a university or institute of higher education up to the greater of 5 percent of the company's own qualifying expenditure and €100,000. Canada counts third-party payments only where the claimant is entitled to exploit the results. Check the agreement for rights to the results.

Materials and reagents

Reagents, cell lines, reference standards and batches of active ingredient consumed in development are eligible costs in most schemes, and are often buried in cost of sales or inventory. Where a development batch is later sold, several schemes reduce or claw back the benefit on the materials in it.

Many life sciences companies are loss making, so how each scheme pays out matters as much as its rate; the country pages explain refundability.

Getting started

Start from the development plan rather than the general ledger. For each programme, list the phases, the sites, the contract organisations and the funding sources, then test each phase against the eligibility rule and each cost against the location and contract rules. The finance module on contractors and overseas costs sets out the rules. Do this before the next contract is signed, not after the year ends.

Illustrative example

Illustrative example. Oriel Biosciences Ltd, a hypothetical company, spent 600,000 in the year on a programme to find a room temperature stable liquid formulation of a protein therapeutic where the known formulations required cold storage. 350,000 was in-house scientist time and consumables at its own laboratory. 150,000 was paid to a contract laboratory in the same country to run the stability pulls to Oriel's written protocol, with payment due whether or not the formulation held. 100,000 was paid to a contract laboratory overseas for a specialised assay not available at home. The programme meets the eligibility test in every scheme: the uncertainty was whether any excipient combination could achieve the target, and the systematic screen resolved it. The in-house 350,000 is a candidate everywhere. The domestic 150,000 enters at the scheme's percentage or cap for contracted work. The overseas 100,000 is where the schemes diverge: excluded in some, allowed within a limit or on a finding in others, allowed at a lower rate in another. The benefit at that country's rate applies to what survives those rules, which is why the decision on where to run the assay belongs before the contract is placed.

Country differences

One rule per country, in the scheme's own wording, on work done outside the country. Each country page holds the detail.

Related pages

• Guide: R&D tax incentives for manufacturers
• Technical Teams Program, Module 5: Industry examples
• In-House Finance Team Program, Module 4: Contractors and overseas costs
• In-House Finance Team Program, Module 5: Grants and subsidised expenditure
• Guide: contemporaneous documentation
• Resource hub: eligibility

Educational material, not advice. Eligibility and treatment depend on the scheme, the location of the work and the facts.