R&D tax credits: A novel approach to supply chain funding
pharmafile | September 1, 2017 | News story | Manufacturing and Production, Medical Communications, Research and Development | biotech, drugs, pharma, pharmaceutical, tax credits
Jenny Tragner, director at R&D tax credit consultancy ForrestBrown and member of HMRC’s R&D Consultative Committee, says R&D tax credits don’t just exist to fund drug development, they can also apply to the entire pharmaceutical supply chain.
In the pharmaceutical industry, grants and other incentives, including R&D tax credits, are more widely used than in other sectors – providing crucial funding for new and continuing medical developments. R&D tax credits are often claimed for projects involving the development of new drugs, but specialist companies are increasingly developing faster and cheaper ways to help drugs reach patients, while still meeting regulatory requirements, and these areas can also attract R&D tax relief.
Novel drug delivery, supply chain efficiency and packaging development, for example, are all central to global healthcare progress, yet many companies working in these areas might not be claiming R&D tax credits despite their activities qualifying. They could be missing out on a valuable alternative funding source as a result. This article will explain some of the R&D tax credit incentive’s main applications aside from drug development, as well as addressing some of the common misconceptions around eligibility that tend to see incentives not reach their potential in this sector.
Defining R&D
The government deems R&D to take place when a project seeks to achieve an advance in science or technology through the resolution of scientific or technological uncertainty. The definition is purposefully broad so that it can apply equally to all sectors and for pharma, R&D can mean much more than initial drug development. So, in which areas could firms be missing out on R&D tax relief?
Developing or adapting a manufacturing process for a new drug
One of the primary misconceptions around R&D tax credit eligibility, not just in the pharmaceutical sector but across the board, is that qualifying R&D does not include improvements to a manufacturing process – this is not the case.
As with any manufacturing process, there are numerous targets to monitor in pharmaceutical manufacturing. These include wastage, cost effectiveness and quality amongst others. Therefore, modifying an existing manufacturing process or developing a new one could, for example, create a faster line through automation, or increase the aseptic properties of the finished drug. In pharmaceutical manufacturing especially, production cannot simply be up-scaled, owing to the behaviour of chemicals when processed in certain environments. Therefore, this area of development is heavily R&D-intensive and could potentially be eligible for R&D tax credits.
Pharmaceutical testing
Many drug testing methods are well established and universally adopted. However, as new drugs and their delivery methods become more innovative, and as the need for volume and speed increases, there becomes a requirement for new testing techniques, as well as process improvement though automation and computing for example. The development of these new methods potentially becomes a qualifying R&D activity as new challenges are being addressed. The same can be true of claims testing – proving the efficiency and impact of a particular drug – meaning companies involved in developing new chemical analysis methodologies to substantiate claims could qualify for R&D tax incentives.
Drug delivery
Given the significant cost and time investment involved in developing brand new drugs, much of the activity of SMEs in the sector, who don’t have the same resources available as larger firms, centres on improving delivery methods for existing drugs. Whether this involves creating a novel delivery method for an off-patent drug, or a specialist firm developing a bespoke delivery system for a new drug, these projects are intense when it comes to R&D, and usually qualify for tax credits. Many companies assume that because the primary product has already been developed, subsequent modifications will not be eligible, but in the majority of instances this isn’t true.
Activity can be classed as R&D for the purposes of tax relief if it improves the efficacy or stability of a drug, or if it provides the developer a competitive advantage through increased sales and marketing potential. The same applies to more targeted drug delivery, for example in cancer treatment where cellular targeting aims to negate the impact on cells neighbouring the cancerous ones. There is also a significant amount of R&D in adapting drug delivery for use by children, where the size shape and taste of the product, as well as dosing consistency, are key considerations. My advice would be not to make any assumptions about eligibility for R&D tax credits, and to seek expert advice on what specific activities might qualify.
Packaging development
Prolonging the shelf life and security of pharmaceutical products is a key R&D consideration, and packaging development is another area where R&D tax credit claims are not maximised. As product design and packaging focuses to a greater extent on user experience, there are numerous ground-breaking and innovative projects addressing performance, ease of use and sustainability, each of which addresses new technical challenges in the process.
There are a number of companies in the UK developing innovative packaging solutions for pharmaceuticals involving 3D printing, vacuum forming and CNC (Computer Numerical Control) technologies. Whether this activity is in collaboration with a drug manufacturer to produce packaging for a new product, or if a new presentation of an existing drug is being developed, the process is reliant on R&D and could be part of a successful R&D tax claim.
Getting R&D tax claims right
Clearly then, a number of activities outside of drug development can potentially be eligible under the R&D tax credit incentive. But aside from uncertainty around eligibility, there are also areas where companies are not maximising claim potential, and could be missing on vital funding as a result.
Identifying costs: Part of the R&D tax credit process requires companies to provide a description of their R&D activity. This is a good opportunity to look beyond the numbers and explain just how innovative key projects have been. However, many companies restrict the qualifying costs they include in their claim to just the few written examples they’ve given, and not to their entire spend, meaning they miss out. Use words to tell your story and bring it to life, but make sure to include everything in the claim, or the project will not be done justice.
Indirect costs: Assumptions are often made that qualifying R&D costs only include the time spent by technical staff working on relevant projects. But the impact of R&D activity on the wider business is often overlooked – involving the coming together of project management and finance functions, and so on. Look at the full picture of qualifying costs and if you’re not sure, seek specialist advice
Accurate recordkeeping: With staffing costs often forming a large portion of an R&D tax credit claim, HMRC wants to see good record keeping. Many employers do keep excellent records of payroll costs and general records of time spent against projects, but what they tend not to do as well is record how employee time is allocated to specific tasks. Systems can be set up to track this, and they could make a significant difference to the value of a claim.
The R&D tax credit scheme was backed further at this year’s Spring Budget, with a pledge to increase simplicity and certainty around individual claims. The incentive’s aim is to encourage innovation and enable further development through the funding it provides. While uptake is increasing year-on-year, there remains significant scope for companies across the pharma sector to claim tax relief and secure crucial funding for continued innovation.
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