Don’t overlook solid foundations for your early-stage life sciences business

How can early-stage life sciences businesses create solid foundations for business growth? Phil Melia, life sciences specialist, explores some of the issues that early-stage life science businesses need to get right to successfully bring their science into the business environment.

It’s easy for an early-stage life sciences business to focus on what it is good at (i.e., the science), but sometimes it’s so successful that the right foundations for future growth may easily be overlooked.

Keep it simple

Having science that works is obviously essential, but at an early stage the priority must be getting the money to enable commercialisation of that science. 

You need to present investors with a coherent, simple story. In my experience, the broad formula that investors like is: 

1. what problem is being solved?
2. why are you and your team best placed to solve it?
3. how will you use investors’ money?, and
4. how will the money result in growth and an eventually exit? 

When presenting to potential investors, business leaders often focus too much on the science (points i and ii) and not enough on the financial/growth side (points iii and iv). 

EIS and SEIS

For investment at an early stage, make sure you are eligible for EIS and SEIS investment. These are the government-supported investments that generate significant tax breaks for investors.

As a company, you can apply for advanced assurance from HMRC, which gives investors comfort that they should get their tax break. Seeking professional support is always recommended, but if your business is straightforward and you know what you are doing you may be able to use the tool on HMRC’s website.

However, a word of caution – you do need to comply with all the conditions, and it isn’t always clear from HMRC’s tools what these conditions are. You don’t want to find that you’ve told investors they will qualify, and later find out your advanced assurance wasn’t valid because you’d misunderstood a point. Your investors will not thank you!

Outsourcing

It’s worth considering outsourcing when your time is better spent on the science. Once you receive your first investment, it’s important to use that money wisely. As far as you’re able, it’s worth considering whether you can do as much of your accounting in house, while working with external advisers for tax support. 

The ideal professional adviser is prepared to partner with you on your growth journey. They will invest time in getting to know your business and guide you through the early stages. You need to focus on the science but give adequate time to the accounting and get support from your advisers, for example with tax issues. 

R&D tax credits 

As a business leader in the early-stage life science sector, you will live and breathe R&D tax credits (which can provide approximately 33p in the £1 cash back for qualifying expenditure). Over the last two years, HMRC has increased the number of inspectors to clamp down on misuse of this benefit, so it’s always recommended that you use a credible firm to support you with your R&D tax credit claims. 

To the extent that you’re getting grant funding, this may restrict some of the benefit you get through the R&D tax credit. So, where timing permits, always seek professional advice to ensure you can maximise the cash tax benefit. 

Expansion

For an early life science business with the right science, international expansion can happen very quickly. Either there is a market opportunity or the top talent you need for your science is located outside of the UK.

Going overseas can get complicated very quickly, so make sure you’re having the right conversations with the right advisers at an early stage. Tax is often the first hurdle to overcome in a new jurisdiction.

Most jurisdictions base their domestic tax rules on similar concepts across the globe, but the devil is in the detail. We recommend working with an adviser with strong international links, who can be pragmatic and look at the tax position of the group as a whole, not just the local country in isolation.

We’ve seen early-stage businesses get bogged down in local compliance matters too quickly by seeking advice from a local ‘specialist’ that is not connected to a global network. Had the business followed a different path and engaged its UK adviser to support its international expansion, a happier outcome may have been achieved.

IP location

Over the last decade, the general direction of tax regimes is towards taxing where the substance of a business is located. Despite this, we still come across businesses looking to structure their IP in a separate company and in a location with a low tax rate, but not have any substantial presence there – for example, people employed there managing the IP.

Generally, this will not be looked upon favourably by respective tax authorities. Keep it simple. If you are a UK-based company and you have all your people in the UK, that’s where your IP is likely to be. Creating something artificial is likely to cause an issue in the future, either with the tax authorities or a potential investor/acquirer.

In addition, you might lose the benefit of the UK patent box, which (broadly speaking) is effectively a 10 per cent tax on profits arising from patented technology.

How RSM can help

If you have further questions about setting up your life sciences business, please contact Phil Melia, Laragh Jeanroy or Graham Bond.