Pharmaceutical

The types of pharmaceutical activities considered to be R&D are different to other industries because the testing procedures that need to be followed to meet regulatory requirements are long, thorough and strict.

The time it takes from the earliest research stages on a particular drug to get it to out to market is usually about a decade. And only a small percentage of promising compounds identified in early research end up with regulatory approval.

R&D in the pharmaceutical industry typically takes place in four stages:

• Drug discovery

This phase is concerned with the identification of promising new chemical entities.

• Pre-clinical trials

Pre-clinical trials are concerned with the non-human testing of compounds. Compounds that are identified as promising at the pre-clinical trial stage move into clinical trials.

• Clinical trials

Clinical trials go through three phases, generally be described as toxicity tests (phase 1), preliminary efficacy tests (phase 2) and comparative efficacy and tolerability tests (phase 3). Work in these first 3 stages will likely be considered R&D. This will include work on applying to and responding to the regulator, and work on doing further testing as requested by the regulator. Most of the work involved in making an application to the regulator would involve work that directly contributes to the resolution of technological uncertainty and would therefore qualify as R&D.

• Post-launch

The post-launch phase occurs when a product has been licensed. Thus this phase involves post-marketing confirmatory studies, special interest studies, longer-term efficacy, tolerability etc. Work in this phase would generally not be considered R&D unless the work involved a scientific or technologically advanced uncertainty.

The research activities of discovery, pre-clinical development and Phase 1-3 trials will usually be concerned with the resolution of scientific and technological uncertainty, but that phase 4 (post-launch trials) will not.

Our experience has shown that this is generally an appropriate starting point for examination of claims from pharmaceutical companies. If there are unusual circumstances meaning R&D is done in Phase 4 trials, or not done in some elements of phase 1-3 trials, then this can be examined further.

What is important with every claim is that the company claiming can demonstrate by reference, what it has actually done, and that the expenditure incurred is based on R&D.

A business can make a claim for R&D tax relief going back 2 accounting years. The claim can be made in a company tax return or in an amendment to it.

A business can submit an R&D tax relief claim at any time up to the first anniversary of the filing due date of the company tax return for the accounting period in which the claim is made (paragraph 83E(1) of Schedule 19 to the Finance Act 1998).

HMRC will follow guidance in their Statement of Practice SP 05/01 to deal with late claims. The success of these appeals will depend on the claim itself. It’s rare that HMRC will allow a late claim if the claimant simply didn’t have enough time or because they weren’t aware of the R&D tax relief scheme.

An R&D team could consist of many individuals from different parts of the business. It may include the R&D Manager, a Lead Developer, Engineers, Project Co-ordinators, CAD Engineers, Quality Control and Testing specialists, and Cost Accountants, as well as members of the senior management team.

HMRC works to process applications for R&D Tax Credits within 28 days. However, the processing time required for HMRC to review and consider an R&D Tax Credit claim depends on the nature of the claim  and the complexity of a company’s structure and its accounting.

Even the time of year can make a difference, with peak accounting times such as March and December being particularly busy and resulting in slower processing times.

Aside from drug development companies, any company within the pharmaceutical supply chain could be eligible to claim R&D tax relief. From manufacturing to packaging, any organisation that is developing new ways to produce products, supply equipment or test solutions could also qualify.

Around 90% of pharmaceutical companies don’t think the work they do qualifies for R&D tax relief. But, apart from the obvious things such as discovering new drugs and developing innovative medical services, there are so many other activities that could be classified as pharmaceutical  R&D. Like these for instance:

• Adaptation or re-engineering of a manufacturing process
• Progressing new techniques for drug testing
• Development of new drug delivery devices
• Improvement of historic drugs
• Designing new packaging solutions