By Cameron Cooley, Manager, Audit Practice and Chris Janes, Manager, Audit Practice, CBIZ and MHM
The United Kingdom’s decision to leave the European Union (E.U.) in June 2016 sent economic shockwaves throughout international markets. While Britain is taking time to understand the impact of adopting Article 50 of the Treaty of Lisbon, which will trigger its exit from the E.U. (the so-called “Brexit”), U.S.-based companies may have a unique opportunity to expand and take advantage of operations in the U.K.
Immediately following the Brexit vote, the value of the pound declined significantly. At one point, sterling reached its lowest value in nearly 30 years, and over the past year it has been one of the world’s worst-performing currencies. Poor performance from the pound is good news for the U.S. dollar, which has historically had an unfavorable 1.5 to 1 exchange rate.
There continues to be uncertainty over the future of Britain’s economic landscape following the official exit of the E.U.; however, Britain has not yet left and is still expected to be a fully functioning member for a number of years.
It will take two years to exit the E.U. once Britain has adopted Article 50. U.K. Prime Minister Theresa May has indicated that she would like to trigger this by March 2017. May’s timeline received some early pushback, including a High Court ruling that Parliament would have to approve the adoption of Article 50, but it now appears that the March 2017 date is solidifying. The House of Commons recently voted to support May’s plan, removing a significant roadblock to Brexit.
Even if Article 50 is triggered in March 2017, the reality is that the U.K. will continue to experience the same access to European resources and trade deals for a number of years until the country finally leaves the E.U. Also, many arrangements will continue for a longer period in the form of transition agreements. In the meantime, U.S. companies may be able to operate in the U.K. at reduced costs.
Setting up a location in the U.K. may be particularly beneficial for U.S.-based life sciences companies. The U.K.’s talent pool, networking and support services, corporate tax incentives, government and private investments in the sector, world-class banking systems, and established life sciences infrastructure make it ripe for U.S. life sciences companies. The exchange rate may just be the tipping point.
ADVANTAGES FOR LIFE SCIENCES COMPANIES OPERATING IN THE U.K.
R&D often is one of the largest expenses life sciences companies incur. Although the U.S. research and development tax credit has been enhanced over the past year with the passage of the Protecting Americans Against Tax Hikes Act of 2015, similar tax credits and arrangements in the U.K. may offer more benefits.
The life sciences sector has several benefits working in its favor. By moving operations to the U.K., companies can receive credits of up to 230 percent of their eligible R&D expenditures. Small- to mid-sized companies in a loss position can trade this in for 14.5 percent of the credit’s value in physical cash, which can be a significant advantage for cash-strapped start-ups.
Several of the Big Pharma companies, including GSK and AstraZeneca, have their headquarters in the U.K. Between Big Pharma and the research locations, there is a wealth of CROs for U.S.-based companies to access. A snapshot of CRO resources can be easily vetted through online searches or using tools such as the Contract Research Map.
The U.K. also has a highly skilled talent pipeline that is readily available. Cambridge and Oxford attract international talent and produce high-caliber graduates. Add to that the employees from the Big Pharma companies and other research institutions, and you have a local workforce that not only understands the sector and local market, but also includes potential collaborators, key network contacts, and sources of other support services.
With one of the world’s premier banking hubs based in London, investors are within close geographic reach. Several U.K. investment firms specifically look for opportunities in the life sciences sector, which may provide critical access to funding and financial support.
Aside from tax credits, the U.K. government offers financial support for life sciences companies looking to grow their operations or expand their service offerings. Innovate U.K., a government-sponsored organization, supports science and technology activities and start-ups and has assisted more than 7,600 organizations and provided more than £1.8 billion in funding for the sector. The government announced in November 2016 that it would be committing an additional £2 billion to life science and technology investments, of which £400 million would be injected directly into venture capital funds. Innovate U.K. recipients have significantly less red tape with their awards than comparable funding in the U.S. A wide range of organizations can provide advice and access to government funding at relatively low costs.
Another advantage to the infrastructure is that U.K. companies register patents with the European Patent Office. Patents facilitated through the European Patent Office become registered across all 27 E.U. member countries in a single application, thereby reducing the time and cost to commercialize new products across Europe.
Selecting the U.K. over another overseas location also comes with some practical benefits. Because of the existing infrastructure and the shared language, establishing operations in the U.K. would not be wholly different from establishing a new location in the U.S. Company formation and maintenance are relatively inexpensive, and taking advantage of CRO services requires a comparable time investment as doing the same thing in the U.S. Nevertheless, an international tax professional can assist with the transition, particularly for U.S. employees who will be working overseas.
HOW BREXIT AFFECTS U.K. OPERATIONS
Members of the E.U. function as one country, with limited restrictions on travel and trade among E.U. countries. As part of Brexit, the U.K. will be negotiating specifics on trade and travel with the E.U. Many of the Brexit negotiations will have a limited effect on U.S. companies operating in the U.K.
The “how wll Brexit affect trade?” question would not be relevant for U.S. companies using the U.K. for intellectual property development or other types of research because the U.K. location would not be physically exporting or importing products. The European Patent Office is also not expected to be significantly interrupted by Brexit.
Issues relating to the international skilled workforce in the U.K. may be something for U.S. companies to monitor but not in the near term. Some U.K. life sciences companies have already raised questions about what Brexit will do to their talent pool and influx of international investment capital. The U.K. life sciences sector has long benefited from a pan-European workforce; however, indications are that the U.K. government is pursuing a “Hard Brexit,” which would end the right for other E.U. nationals to work in the U.K. without visas. As a result, in the future it may be more difficult for U.K.-based life sciences companies to attract a multinational workforce and multinational funding than in the current environment.
THE TIME TO ACT IS NOW
If your company is considering exploiting overseas interests in the U.K., it should do so in the near future. The British pound continues to perform at historic lows compared to the U.S. dollar and is expected to weaken further as Brexit negotiations progress and Article 50 is triggered. The U.K. is also still enjoying the benefits of being in the E.U. Workers and E.U. capital will continue to flow freely to Great Britain at least until March 2019. Finally, it is uncertain how President Trump’s views on trade may affect the tax and regulatory environment.