Overseas R&D restrictions: What you need to know

The merged R&D tax relief scheme introduces stricter rules on overseas R&D expenditure, with the aim of focusing support on innovation activities carried out within the UK. Under the new regime, only R&D work physically undertaken in the UK will generally qualify for relief, except in circumstances where it is necessary for the project to be conducted abroad, such as where specific facilities, expertise, or regulatory approvals cannot be found domestically.

What’s different now?

Previously, overseas costs could often be included if they met the general qualifying criteria as there was no geographical requirement. Under the merged scheme, contractor payments and externally provided worker (EPW) costs are excluded if the R&D is done outside the UK, unless the work meets the statutory exception.

This exception applies only where:

• There are conditions necessary for the R&D that do not exist in the UK, but are present overseas, and
• It would be wholly unreasonable for the company to replicate those conditions in the UK

Examples of these conditions include:

• Geographical, environmental, or social factors (e.g. unique climate or population)
• Legal or regulatory requirements (e.g. clinical trials mandated by overseas regulators)

However, cost savings or workforce availability do not qualify as valid reasons on their own.

Examples

1. If a pharmaceutical company must conduct clinical trials in another country due to unique patient populations or regulatory requirements not available in the UK, these costs may still qualify, provided robust evidence is supplied to justify the overseas work
2. However, if a business chooses to outsource software development to an overseas team simply for cost reasons, those costs are unlikely to be eligible for relief under the new rules

Key actions

To align with the new definition, businesses should carefully review their contracts to ensure roles, responsibilities, and risks are clearly set out and documented. This will help establish who is entitled to claim and provide the necessary evidence should HMRC request further information. By understanding the new definition and structuring agreements accordingly, companies can maximise their R&D tax relief claims and avoid costly misunderstandings.

To download the full merged R&D tax relief scheme document, please click here. 

If you wish to discuss this in further detail, please contact one of our Business Tax experts here.