Oversees R&D Tax Relief
Changes happening for accounting periods beginning or after 01 April 2024
Starting from April 2024, HMRC is going to impose new rules on what your business can claim for its overseas R&D spending. Basically, you won’t be able to claim expenses for things like externally provided workers, subcontractors, and contributions to independent R&D (like payments to universities) unless replicating those conditions in the UK is totally impractical.
Originally, these changes were supposed to start in April 2023, but in the Spring Budget 2023, HMRC announced a one-year delay. They want more time to figure out how these restrictions will work alongside the potential merged R&D relief scheme. The good news is that this delay gives businesses conducting R&D overseas some extra time to get ready for the upcoming changes.
Although there might be further updates due to the delay, this blog will dive into the information we currently have about the 2024 rule changes for claiming tax relief on overseas R&D expenses. It will also provide guidance on the planned new qualifying overseas expenditure (QOE).
From 01 April 2024, expenditure on payments to subcontractors and externally provided workers is required to be UK Expenditure or Qualifying Overseas Expenditure. Therefore, R&D (Research and Development) activities subcontracted abroad will most likely not qualify unless it meets all the Qualifying Overseas Expenditure tests (below).
- UK Expenditure is expenditure that can be attributed to relevant R&D undertaken in the UK, meaning that the subcontractor’s activities must be carried out and based in the UK
Qualifying Overseas Expenditure is expenditure on R&D undertaken outside of the UK.
In order to qualify, all three of the following factors must apply:
- The conditions necessary for the R&D are not present in the UK
- The conditions are present in the location where the R&D is undertaken
- It would be wholly unreasonable to replicate the conditions in the UK
The necessary conditions for carrying out the R&D are absent in the UK Sometimes it just won’t be possible to do the work in the UK. This might be due to: geography environment social factors other conditions not present in the UK Examples of work that can’t be conducted within the UK potentially include volcanic, seismologic, zoologic, botanic, oceanographic, mining, deep sea or climate change R&D – to name just a few. There may also be certain regulatory or other legal conditions that require work to take place in specific areas, such as clinical trials.
e.g. If the R&D involved placing sensors on an active volcano. The volcano is clearly outside the UK therefore the presence of a volcano cannot be achieved in the UK and it would be wholly unreasonable (impossible) to replicate this in the UK. A subcontractor placing these sensors would therefore be classified as qualifying overseas expenditure.
- Cost and Availability of subcontractors are not factors to justify the activity being Qualifying Overseas Expenditure.