New Rules for UK R&D Reliefs for Overseas Contractors and Workers

R&D tax relief – are you up to date on restrictions to R&D expenditure overseas?

The UK Government has pushed forward on applying these restrictions even though related guidance is still only in draft form. How does HMRC advise you to deal with this? Well it advises that “No-one should take irreversible actions based on this draft guidance.” (Link at the end of this article.)

In this article I pull out the key points to be aware of.

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The restrictions apply for all accounting periods starting on or after 1st April 2024 including both Research and Development Expenditure Credit (RDEC) and claims from Small & Medium Enterprises, that qualify as R&D Intensive. They relate to both Contracted-out R&D and the hiring of Externally Provided Workers through a staff provider or controller.

Key points for hiring staff:

• To qualify for relief, R&D must be undertaken by UK employees (or meet specific exceptions, see more below).

Where staff don’t meet all the exceptions the following rules apply:

• The ‘gateway’ test for being a UK employee is that the employee is subject to Pay As You Earn (PAYE) and Class 1 National Insurance Contributions (NIC).
• If a member of staff passes the ‘gateway’ test then all related payroll costs on R&D will qualify, including if travel abroad is required for R&D purposes.
• If you are using staff hired through a staff provider (normally referred to as Externally Provided Workers or EPWs), you must exclude expenditure on non UK employees.
• Where only some of your EPWs are UK based, only the portion of expenditure and related staff provider overheads, paid in respect to the UK staff, will qualify as R&D expenditure.

Key point for Contracting-out:

• To qualify for relief, R&D activities must be undertaken in the UK (or meet specific exceptions, see more below).

Where Contracted-out activities don’t meet all the exceptions the following rules apply:

• R&D is deemed to be undertaken in the UK if the activities which are part of the R&D project actually take place in the UK.
• Where some of the Contractor activity takes place in the UK and some abroad, the expenditure will need to be apportioned to include only the UK portion.
• There is no restriction on including expenditure on other factors such as R&D consumables or software being purchased from, or used, abroad.

Exceptions to the restrictions

Overseas expenditure on contracted out R&D and on payments for EPWs who are not subject to UK PAYE and NIC, may still qualify for relief if 3 circumstances are ALL met as follows:

1. the first circumstance is that conditions necessary for the R&D are not present in the UK
2. the second is that the conditions are present in the location where the R&D is undertaken
3. the third is that it would be wholly unreasonable for the company to replicate the conditions in the UK.

The above is a high level summary – for a full understanding of the Guidance and how it impacts on your R&D claims read the full document and/or seek professional advice.

Link to the draft Guidance:

https://www.gov.uk/government/consultations/draft-guidance-research-and-development-rd-tax-reliefs-new-contracting-out-rules-and-overseas-restrictions/research-and-development-tax-reliefs-new-contracting-out-rules-and-overseas-restrictions-draft-guidance

I'm always open to discuss how any of the extensive R&D Guidelines may apply to your circumstances - get in touch.

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