In the Spring Statement 2022, the Chancellor announced some changes to the R&D tax relief scheme, which included refocusing the reliefs on UK based R&D activities. This particular change would only allow for costs incurred on R&D projects where the R&D activity took place in the UK and payments were made to UK based staff or contractors.
Currently if you had foreign based workers, then you can still include those costs in an R&D claim. These changes will only apply for accounting periods beginning on or after 1 April 2023.
Note though further details are still to be published and expected in the Autumn Statement on 17 November 2022. A parliamentary sub-finance committee is currently reviewing several of the changes announced previously, including the rules on non-UK based R&D costs, so this could change and we will update this page accordingly.
The rest of this article refers to the current position and up to 31 March 2023.
R&D work doesn’t have to take place in the UK for generous R&D Tax Reliefs to be available for your company.
The first point to note is that R&D tax relief is a reduction in UK corporation tax and so it follows that to be eligible, the claimant must firstly be a company and secondly must be paying UK corporation tax. (Whilst this might appear to be stating the obvious, we do get queries from sole traders wanting to access the relief. In these cases, it can be worth considering incorporating but that is the subject of another article!) The worldwide profits of UK based companies are in the charge to UK corporation tax and this can include the cost of branches based overseas.
R&D tax relief is based on the qualifying activities and qualifying expenditure of the company paying UK corporation tax and not where the R&D activity is undertaken.
Assuming that your company paying UK corporation tax has a qualifying R&D project, let’s look at the possible qualifying costs and where these may be incurred.
Qualifying R&D Tax Relief expenditure
- Sub-contracted R&D is the most common area where we see R&D activity taking place offshore, with relief available in the UK. Sub-contract R&D can be difficult to identify but essentially the claimant company needs to be contracting with another party for the other party to take on responsibility for and fulfil a specific part of the R&D project.
- Where UK based SMEs are sub-contracting work, the sub-contractor does not need to be based in the UK and the work need not be performed in the UK – it can take place anywhere in the world. Several of our clients’ sub-contract part of their R&D projects overseas, particularly with regard to testing and prototype manufacture.
- Where a large company sub-contracts its R&D, it cannot claim relief unless the work is subcontracted to an individual, or a qualifying body.
- A qualifying body does not necessarily have to be based in the UK but overseas bodies must be pre-approved by HMRC and it is not the case that all overseas educational bodies are included. We have practical experience of one of our clients being able to claim for costs sub-contracted to one overseas University but not another and so if this is relevant to you, it is worth seeking advice at an early stage.
- The relief for sub-contracted costs varies depending on whether the contractor and sub-contractor are connected. Where they are connected, for example, where a UK company sub- contracts an aspect of its R&D project to its overseas subsidiary, relief is determined by the relevant expenditure in the sub-contractors’ accounts
- Salary costs are typically the largest component of R&D tax relief claims. It’s unlikely that a UK based company will have staff on the payroll outside the UK, but if they do, and assuming these people are involved in the qualifying R&D project, then relief will be available for their costs. (NB companies in this situation should seek advice to ensure they are dealing with any compliance requirements in the other jurisdiction.)
- Externally Provided Workers (EPWs) can be another significant R&D cost. It is possible for the EPWs to be based anywhere in the world – for example, larger companies undertaking significant R&D projects may use the services of EPWs based in India or China. Again, these costs would qualify, subject to the normal connected party rules, which would come into play if the EPW provider was, for example, a subsidiary or sister company based overseas.
R&D activity can be eligible for relief even where it doesn’t take place in the UK. If this is something you are interested in discussing further, then please claim your free consultation with one of the Radius team.