Reviewed by Akshay Thaman, IP and Policy Lead | 04 February 2025

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Overseas restrictions under the new merged RDEC scheme

The new merged RDEC scheme will see a move to only incentivise R&D carried out in the UK through tax relief. The idea is to encourage the use of UK workforce and, in the long term, boost skills and jobs in the science and technology sector.

When do overseas R&D costs qualify under the new RDEC scheme?

Therefore, as a rule of thumb, overseas R&D costs will not be qualifying R&D expenditure under the new merged RDEC scheme. However, there are exclusions to this rule in the form of a three-step test, should a claimant be able to satisfy all steps, the related overseas costs may be eligible:

  1. Conditions necessary for R&D are not present in the UK.
  2. Conditions necessary are present in the location of undertaken R&D; and
  3. It would be wholly unreasonable for the company to replicate conditions in the UK.

What conditions may meet the criteria for allowable overseas expenditure? 

HMRC sets out two main condition categories that may deem overseas expenditure allowable: 

  1. Geographical, environmental, and social conditions i.e. climate, sustainability, machinery location, IP infringement. 
  2. Legal or regulatory requirements i.e. explicit legislative requirements (international treaties etc) or regulatory rules including guidance from regulatory bodies. 

HMRC guidance explains that this list is not exhaustive and states that a valid condition may fall under both above conditions or neither of the above conditions. This gives the impression that HMRC is understanding of the complex situations likely to be at play and will be willing to hear a claimant make their case based on their specific circumstances. 

What conditions won’t meet the criteria for allowable overseas expenditure?

HMRC set out two conditions excluded from meeting the allowable overseas expenditure test, these are:

  1. Cost of the R&D activity; and
  2. Availability of workers to carry out the R&D.

The guidance explains that if either the cost of carrying out the R&D activity or the availability of workers are the main reason or the only reason for contracting out overseas, the expenditure will not qualify. Claimants are likely to need show evidence of this should the claim go into enquiry. However, if the cost of replicating the conditions necessary for R&D to take place are commercially not viable. For example, due to the need to build a new test facility to carry out the relevant activity and that site would see minimal use. This is an acceptable reason to carry out the activity abroad. 

Summary

If a business currently carries out some, or all, of its R&D activity overseas and has been claiming tax relief on those costs, then things have changed. You need to be aware that under the new RDEC merged scheme those costs are not likely to qualify. This will have impact on the amount of benefit you receive in your R&D tax relief claim. The new rules will apply to accounting periods beginning on or after 1 April 2024.

Contact us to find out how you can make the most of your claim

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