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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.
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:
HMRC sets out two main condition categories that may deem overseas expenditure allowable:
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.
HMRC set out two conditions excluded from meeting the allowable overseas expenditure test, these are:
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.
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.