Does R&D tax relief apply to overseas activity

Companies claiming R&D tax relief will be aware of the benefits of doing so. With rates of relief reaching up to 230% of expenditure on qualifying costs, UK businesses can receive a significant reduction to their corporation tax bill, meaning in many cases that they can continue their research into the next tax year.

But what many organisations don’t realise is that they can claim R&D tax relief on activity that takes place overseas. The key point to note is that the relief applies to UK corporation tax; it therefore follows that the company must be paying UK corporation tax to be eligible. Whether the actual location of the research project is in the UK or overseas is irrelevant.

Where overseas costs may be incurred

The most common expenditure in overseas R&D is on sub-contractors. Although sub-contracted R&D may be difficult to identify, the UK business essentially needs to be contracting a specific part of the research activity out to a third party. Under the SME scheme, the sub-contracted work can be fulfilled by an overseas organisation and can be carried out anywhere in the world.

For larger companies claiming under the RDEC scheme, relief can only be claimed for if the activity is subcontracted to an individual or qualifying body. If the qualifying body is based overseas, it must be pre-approved by HMRC.

The relationship between the contractor and sub-contractor also affects the rate of relief that can be awarded. It’s a notoriously complex area, which is why seeking the help of a professional R&D tax specialist is advisable. Professional assistance ensures you can make an accurate claim and supply all of the supporting documentation that HMRC would require to process the claim.

Key points for overseas claims

Salary costs are a large part of an R&D claim. If your company has overseas staff on its payroll and they are directly involved with the R&D project, their salaries may be claimed for. It’s worth noting, however, that organisations in this situation need to ensure any compliance requirements in the other jurisdiction are also met.

Externally provided workers (those provided by another company) can also be a significant cost. They can be based anywhere in the world – it’s not unusual, for example, for larger companies to use EPWs based in China or India. Under these circumstances, the qualifying costs are subject to normal ‘connected party’ regulations.

Finally, collaborative costs are those incurred when research is conducted in-house in conjunction with an overseas entity. In this case, the expenditure of each company is evaluated and claims are made based on qualifying costs.

More details on R&D relief for overseas activity

If your business is looking to make a claim for R&D tax relief on costs incurred overseas, it’s advisable to speak to an R&D tax specialist. Not only can they keep you updated on the most recent regulations, they can also help to put your claim together, along with all the supporting documentation.


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