HMRC Legislation Changes - Overseas R&D

In recent years the UK governments R&D tax relief scheme has come under increased scrutiny, which has led to updated legislation regarding the scheme.

 

To give a brief overview; at the Spring Budget 2021, the government announced a review of the Research and Development (R&D) tax reliefs. The objectives were to ensure that the UK remained a competitive location for cutting edge research, that the R&D reliefs continued to be fit for purpose, and that taxpayer money was effectively used. The government concluded the review at the Autumn Statement 2023 with the announcement that the SME and RDEC Schemes would merge.

 

Then, at the Autumn Statement 2023, the government confirmed the introduction of the merged R&D expenditure credit and changes to the way contracted out R&D activities will be treated from 1 April 2024. The overseas rules will also apply from 1 April 2024.

 

 

The latest legislation regarding overseas R&D states that R&D activities must be done by companies located in the UK and focuses on two key areas:

 

- Restricts the extent to which contractor payments for R&D and payments for externally provided workers can qualify for R&D relief where the R&D activity takes place overseas.

- Introduces new rules for contracted-out R&D.

 

Overseas expenditure on contracted out R&D, and on payments for externally provided workers (EPWs) who are not subject to UK PAYE/NIC, may still qualify for relief if certain circumstances are met.

 

As highlighted by HMRC there are three major circumstances that must all apply to qualify for relief. These include:

 

1. The conditions necessary for the R&D are not present in the UK.

2. The conditions are present in the location where the R&D is undertaken.

3. It would be wholly unreasonable for the company to replicate the conditions in the UK.

 

A key example that would meet all three would be geographical circumstances such as deep oceans, high altitudes, volcanic or seismic activity.

 

 

This requirement applies to the activities of the contractor, i.e. the company being paid to carry out the work.

 

R&D is undertaken in the UK to the extent that the activities which are part of the R&D project actually take place in the UK, regardless of where the factors used for the R&D project (such as materials) are sourced.

 

This would include expenditure by the contractor on:

 

- Employees of the contractor who are engaged in R&D activities, carrying out their duties in the UK and subject to UK PAYE.

- Consumable items used by the contractor in R&D activities, which are used or consumed in the UK (they may be sourced from elsewhere).

- Software, data, and cloud services may be used by the contractor for R&D activities undertaken by workers in the UK (although the software, data or cloud services may again, be sourced elsewhere).

- Payments to clinical trial volunteers located in the UK.

 

 

To the extent that the condition is partially met, with some activity taking place in the UK and some not, the contractor payment should be apportioned to the UK element of the activity on a just and reasonable basis. This will depend on the company’s circumstances, but it could, for example, be based on:

 

- The number of workers in the UK vs overseas.

- The proportion of salary costs attributable to the UK vs overseas, or

- The number of days worked in the UK vs overseas.

 

In claiming relief for contractor payments, a company is self-assessing that the expenditure meets all the conditions for relief, including the overseas restrictions. The company needs to take reasonable care to understand where the R&D takes place. HMRC cannot specify exactly how this is done, as circumstances will vary widely but businesses have a duty to keep and reserve records. This duty applies to all aspects of R&D relief claims.

 

 

At the Momentum Group we are consistently ensuring we are up to date with the latest legislation. In turn we want to ensure our clients are up to date with changes and updates as to how R&D is viewed and monitored under HMRC.

 

Our clients work hard to be innovative and change their own industries dynamics to stand above the crowd. So, we in turn meet them there with our attention to detail and proactive approach to legislation changes and updates.

Research and development tax reliefs: new contracting out rules and overseas restrictions – draft guidance - GOV.UK (www.gov.uk)

 

A company is conducting R&D to develop a prefabricated wall panel for an overseas market which has different regulatory standards/ building practices to the UK. Development requires the company to work closely with construction companies local to this market to evaluate the constructability of prototypes. This clearly requires conditions (the presence of alternative construction practices) that are not present in the UK. It would be wholly unreasonable to replicate these conditions in the UK and these conditions exist in places outside of the UK. Therefore, this activity would satisfy CTA09/1138A(2) if undertaken in a location where the necessary conditions arise.