Building on the rules outlined in Claiming R&D on Overseas Expenditure this article and summary video, provide illustrative examples to clarify the application of the rules. It should enable you to get a rapid overview on how the rules may apply to your R&D claims under the RDEC scheme.
Below we proivide some illustrative examples where there is an exception to the restriction on Claiming R&D on Overseas Expenditure, in respect to contracted out activities and those undertaken by employees that are not on UK payroll.
Permitted R&D Overseas Activities Examples:
1. Geographical/Environmental Conditions:
A company developing a new type of desert-resistant crop may conduct field trials in a desert environment overseas, as such conditions are not available in the UK. The costs of these trials could be eligible for RDEC.
A company conducting research on deep sea organisms, requiring deep sea submersibles and deep ocean environments, may be able to claim the cost of the research even if conducted outside of the UK.
2. Regulatory/Legal Requirements:
A pharmaceutical company conducting clinical trials overseas to comply with local regulatory requirements for drug approval in that country. These costs may be eligible for RDEC, provided the trials are part of the overall R&D project.
A company is conducting R&D in the development of a software service for the commercial banking market in the US. Development requires the company to have a collocated team in the US due to access regulations within the US banking sector.
3. Unavailable Resources:
A company needing to access a specific genetic sequence of a plant only found in a certain location outside of the UK, can claim the costs of obtaining this material.
A disease with no prevalence in the UK requires a clinical trial to be undertaken outside the UK.
Non-Permitted Overseas Activities Examples:
1. Cost Reduction/Convenience:
Conducting software development overseas solely due to lower labour costs would not qualify for RDEC.
2. Replicable Activities:
Standard laboratory testing that could be carried out in the UK, but is instead done overseas, would not be eligible.
Key Considerations:
These examples illustrate the application of the rule that states that if the R&D could have reasonably taken place using staff or contractors based within the United kingdom, but instead costs were incurred with overseas contractors or workers not on UK payroll, then these costs are are not claimable.
These examples also highlight that the R&D must meet all three points of the CTA09/1138A(2) conditions.
Documentation is key. The company must be able to prove that the expenditure meets the exception rules.
These examples aim to provide a clearer understanding of the new RDEC rules for overseas expenditure. Businesses should always refer to the latest HMRC guidelines and seek professional advice to ensure compliance.