The UK's Research and Development Expenditure Credit (RDEC) scheme has undergone significant changes, with new rules applying to accounting periods beginning on or after 1st April 2024. A crucial aspect of these changes concerns the eligibility of expenditure on activities conducted overseas. Understanding these rules is vital for businesses seeking to maximise their RDEC claims. This summary video and longer article set out the main criteria underpinning the rules. A companion video and article provide real life examples of where exceptions apply.
Understanding the New RDEC Rules for Claiming Overseas Expenditure
General Exclusion and Exceptions
Previously, under UK R&D claim rules, R&D activities could be performed anywhere in the world, provided the relevant costs were incurred by a company subject to UK corporation tax. However, the updated RDEC scheme introduces stricter limitations on claiming expenditure for overseas activities. The core principle now is that costs related to overseas R&D activities are generally excluded, unless specific exceptions apply.
These rules apply to contracted out R&D (contractors) and the hiring of externally provided workers, where the workers are not subject to UK payroll taxes. They do not apply to other items such as consumables, software, data and cloud computing, or payments to clinical trial participants. They also do not apply where a company sends UK staff to work on an overseas site.
The HMRC guidelines emphasize that expenditure related to overseas R&D activities undertaken by contractors or externally provided workers, is not eligible for RDEC. This reflects the government's aim to incentivise R&D investment within the UK. However, there are exceptions where overseas activities can still qualify.
Exceptions:
Expenditure may qualify if all three conditions in CTA09/1138A(2) are met, in summary these are that:
The conditions necessary for the R&D are not present in the UK.
These conditions are present in the location where the R&D is undertaken.
It would be wholly unreasonable for the company to replicate these conditions in the UK.
Permitted Overseas Activities – More Detail:
The conditions necessary for the R&D are not present in the UK.
When the R&D activities necessitate a specific geographical, environmental, or social condition that is not present in the UK, the associated expenditure may be eligible.
These conditions are present in the location where the R&D is undertaken.
This point clearly follows the first point - the conditions necessary for the R&D that were not present in the UK, must be present in the location that is chosen to undertake the R&D.
It would be wholly unreasonable for the company to replicate these conditions in the UK.
Whether it is wholly unreasonable for the company to replicate the conditions in the UK will depend upon the R&D, the circumstances of the company and the reason for undertaking the work abroad.
For example, there could be time pressures in accessing test facilities in the UK or suitable facilities simply do not exist in the UK, or it may be that local knowledge is required in a specific location, or a clear-cut case of the physical conditions not exiting in the UK.
Activities conducted overseas to meet regulatory or legal requirements that are specific to the overseas location may also qualify.
Where the data sets, biological materials or other resources that are needed for the R&D are not available within the UK, then the costs of accessing these items outside of the UK can be claimed.
Non-Permitted Overseas Activities:
Activities undertaken overseas simply for cost reduction or convenience are not eligible.
Activities that can be reasonably replicated within the UK will not be claimable if undertaken overseas.
HMRC Guidance and Documentation:
Businesses must maintain good records to demonstrate that their overseas R&D activities meet the eligibility criteria. This includes documenting the specific reasons for conducting the activities overseas, the unavailability of suitable alternatives in the UK, and the link to the overall R&D project. Refer to the latest HMRC guidelines and manuals for detailed information and additional, specific examples.
Key Takeaways:
The new RDEC rules restrict claims for expenditure on overseas R&D activities.
Exceptions exist for activities requiring specific geographical, environmental, or regulatory conditions, or access to unavailable resources in the UK.
Clear documentation is essential to support claims for overseas R&D expenditure.
By understanding these nuances, businesses can navigate the new RDEC scheme effectively and ensure they are claiming eligible expenditure. It is recommended to seek professional advice to ensure compliance with the latest HMRC regulations.