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The very core of R&D is pushing boundaries and discovering something unknown.
Just as an advance cannot be constrained by the knowledge of the time, it should not be constrained by the geographical borders of the country.
If your client is looking to conduct work overseas, you need to understand the impact this has on an R&D tax relief claim.
Is overseas expenditure ineligible for R&D tax relief?
On the whole, overseas expenditure is no longer eligible for inclusion in an R&D tax relief claim.
We are here to provide R&D help for accountants and you have likely realised the situation is more nuanced than a simple no.
The Merged Scheme changed many things about R&D tax relief claims and clamping down on overseas expenditure was one of the big ones.
Before this, innovative companies made use of overseas work in order to keep costs down, which was seen to be against the spirit of R&D tax reliefs and the stated goal of boosting UK innovation.
As such, HMRC placed a general ban on the inclusion of overseas expenditure.
A window does exist in which overseas expenditure can be claimed, but only when it is deemed truly vital for the success of the R&D project.
What makes overseas expenditure vital for R&D?
To know whether a client’s overseas work threatens the validity of the project, you can subject it to the same three-step check that HMRC will do.
Overseas expenditure qualifies if:
- The required conditions for R&D cannot be found in the UK
- The overseas location has the correct conditions for the R&D project
- It would not be reasonable to replicate the conditions in the UK
Only where all three conditions are met can overseas expenditure be considered valid for an R&D tax relief claim.
How is valid overseas expenditure represented in an R&D tax relief claim?
The main challenge will be explaining to HMRC why the overseas expenditure does meet the listed criteria.
A clear example would be innovation to develop ways to tackle the impact of climate change on agriculture by working to improve farming conditions in desert environments.
As traditional farmland becomes more difficult to use, finding innovative ways to use new land by reducing the water required to grow crops could be the key to staving off mass global starvation.
There are no deserts in the UK, nor would it be possible to create a desert, so travelling to the Sahara may be necessary to ensure that a project can achieve the advance.
HMRC use the example of a volcano in their own literature, but access to specific oceans or other geological conditions could all qualify.
The technical narrative will be used to illustrate the reasoning behind selecting the location and how it facilitated the advance.
It would be best to limit the overseas expenditure to only that which is essential, with the rest of the R&D work being done in the UK, where it will be eligible for inclusion in an R&D tax relief claim without controversy.
As R&D tax consultants, we can support you in empowering your clients to make the most of R&D tax reliefs, even if they need to go beyond borders.
We are adept at handling R&D tax relief claims so that HMRC understand the value of the work being done and its necessity.
If an enquiry does arise, we can defend the full value of legitimate expenditure included in the claim.
Don’t let your clients’ innovations be restricted by borders, speak to our team today.
Adam Bointon is a Technical Director specialising in R&D Tax Credits for SMEs in manufacturing and software sectors. With over 15 years’ experience, he works closely with businesses to identify qualifying R&D activities and prepare clear, compliant claims. He combines technical expertise with a strong understanding of economics and finance to support successful outcomes. Adam also contributes to industry webinars and CPD sessions, sharing insights on R&D tax relief and HMRC requirements.
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