The UK’s global position may be shifting – will R&D tax reliefs keep pace?

With the UK Government making clearer commitments to reforging connections with Europe and a number of international research treaties signed recently, it is clear that the UK is attempting to be more collaborative than it has been.

Innovative businesses are often unconstrained by borders and the accountants who seek to help them with R&D should consider how the R&D tax relief scheme approaches international research.

In particular, the way in which overseas expenditure is treated can catch out those who are unprepared, so understanding this may preserve the validity of an R&D tax relief claim.

How is overseas expenditure treated in an R&D tax relief claim?

Before the Merged Scheme was introduced to simplify the R&D tax relief process, it was possible to offshore much of the R&D work and still claim the costs afterwards.

Given that R&D tax reliefs are supposed to help the UK become more innovative, having an incentive for businesses to make the most of cheaper resources overseas ran counter to the spirit of the scheme.

This is why the Merged Scheme scrapped the eligibility of most overseas expenditure to qualify for R&D tax reliefs.

However, there are some instances in which it is valid to include overseas work and this will be determined by three core criteria, defined by HMRC.

These criteria are:

• The conditions for R&D are not present in the UK.
• The conditions are present in the location where the R&D is undertaken.
• It would be wholly unreasonable to replicate the conditions in the UK.

By applying the criteria, it is possible to exclude work that was moved overseas for purely economic reasons and work that takes place overseas for legitimate purposes.

While something like the development of a piece of software or medication is unlikely to find much of a valid reason to be done outside the UK, research that involves specific geological conditions may have a better chance of meeting the criteria.

While the UK has around 41 volcanoes, all of them have been extinct for an incredible period of time, so any piece of research that is dependent on volcanic activity would have to seek different shores to be effective.

This is the example used in the guidance by HMRC and illustrates the way in which the UK’s limitations do provide a reasonable excuse to rely on overseas expenditure for R&D when it is fully necessary.

Will R&D tax relief claims be impacted by the UK’s changing international relations?

Even as innovation remains at the heart of many of the international agreements the UK has recently signed, there is no indication that R&D tax reliefs will permit overseas expenditure as standard once more.

Instead, innovative businesses should consider the ways in which international cooperation can further their research while maintaining a strong focus on the UK side of R&D.

There may be increased funding opportunities or access to otherwise unreachable competent professionals gained through more cooperative UK foreign policy.

Accountants should be mindful of how and where their clients spent money on R&D, so that only qualifying expenditure incurred in the UK is included in an R&D tax relief claim.

Our team of R&D tax consultants can assist with this process, providing expert support for businesses that do permitted research overseas and those who need to narrow the focus to the UK work.

A strong technical narrative is vital for R&D tax relief claims that have an international component to them, whether that element is being included or excluded from the costs, as it is vital for HMRC to understand how the project was conducted in its entirety.

We support the compilation of valid R&D tax relief claims and can assist with enquiries if HMRC seeks to understand more about a claim that has already been submitted.

Working with international businesses represents an exciting opportunity for many accountants and our support can ensure that you are able to keep helping clients with R&D.

To ensure that overseas expenditure does not threaten the validity of your clients’ R&D tax relief claims, get in touch with our team.

Adam Bointon

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.