Why HMRC still needs to change planned R&D tax relief exemptions on overseas expenditure

Date: April 26, 2022

The Government is reforming R&D tax relief, and is consulting on proposed changes. In the second of a three part series of blogs, Catax looks at plans to overhaul reliefs on overseas expenditure. You can see Catax’s first focus piece, on data licence exemptions, here.

One of the Government’s most headline-grabbing proposals to overhaul R&D tax relief removes the ability to claim for overseas R&D costs.

With the Government looking to bring even more innovation, research and development to these shores, it was not a wholly surprising announcement. However, it will have a big impact on companies that rely on overseas support, especially those who do not have any choice over where their R&D work takes place.

HMRC has asked whether there should be any narrow exceptions to allow claims on some overseas activity — and the answer from Catax’s point of view was a resounding ‘yes’.

The Government has reviewed stakeholder comments, and in the Spring Statement said that it recognises that there are some cases where it is necessary for the R&D to take place overseas. This would be in situations where:

However, in Catax’s view, further exceptions are needed when relevant expertise is not available in the UK, when relevant facilities/equipment are not available and so companies can continue to use overseas connected-party subcontractors and Externally Provided Workers (EPWs).

Below are some of the ways Catax thinks this could work:

An exception for relevant expertise

In the case of relevant expertise not being available in the UK, a company wouldn’t simply be able to make a declaration — they would need to show that they conducted a reasonable UK-wide search or created an advertising campaign in order to find such expertise.

Alternatively, they could offer an evidenced and reasonable explanation as to why they had to look overseas. For instance, if the only developer of a certain software program is based outside the UK, and no-one but them has the requisite knowledge related to that program, then a company would have no choice but to seek that expertise overseas.

An exception for facilities/equipment

The Government has so far also neglected to allow an exception for facilities or equipment not being available in the UK. This would be the case when the necessary equipment/facilities cannot be sourced here, or if they are fully booked and not available within a reasonable timeframe. Companies who made genuine attempts to access UK facilities but had had requests denied may also need to look overseas.

Exceptions for subcontractors

One reason for denying relief payments for overseas contractors is to help ensure that other rewards from the research, such as improved skills, benefit the UK.

However, the lack of exceptions for overseas connected-party subcontractors and EPWs could create the unwanted side-effect that companies move the whole of their R&D operation overseas, to jurisdictions that have generous R&D tax relief schemes of their own.

There is therefore an argument for allowing these overseas costs to be claimed, and counting on the natural spillover of expertise that will benefit UK-based parts of the same group. Indeed, with the pandemic enhancing the ability to collaborate remotely, there is likely to be far more sharing of information, and therefore improved skills feeding into the UK, than ever before.

To favour UK-based work, exceptions could require that the costs of overseas R&D activities be less than the costs of related R&D activities undertaken solely in this country.

This cannot happen overnight

Finally, a transition period is needed in order to refocus R&D benefits back to the UK. In practice, we find UK companies working with emerging technologies or at the cutting edge of scientific fields have to search globally for the specialist skills they need. It seems unlikely that this expertise will materialise suddenly in the UK simply because a new restriction is introduced on overseas R&D tax relief.

We hope the Government will consider these further changes before publishing its legislation.


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