Restrictions on overseas R&D costs

For accounting periods beginning on or after 1 April 2024, payments to contractors for R&D done outside the UK, and payments for externally provided workers whose earnings are not subject to UK PAYE, generally do not qualify for R&D relief. The only general exception, in section 1138A of the Corporation Tax Act 2009, covers work that has to be done abroad because conditions it needs are not present in the UK and it would be wholly unreasonable to replicate them here. Cost and staff shortages never count.

Which costs does the overseas restriction affect?

HMRC’s overview at CIRD150500 says the restriction applies to two categories of qualifying expenditure under both the merged scheme and enhanced R&D intensive support:

• Externally provided workers. Only qualifying earnings count. These are earnings subject wholly or partly to UK PAYE and National Insurance, or earnings attributable to overseas R&D that falls within section 1138A.
• Contractor payments. Only the relevant portion counts, meaning the amount for R&D carried out in the UK plus any overseas R&D within section 1138A.

Overseas and abroad both mean outside the United Kingdom of Great Britain and Northern Ireland. The restriction does not reach every cost incurred abroad. HMRC notes in an example at CIRD152000 that if a company carries out work directly itself, there is no restriction on its own staff costs or on its payments to clinical trial participants. So the restriction bites on work bought in through contractors and staff providers, not on the claimant’s own employees. The other categories are explained in which costs qualify for R&D tax relief.

What is the exception for R&D that must be done abroad?

Section 1138A(2) applies where there are conditions necessary for the purposes of the R&D that:

1. are not present in the United Kingdom;
2. are present in the location where the R&D is undertaken; and
3. it would be wholly unreasonable for the company to replicate in the United Kingdom.

Conditions include, in particular, geographical, environmental or social conditions and legal or regulatory requirements. That list is not exhaustive. Section 1138A(3)(b) then says conditions are disregarded so far as they relate to the cost of the R&D or the availability of workers to carry it out, and HMRC confirms that list of excluded factors is exhaustive.

What counts as a necessary condition?

Necessary takes its ordinary meaning: if the R&D cannot proceed unless the condition is met, it is necessary. HMRC’s examples of qualifying conditions at CIRD151000 include:

• the incidence of a disease, or the availability of suitable or willing trial participants;
• animal or plant distribution;
• physical features such as deep oceans, high altitude, seismic conditions or particular geology;
• access to machinery or facilities, or to a centre of expertise such as a university research group;
• reliable access to essential materials where supply interruption is a real risk;
• legislation, regulator decisions or accreditation body requirements that the work be done in a particular place or way.

Each activity is judged separately. The fact that a clinical trial must happen abroad does not automatically mean that project management or data analysis linked to it also qualifies, although CIRD152000 accepts the whole cost where splitting those tasks out to another provider would be unreasonable.

When is it wholly unreasonable to replicate conditions in the UK?

This depends on the R&D, the company’s circumstances and why the work is abroad. HMRC accepts that time pressure is relevant, whether it comes from the R&D itself, such as samples with a limited life, or from commercial, legal or contractual factors. What is unreasonable for a small company may be reasonable for a large one.

HMRC’s destructive testing example at CIRD152000 shows the approach. If a suitable UK test facility is available in time, overseas testing does not qualify. If UK facilities exist but are fully booked and there is time pressure, it can. If no UK facility exists, the question is whether this company could reasonably build one; it would be wholly unreasonable for a company without the expertise to run one or with too little use for it, but possibly not for a company already running similar facilities that could easily be adapted.

Replication can be partial. In another HMRC example, UK databases showed 20% of clinical trial participants could reasonably have been recruited in the UK on the same timescale, so the company limited its qualifying expenditure to 80% of the overseas trial cost.

Why do cost and staff shortages not count?

Because section 1138A(3)(b) excludes them. HMRC’s examples at CIRD151100 include:

• a company that cannot recruit enough AI specialists in the UK and engages overseas workers through a staff provider: the costs do not qualify;
• a company using specialists in Switzerland for pre clinical research because the leading experts are there: availability of workers cannot satisfy the test;
• a company choosing a cheaper overseas trial site: cost alone cannot satisfy the test.

Cost or staff availability being present does not spoil a claim where another genuine condition applies. HMRC gives the example of time pressure where a UK facility does not yet exist. The exclusion also does not cover other people related factors, such as being close to a leading university research group that advises but does not carry out the R&D.

Does the restriction apply in Northern Ireland?

Section 1138A(1)(b) gives a separate route for enhanced R&D intensive support claims by companies with a registered office in Northern Ireland. Unless such a company opts out, the overseas restriction does not apply to its enhanced support expenditure, although it still applies to any merged scheme expenditure and a three year limit on the amount claimable applies.

How does the restriction change the numbers?

HMRC’s own example at CIRD137000: a UK company pays an unconnected staff provider a single fee for ten workers. Six work in the UK under PAYE and four work remotely from Mexico outside PAYE. Assuming equal pay, 60% of the payment is qualifying earnings, and 65% of that, or 39% of the total payment, is qualifying expenditure.

Illustration only. A company pays an unconnected software house £50,000 for R&D it contracted out. £30,000 relates to work in the UK and £20,000 to a team abroad chosen because it was cheaper. Only the UK portion counts, so qualifying expenditure is 65% of £30,000, which is £19,500.

What evidence should a company keep?

HMRC expects companies to consider alternatives when planning a project and says that planning can justify the choices made. Useful evidence includes vendor selection records explaining why an overseas supplier was chosen, correspondence from regulators, project plans showing time constraints, and records of UK capacity at the time. Contractors and staff providers should be asked to split invoices between UK and overseas work, because a single undivided fee makes apportionment difficult.

Common mistakes are claiming the full cost of overseas contractors after 1 April 2024, treating a recruitment difficulty as a necessary condition, and missing that work done abroad by a UK contractor’s overseas team is caught too. The restriction also interacts with the rules on who claims R&D relief on contracted work, and any overseas element should be explained clearly in the additional information form.

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Related Accountapedia entries

• The PAYE cap on R&D payable credits
• Research and development capital allowances
• What to expect in a HMRC R&D enquiry
• What counts as R&D for tax relief
• Relief for cleaning up contaminated or derelict sites

Sources

• GOV.UK: Check what research and development rd costs you can claim
• GOV.UK: Manual page CIRD150500
• GOV.UK: Manual page CIRD137000
• GOV.UK: Manual page CIRD138000
• GOV.UK: Manual page CIRD152000
• legislation.gov.uk: Act 2009 c. 4, section 1138A
• GOV.UK: Manual page CIRD151100
• GOV.UK: Manual page CIRD151000

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.