I would like to know the new R&D restrictions put in place for overseas workers and contractors. Could you also comment on the brief summaries of each company below?
Company A
This company studies certain species that are not in the UK as part of their scientific research. The studies need to take place in the natural environment of the species whilst there are government restrictions for those species in the relevant state.
Company B
Company carries out lab work which could but done in the UK, but the company chooses to engage overseas workers and sub-contractors as it’s more efficient for profits of the company.
A.) The new restrictions in relation to R&D undertaken overseas come into force for accounting periods beginning on or after the 1 April 2024.
The changes only affect the cost of externally provided workers and contracted out work – CTA09 S1132A(3), S1134(3)(e) and s1136(3) CTA 2009.
The relevant expenditure for R&D overseas workers and contractors must either be incurred for R&D taking place in the UK or outside the UK where the conditions under CTA09 S1138A are met:
1138A(2) The circumstances are that there are conditions necessary for the purposes of the research and development–
(a)that are not present in the United Kingdom,
(b)that are present in the location in which the research and development is undertaken, and
(c)that it would be wholly unreasonable for the company to replicate in the United Kingdom.
The legislation defines the conditions as geographic, environment or social and legal or regulatory requirements but adds that those do not include conditions relating to the cost of the R&D or the availability of workers – CTA09 S1138A (3). It is worth noting that HMRC’s draft guidance comments on circumstances where if costs are not the only factor relief may still be available.
A company is required to preserve and keep records under FA98 Sch 18 para 2. This is important for R&D as HMRC will expect that a company has documented the reasons why the overseas part of the project cannot take place in the UK.
Company A
From the information provided, Company A would still qualify for R&D expenditure on the overseas costs due to the geographic, environmental and regulatory requirements of the R&D project and the exclusions do not apply here.
Company B
If Company B continue to engage overseas workers and sub-contractors, then those costs will no longer qualify for R&D relief based on the information provided. The company may want to re-consider engaging UK workers and sub-contractors to qualify for R&D tax relief on those costs but depends on whether they outweigh savings made by engaging overseas workers.
Please see commentary at Croner I 714-150 and HMRC draft R&D guidance.
