Overseas Expenditure: What changed on 1 April 2023?

The government wants to encourage companies to undertake their research and development activities within the UK.

Consequently, from 1 April 2023, R&D activity will have to be physically located in the UK for the costs to be included in R&D tax relief claims. UK companies that currently claim R&D costs paid to overseas subsidiaries or third parties may no longer be able to include these costs in their claims.

The costs of externally provided workers (EPWs) will normally be limited to work undertaken in the UK.

Nonetheless, the government has taken account of the fact that it may not be practical or reasonable to carry out some types of research in the UK and is looking at creating exceptions to the rule.

These are likely to include:

• Environmental/geographical reasons;
• Legal or regulatory reasons (eg, local testing of drugs in other territories);
• Specialist skills (where the expertise is not available in the UK).

The government gives the example of work involving monitoring active volcanoes. This cannot be done in the UK so the overseas costs of doing so could be included in a tax relief claim.

HMRC will consider if the conditions exist in the UK for the research to be undertaken. It will also consider if they exist in the territory where the research is to be undertaken. It will further consider if it would be wholly unreasonable to replicate those conditions in the UK.

International UK-based companies will have to have regard to their structure when assessing what is eligible R&D activity. Could they for example claim for overseas work undertaken by a subsidiary if the intellectual property deriving from the work was patented in the UK and if UK tax was paid on the work? And what of an overseas worker temporarily relocated to the UK who is paying income tax and national insurance contributions. Are his or her salary costs claimable?

Draft legislation has been published to implement its planned changes to the R&D tax incentives. They apply to accounting periods beginning on or after 1 April 2023.

Software and technology

Spending on materials and software bought overseas and used in UK-based R&D are eligible for relief.

Accounting year changes

It may be worth considering changing your company’s year end date to continue to benefit from the tax regime prior to the changes taking effect on 1 April 2023

You might consider changing your year end to gain extra time under the old regulations. However, doing so may have other consequences so it would be worth taking expert advice to ensure that the net outcome is positive, both in the present and in future. Factors to consider include the possibility of your company’s credit rating being downgraded, the bringing forward of accountancy and auditing fees and, if you are part of a group, becoming misaligned with other group entities’ reporting periods.

It is important to bear in mind that HMRC (as of April 2023) is still consulting on its planned reforms to the R&D tax credit regime. Therefore, some advice and information that is generally available online may be or may become out of date and unreliable. Consequently, it would be wise to seek professional advice on the implications for your business of its planned changes.