On 27 March 2024, just days before the new merged R&D scheme took effect, HMRC published an updated version of its draft new contracting-out rules and overseas restrictions guidance, which applies to both the merged scheme and the R&D intensive scheme.
The main additions to the guidance focus on the rules that disallow costs to be claimed where R&D work is carried out overseas, with two of the three new examples (there are now 34 in total) relating to overseas costs. HMRC have expanded their commentary on how the rules should be applied, particularly in the context of the limited exemptions. As a reminder, there are specific situations where costs for R&D work carried out outside the UK can qualify for relief – broadly, where geographical, environmental, social or regulatory/legal reasons mean it is not possible to carry out the required R&D in the UK.
R&D claims are now routinely challenged where a forensic level analysis of costs is not carried out. So it is perhaps no surprise that the first new example sets out how costs should be apportioned where contracted out R&D work is carried out partly overseas and partly in the UK. In essence, HMRC say that the costs claimed should reflect only the activity of the workers involved in R&D carried out in the UK. That means claimants will need to get operational details (number of workers in the UK and hours worked etc.) from their contractors to support their claims for apportioned project costs in such cases.
The same is true where a company uses ‘externally provided workers’ (EPWs) to carry out specialist R&D tasks. For accounting periods beginning on or after 1 April 2024, such workers will need to be on a UK payroll (even if no NIC is payable, e.g. for temporary visitors). Where EPWs work on R&D projects from outside the UK, costs related to them will not qualify. Therefore, where there are a range of EPWs at different sites, detailed analysis will be needed to ensure that only costs for activities undertaken in the UK are claimed. Again, claimants will need to get evidence to support apportionments from any agency providing and paying such workers.
On the positive side, a further example covers clinical trials of new medicines carried out overseas. HMRC acknowledges that even if there is not a local regulatory reason for trials to be carried out in another country (one of the exemptions), such costs may still be qualifying if the company wants to test the medicine with an ethnically diverse group of volunteers.
The contracted-out R&D section of the guidance has also been updated. Alongside expanded examples, there is a new one to confirm that, although there must be a ‘contract’ for costs of outsourced work to qualify, it does not have to be a written one provided ‘the conditions for a verbal contract for services did exist’.
While it is helpful to have such detailed guidance, at 14,000 words it is not a light read. This highlights that, notwithstanding the complexity of the new rules, HMRC now expects a forensic level of detail and evidence in support of R&D claims.
On 27 March 2024, just days before the new merged R&D scheme took effect, HMRC published an updated version of its draft new contracting-out rules and overseas restrictions guidance, which applies to both the merged scheme and the R&D intensive scheme.
The main additions to the guidance focus on the rules that disallow costs to be claimed where R&D work is carried out overseas, with two of the three new examples (there are now 34 in total) relating to overseas costs. HMRC have expanded their commentary on how the rules should be applied, particularly in the context of the limited exemptions. As a reminder, there are specific situations where costs for R&D work carried out outside the UK can qualify for relief – broadly, where geographical, environmental, social or regulatory/legal reasons mean it is not possible to carry out the required R&D in the UK.
R&D claims are now routinely challenged where a forensic level analysis of costs is not carried out. So it is perhaps no surprise that the first new example sets out how costs should be apportioned where contracted out R&D work is carried out partly overseas and partly in the UK. In essence, HMRC say that the costs claimed should reflect only the activity of the workers involved in R&D carried out in the UK. That means claimants will need to get operational details (number of workers in the UK and hours worked etc.) from their contractors to support their claims for apportioned project costs in such cases.
The same is true where a company uses ‘externally provided workers’ (EPWs) to carry out specialist R&D tasks. For accounting periods beginning on or after 1 April 2024, such workers will need to be on a UK payroll (even if no NIC is payable, e.g. for temporary visitors). Where EPWs work on R&D projects from outside the UK, costs related to them will not qualify. Therefore, where there are a range of EPWs at different sites, detailed analysis will be needed to ensure that only costs for activities undertaken in the UK are claimed. Again, claimants will need to get evidence to support apportionments from any agency providing and paying such workers.
On the positive side, a further example covers clinical trials of new medicines carried out overseas. HMRC acknowledges that even if there is not a local regulatory reason for trials to be carried out in another country (one of the exemptions), such costs may still be qualifying if the company wants to test the medicine with an ethnically diverse group of volunteers.
The contracted-out R&D section of the guidance has also been updated. Alongside expanded examples, there is a new one to confirm that, although there must be a ‘contract’ for costs of outsourced work to qualify, it does not have to be a written one provided ‘the conditions for a verbal contract for services did exist’.
While it is helpful to have such detailed guidance, at 14,000 words it is not a light read. This highlights that, notwithstanding the complexity of the new rules, HMRC now expects a forensic level of detail and evidence in support of R&D claims.
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