Does your business have non-UK R&D activities?

As most affected businesses will be aware, new R&D tax relief rules take effect for accounting periods starting on or after 1 April 2024, which restrict enhanced tax relief for non-UK R&D activity. 

The new overseas restrictions

Under the new rules, contracted out R&D and the costs of externally provided workers (such as agency workers) generally only qualify for enhanced relief to the extent that the relevant activities are carried out in the UK. 

There are limited exceptions for R&D activities that cannot take place in the UK, either because the R&D requires specific geographical, environmental, or social conditions not present in UK, or because of legal or regulatory requirements that mean it cannot take place in the UK. Guidance released in February 2024 suggests HMRC intends to apply a less tightly framed interpretation of these rules than many feared, but even so, these changes are expected to impact many businesses with global supply chains. 

Other considerations that might impact where R&D takes place

The government intends that the new R&D tax relief rules will encourage businesses to consider onshoring their R&D activities to the UK, with the understandable aim of ensuring that the regime incentivises those that contribute most to the UK ‘knowledge economy’. However, there are also generous R&D tax incentives in other jurisdictions, and businesses may therefore consider changing their current trading arrangements or supply chains to try and avail of these, as opposed to bringing R&D activities back to the UK.

However, care will need to be taken over such decisions, as changes to a group’s trading arrangements can have unintended consequences. These may include an impact on the jurisdiction in which the intellectual property arising from R&D is considered to be owned. This could in turn create immediate tax considerations (for example, in relation to transfer pricing, VAT and withholding taxes) and future issues and risks on an exit event. The impact of these may, in some cases, necessitate restructuring to align with the group’s intellectual property strategy, potentially giving rise to significant tax charges, particularly where the value of the intellectual property created has increased by the time the restructuring is undertaken.

It should be noted that the changes to the R&D tax relief rules do not affect the eligibility of staffing costs in respect of a company’s own employees. If there are individuals employed by an overseas branch of a UK-resident company, it appears that these costs could still, in many circumstances, be eligible for UK R&D tax relief. The position in this regard is subject to specific rules relating to overseas branches, and a wider consideration of the specific tax circumstances.

What this means

UK businesses should seek advice if they are currently, or are considering, undertaking R&D activities outside the UK, as the short-term attraction of generous non-UK R&D tax reliefs may, in some cases, be offset by significant longer-term risks and much wider unintended consequences.

For more information, please get in touch with Suze McDonald, James Tetley or your usual RSM contact.