Overseas R&D and subcontractors: the territorial rules explained

The rule in one line

Relief on subcontracted R&D and on externally provided workers is now restricted to work carried out in the United Kingdom. Companies that built their engineering or laboratory capacity offshore have seen claims fall sharply, and many discovered it only when the claim was prepared.

The restriction applies to where the work is physically done and, for externally provided workers, to whether their earnings are subject to UK payroll taxes. It does not depend on where the supplier is incorporated or where the invoice is raised.

What still qualifies

Your own employees, wherever the company sits, provided they are on UK payroll. UK based subcontractors, usually restricted to 65% of the invoiced cost where the parties are unconnected. Externally provided workers supplied through a UK agency whose earnings are subject to UK PAYE.

Consumables, software, data and cloud costs are treated differently from labour. Cloud compute bought from an overseas provider but used in qualifying UK R&D is not caught by the labour restriction, which matters for machine learning and simulation heavy projects.

The narrow exemptions

Overseas expenditure can still qualify where the conditions necessary for the research are not present in the UK, it is wholly unreasonable to replicate them here, and the work has to be done where those conditions exist. The examples that fit are geographic, environmental, social or regulatory: deep ocean trials, a specific climate, a population for a clinical study, or a regulatory regime that only exists in another jurisdiction.

Cost and availability of workers are explicitly excluded. Cheaper offshore engineering, or an inability to hire in the UK, does not open the exemption however genuine the constraint feels commercially.

Practical steps if your R&D is offshore

Map each supplier against where the work actually happens, not where the contract sits. Split mixed engagements so the UK portion is identifiable and evidenced with timesheets or delivery records. Where an exemption is being relied on, document the condition and why replicating it in the UK is unreasonable, at the time, not afterwards.

For work being planned rather than already done, the decision is commercial as well as technical. Bringing a team or a test programme onshore can change the value of a claim materially, and it also affects grant eligibility, since UK funders generally require the funded work to take place in the UK.

Where to go next

If part of your development happens outside the UK, book a free review. We will work through supplier by supplier what still qualifies, whether any exemption genuinely applies, and what restructuring would be worth doing before the next accounting period ends.