The UK government has introduced significant changes to the R&D tax relief rules, particularly affecting overseas R&D expenditure. These changes, effective from April 1, 2024, are part of the Finance Act 2024 and aim to encourage more R&D activities within the UK. The key aspects of these new rules include:
Restrictions on Overseas R&D Expenditure:
- Contractor Payments: Payments to contractors for R&D activities will only qualify for tax relief if the R&D is conducted within the UK. Exceptions apply if the R&D activity must necessarily take place abroad due to specific conditions. For example, if the required expertise or environment is only available overseas, such as specific geological or climatic conditions, the expenditure may still qualify.
- Externally Provided Workers (EPWs): Payments for EPWs will only qualify if the workers’ earnings are subject to UK PAYE and National Insurance contributions. This means that companies must ensure that their EPWs are on UK payroll to benefit from the tax relief.
Qualifying R&D Activities
The definition of qualifying R&D activities remains focused on projects that seek to achieve an advance in science or technology. However, the location of these activities is now a critical factor. Companies must demonstrate that the R&D activities are conducted within the UK unless they fall under the specified exceptions.
Evidence Requirements
Companies must maintain detailed records to support claims for R&D tax relief, demonstrating where the R&D activities are conducted. This includes contracts, invoices, and other relevant documentation. The documentation should clearly outline the nature of the R&D activities, the location, and the necessity for any overseas work.
Transitional Provisions
There are transitional provisions for accounting periods beginning before April 1, 2024, allowing some flexibility as companies adjust to the new rules. During this transitional period, companies can continue to claim relief for overseas R&D expenditure under the old rules, provided the expenditure was incurred before the cut-off date.
Impact on Multinational Companies
Multinational companies with R&D operations spread across different countries will need to reassess their R&D strategies. The new rules may necessitate a shift of R&D activities to the UK or a restructuring of how R&D projects are managed and documented.