Overseas R&D costs: the UK-only restriction.

If they are subcontractors or externally provided workers, only where the work meets the overseas test. For accounting periods beginning on or after 1 April 2024, contracted-out R&D and EPW costs qualify only if the work is done in the UK or is qualifying overseas expenditure. Lower cost or hard-to-find skills are not enough. Staff on your own payroll are a separate matter that we check on the facts.

It is expenditure on work done outside the UK that meets a strict test in section 1138A of the Corporation Tax Act 2009. The work must be necessary because of geographical, environmental or social conditions, or legal or regulatory requirements, that are not present in the UK. It must also be wholly unreasonable to replicate those conditions here.

No. HMRC's manual says the cost of doing the work is disregarded when deciding whether it was necessary to do it abroad. A lower day rate, a favourable exchange rate or a cheaper supplier cannot make the expenditure qualifying overseas expenditure. The test looks only at the conditions needed for the R&D itself.

That does not help either. The availability of workers is also disregarded by the test. A skills shortage in the UK, or a specialist team who happen to be abroad, will not qualify the expenditure. Only the conditions the work needs, such as a specific disease prevalence or a geophysical feature, count towards the test.

They can, where the trial needs conditions that are absent from the UK. HMRC's manual gives examples such as disease incidence and trial populations. The company has to show that those conditions were necessary for the research and that replicating them here would be wholly unreasonable. A trial run abroad purely for speed or cost will not meet the test.

It can. Legal or regulatory requirements not present in the UK are among the conditions the test recognises, for example where a foreign regulator requires the testing to be done in its territory. The requirement has to be real and relevant to the R&D, and you should keep the correspondence or rules that prove it.

No. HMRC's manual says contract terms alone are not regulatory requirements. A customer or partner that insists the work is done abroad does not, for that reason alone, make the expenditure qualifying overseas expenditure. The necessity must come from the conditions the research depends on, not from commercial arrangements between the parties.

The restriction is framed around contracted-out R&D and externally provided worker costs, not around your own direct employees as a category. Cost treatment for staff based outside the UK can still raise other questions, such as payroll and the PAYE cap. Tell us where your team works and we will check the position for each person.

The Northern Ireland exemption is now limited to ERIS claimants who have not opted out of the Northern Ireland provisions. Finance Act 2026 section 34 makes that change for claims on or after 30 October 2024. Merged scheme claimants in Northern Ireland are therefore outside the exemption. The position is technical, so check it before relying on it.

Keep the documents that show the necessity: regulator rules, protocols, site or population data, scientific reasoning for the location, and the correspondence in which the decision was made. A short technical note written at the time is better than an explanation written later. Contract terms and cost comparisons carry no weight under the test.

No. It applies to accounting periods beginning on or after 1 April 2024. Earlier periods follow the old SME and RDEC rules, which did not contain this restriction. If you are making a late claim for an older period, we check the rules that applied to that specific period, including any grant or scheme restrictions of the time.

Possibly. The targeted advance assurance pilot, launched on 18 May 2026, lets an SME ask HMRC about up to two areas of its claim, one project and one area each. Overseas expenditure is one of the four areas. HMRC aims to respond within 40 calendar days, and HMRC's overview says the pilot runs until May 2027.

The restriction applies to the costs of the contracted-out or EPW work done abroad, not to the whole project. The UK-based parts of the project are unaffected. We separate the claim by location, test each overseas element against the conditions in the legislation and remove any cost that does not pass.

If an overseas group company carries out R&D for you, its work is contracted-out R&D or an externally provided worker, so the overseas test applies, and the connected-party cost rules also apply. Being in the same group does not remove the restriction. Group structures with overseas teams should be reviewed before claiming.

A supplier or contractor in a lower-cost country, a team chosen for skills or availability, and no document explaining why the work had to be done abroad. These are the facts the test disregards. If your claim includes any of them, we recommend a review before filing, because HMRC has published specific guidance on the scope of the rule.