For accounting periods beginning on or after 1 April 2024, R&D tax relief is restricted to work done in the UK. Subcontractor payments qualify only where the R&D is undertaken in the UK, and externally provided workers count only where they are subject to UK PAYE and Class 1 National Insurance. The single exception, qualifying overseas expenditure, is narrow, and the legislation expressly rules out cost savings and workforce availability as ways through it.
Which costs does the overseas restriction apply to?
The restriction is written into two cost categories: subcontracted R&D and externally provided workers (EPWs).
For subcontracted R&D, the test is where the work is undertaken, not where the contractor is incorporated or invoices from. A payment to a UK-registered contractor whose team does the work abroad fails the test. A payment to an overseas-headquartered group whose people do the work at a UK site passes it. Multi-site providers therefore need their fees split by where the work actually happened.
For EPWs, the test is payroll status: the workers must be subject to UK PAYE and Class 1 NIC. Contract staff supplied from abroad and paid outside UK payroll are excluded, however closely they work under your direction. A developer supplied through a UK agency and paid within UK payroll can qualify; the same role filled from an overseas agency’s payroll cannot. The 65% rule for unconnected providers applies on top, as it does for unconnected subcontractors; the categories themselves are set out in which costs qualify for R&D tax relief.
| Cost category | Default rule | Route in for overseas work |
|---|---|---|
| Subcontracted R&D | Qualifies only where the R&D is undertaken in the UK | Qualifying overseas expenditure |
| Externally provided workers | Qualify only where subject to UK PAYE and Class 1 NIC | Qualifying overseas expenditure |
The restriction binds both current schemes. Whether a claim runs through the merged scheme or Enhanced R&D Intensive Support (ERIS), the same UK-only default and the same exception apply.
What is qualifying overseas expenditure?
Qualifying overseas expenditure is the exception that lets some overseas subcontracting and EPW costs into a claim. It applies where conditions necessary for the R&D are not present in the UK, cannot reasonably be replicated here, and are present where the work is done. The legislation frames those conditions as geographical, environmental, social or regulatory.
Clinical trials are the flagship example. A trial that needs a patient population which does not exist in the UK, or that a regulator requires to be run in its own territory, meets conditions the UK genuinely cannot supply. Environmental and geographical conditions work the same way: R&D that must be conducted in a climate, terrain or setting the UK does not have can support the exception. In every case the condition must be necessary for the R&D itself, and you should expect to show why it could not reasonably be replicated in the UK. We cover the trials angle in detail in clinical trial costs in R&D claims.
What does the exception refuse to accept?
Cost and workforce availability. Both are expressly excluded as justifications, and they are exactly the reasons most companies do R&D abroad. A development team in India at a third of the UK day rate does not qualify. Neither does the argument that suitable engineers or scientists are scarce in the UK, however true it is. If the honest reason for the overseas work is price or hiring, the costs are out.
The working distinction is between what the R&D needs and what the business prefers. A patient population that does not exist in the UK is a condition of the science. A site that recruits faster or charges less is a condition of the budget. Only the first can support a qualifying overseas expenditure position.
Does the restriction affect older claims?
No. It applies to the current schemes, for accounting periods beginning on or after 1 April 2024. Earlier periods follow the old-scheme rules, without this restriction, and many of them remain open to amendment: the final old-scheme deadline falls around 30 and 31 March 2027, as explained in backdated R&D claims. If you are unsure which regime your period falls under, which R&D scheme applies to your company walks through the dates.
What does this mean for planning R&D?
Three practical consequences follow from the UK-only default.
First, location now changes claim value. £100,000 of qualifying spend generates a £20,000 gross credit under the merged scheme, so moving development work from an overseas contractor to a UK one can change the economics of the arrangement, not just the tax paperwork. Run the comparison before contracts are signed, not after year end.
Second, contracts and invoices need to show where work is done. Ask providers to identify delivery locations in the contract and to split invoices between UK and overseas work. A single global fee from a multi-site provider leaves you apportioning after the fact, with weaker evidence.
Third, if you intend to rely on qualifying overseas expenditure, build the case before the spend. Record what condition the R&D needs, why the UK cannot reasonably provide or replicate it, and why the chosen location can. A note written at planning stage is worth far more than a justification assembled two years later, and the question of who is entitled to claim contracted-out work at all runs alongside this one: see contracted-out R&D: who claims?
How does HMRC test overseas costs?
Through the enquiry process, and location evidence is an obvious target. HMRC checks roughly one in six R&D claims, and a claim that includes overseas subcontractor or EPW costs should expect to evidence where the work was done, the payroll status of any workers, and the basis for any qualifying overseas expenditure position. Our guide to HMRC R&D enquiries explains the process and how prepared claims hold up. The rest of the framework is indexed in our R&D tax relief guides.
If your R&D crosses borders and you want a clear view of what qualifies, talk it through with a chartered adviser. We will map your arrangements against the rules and tell you plainly what belongs in the claim.
Written by Matthew Jones ACA CTA. Last reviewed July 2026.
Sources
- Draft guidance: contracting-out & overseas restrictions — the UK-location rule and the qualifying overseas expenditure conditions.
- Merged scheme RDEC reform (policy paper) — the overseas restriction applying from 1 April 2024.