This page costs out a claim in which the overseas restriction removes £156,000 of qualifying expenditure and one overseas cost of £130,000 survives it: £300,000 of qualifying expenditure, a £60,000 credit and £44,100 of net benefit, or 14.7p per £1. Example Diagnostics Ltd is invented and every figure is illustrative.
The accounting period runs from 1 April 2025 to 31 March 2026, so the merged R&D Expenditure Credit applies, as it does for accounting periods beginning on or after 1 April 2024. The company is profitable, has no associated companies, and has augmented profits before the claim of £150,000, between the £50,000 and £250,000 limits, so marginal relief applies.
The R&D behind the figures
Example Diagnostics Ltd develops point-of-care diagnostic devices. The baseline is what published assay practice could achieve for detecting a low-concentration analyte in whole blood outside a laboratory; the advance sought belongs to the field, being a method that holds that sensitivity in an unrefrigerated cartridge. The technological uncertainty was whether the reagent chemistry would stay stable once immobilised on the cartridge substrate, which a competent professional could not readily deduce from published knowledge. Resolution came through formulation work, stability testing and a clinical investigation. See what counts as qualifying R&D.
Which overseas costs get into a claim, and which do not?
For accounting periods beginning on or after 1 April 2024, contractor payments qualify only where the R&D is undertaken in the UK, and staff provision payments only so far as they are attributable to the workers’ qualifying earnings: earnings on which PAYE and Class 1 National Insurance contributions are accounted for in respect of any part of them, which is why a partly UK-payrolled worker qualifies in full (s1132A(2)). For contracted-out work the test is where the work is undertaken, not where the contractor is incorporated or invoices from.
Both restrictions share one exception: qualifying overseas expenditure under CTA 2009 s1138A. It applies where conditions necessary for the R&D are not present in the UK, are present where the work is done, and it would be wholly unreasonable to replicate them here. Subsection (3)(a) gives a non-exhaustive list of what can count, including geographical, environmental or social conditions and legal or regulatory requirements as a result of which the R&D may not be undertaken in the UK. Subsection (3)(b) excludes two things, and that list is closed: conditions relating to the cost of the R&D and to the availability of workers.
CIRD150500 puts the asymmetry plainly: the conditions that can count are open-ended, while “The list of conditions to be disregarded is exhaustive.” HMRC’s examples include a regulator requiring testing by a particular method or in a particular place, and good manufacturing and good clinical practice standards.
The working distinction is what the R&D needs against what the business prefers. A patient population that does not exist in the UK is a condition of the science; a site that charges less is a condition of the budget.
What did the company spend, and how much of it qualifies?
Three tranches of overseas spend sit in this period, and one survives. The contractor was engaged at roughly a third of UK day rates: the honest reason is price. The agency workers sat outside UK payroll. The investigation was run where the regulator requires it, and where the patient population the study needs is not present in the UK.
| Spend | Amount | In or out | Qualifying element |
|---|---|---|---|
| UK staffing costs, apportioned to the R&D | £140,000 | In | £140,000 |
| UK consumable items | £22,000 | In | £22,000 |
| Software, data licences and cloud computing | £8,000 | In | £8,000 |
| Contract research organisation, overseas clinical investigation | £200,000 | In: qualifying overseas expenditure | £130,000 |
| Overseas development contractor, engaged for cost | £160,000 | Out: R&D not undertaken in the UK, and cost is a disregarded condition | nil |
| Externally provided workers, overseas agency, outside UK PAYE and Class 1 NIC | £80,000 | Out: the payroll test fails and no s1138A route on these facts | nil |
| Total qualifying expenditure | £300,000 |
Payments to unconnected subcontractors qualify at 65%, and the clinical investigation is no exception: £200,000 x 65% = £130,000 under CTA 2009 s1136. Qualifying overseas expenditure gets the cost into the claim; it does not change the 65%.
Both lines drop out in full rather than at 35%, and for different reasons. Price is what put the contractor abroad, and subsection (3)(b) will not accept it. The agency workers fail the payroll test at s1132A(2), but that is not the end of it: where subsection (2) does not apply, earnings are still qualifying earnings if and to the extent that they are attributable to R&D undertaken outside the UK to which s1138A applies (s1132A(3)). So the same exception reaches externally provided workers, and nothing in these facts brings them within it. The cost categories are set out in which costs qualify.
| What the restriction removed | Figure |
|---|---|
| Development contractor, £160,000 at 65% | £104,000 |
| Externally provided workers, £80,000 at 65% | £52,000 |
| Qualifying expenditure lost | £156,000 |
| Gross credit lost at 20% | £31,200 |
| Net benefit lost at the 26.5% marginal rate | £22,932 |
What is the claim worth?
| Step | Figure | Reference |
|---|---|---|
| Qualifying R&D expenditure | £300,000 | |
| Expenditure credit at 20% | £60,000 | s1042G |
| Augmented profits before the credit | £150,000 | |
| Taxable total profits, credit included as income | £210,000 | |
| Corporation tax, main rate less marginal relief | £51,900 | CTA 2010 s18B |
| Step 1, credit set against that liability | £51,900 | s1042I |
| Amount remaining after step 1 | £8,100 | |
| Step 2, the notional tax deduction | nil | s1042K |
| Step 3, the PAYE cap: £20,000 plus 300% of £46,000 of relevant PAYE and NIC | £158,000, no restriction | s1112B |
| Step 7, paid in cash | £8,100 |
The corporation tax line is the part readers get wrong. Marginal relief reduces the charge by F x (U - A) x N/A, where F is the standard marginal relief fraction of 3/200, U the £250,000 upper limit, A the augmented profits and N the taxable total profits. With no distributions, N and A are the same figure.
- With the claim: 25% of £210,000 is £52,500, less 3/200 x (£250,000 less £210,000) = £600, giving £51,900.
- Without the claim: 25% of £150,000 is £37,500, less 3/200 x (£250,000 less £150,000) = £1,500, giving £36,000.
The credit therefore adds £15,900 of corporation tax, which is 26.5% of £60,000, the marginal rate on profits inside the band.
Step 2 is the subtle one. Section 1042K deducts the amount, if any, by which the amount remaining after step 1 exceeds the initial credit less the notional tax charge on it. This company has profits chargeable at the main rate, so that charge is computed at 25%: £60,000 less £15,000 is £45,000. The £8,100 remaining falls well under that, so the step 2 deduction is nil.
Step 3 tests the balance against the cap of £20,000 plus 300% of relevant PAYE and National Insurance contributions, which at £158,000 does nothing here. The PAYE cap bites where the UK payroll is small and most of the work is contracted out.
| Position | Result |
|---|---|
| No claim: corporation tax payable | £36,000 |
| With the claim: corporation tax payable | nil |
| With the claim: cash received at step 7 | £8,100 |
| Net benefit | £44,100, or 14.7p per £1 |
14.7p is the lowest figure the merged scheme produces, and where a company in the marginal band lands. A credit large enough to carry augmented profits past £250,000 would bear a blend rather than a flat 26.5%; this one does not.
Evidencing a qualifying overseas expenditure position
Build the case before the spend. Record what condition the R&D needs, why the chosen location supplies it, and why replicating it here would have been wholly unreasonable. For this investigation that means the regulator’s requirement and the absent patient population, documented at planning stage rather than two years later. Ask multi-site providers to identify delivery locations in the contract and split invoices between UK and overseas work; a single global fee leaves you apportioning after the fact, on weaker evidence. HMRC checked around one in six R&D claims in 2023-24, its latest published figure, and location evidence is an obvious target in an enquiry.
What the claim looks like on the form
The Additional Information Form carries qualifying expenditure by category, so the figure entered for contracted-out R&D is £130,000, not the £200,000 paid to the contract research organisation and not the £360,000 of contractor spend in the ledger, with the portion of each category attributable to qualifying indirect activities identified separately. Alongside it go the company details, the senior internal R&D contact, every agent involved, the accounting period dates and the project descriptions. The excluded costs never appear on the form, which is why the working papers must show the apportionment behind the figure that does.
What changes the answer
- The development contractor moves to the UK. £104,000 comes back into the claim, worth £20,800 more gross credit and £15,288 more net at the marginal rate. Location changes claim value, so run that comparison before contracts are signed.
- The overseas workers come onto UK payroll. The same role filled through a UK agency and paid within UK PAYE and Class 1 NIC qualifies outright. Left on an overseas agency’s payroll, the cost gets in only so far as the work is done overseas and meets the s1138A conditions, which these facts do not.
- The trial could have been run in the UK. Without the regulator’s requirement, and with the patient population available here, the £130,000 comes out too, leaving £170,000 of qualifying expenditure and £24,990 of net benefit.
- An accounting period beginning before 1 April 2024. The restriction does not apply. Those periods follow the old rules, and many remain within the claim window, two years from the end of the period of account, with the last standard old-scheme deadlines in late March 2027. See backdated R&D claims.
Talk it through with a chartered adviser
The arithmetic here is the easy half. The £300,000 at the top of it rests on judgements about which conditions the R&D needed, whether the UK could have supplied them, and what the contracts say about where work was done.
Those judgements are signed off by a chartered adviser before the claim reaches HMRC, and enquiry support is included as standard.
For an estimate on your own figures, use the claim value calculator. The rules behind this example are in overseas R&D costs, the other cases in the worked examples, and the rest of the framework in the R&D tax relief guide. If your R&D crosses borders, get in touch.
Sources
- CTA 2009 s1138A — qualifying overseas expenditure: conditions not present in the UK, present where the R&D is undertaken, and wholly unreasonable to replicate here; subsection (3)(a)‘s non-exhaustive list of geographical, environmental or social conditions and legal or regulatory requirements; subsection (3)(b) excluding conditions relating to the cost of the R&D and the availability of workers.
- CIRD150500: overseas restrictions — “This list is not exhaustive” for the conditions that count, against “The list of conditions to be disregarded is exhaustive”, and the regulatory examples.
- CTA 2009 s1131 — subsection (2), qualifying expenditure on externally provided workers where the parties are not all connected: 65% of so much of the staff provision payment as is attributable to qualifying earnings.
- CTA 2009 s1132A — subsection (2), earnings on which PAYE and Class 1 NIC are accounted for “in respect of any part of those earnings”; and subsection (3), under which earnings outside subsection (2) are qualifying earnings “if and to the extent that they are attributable to relevant research and development that is undertaken outside the United Kingdom and to which section 1138A applies”.
- CTA 2009 s1136 — the qualifying element of a contractor payment: 65% of the relevant portion, itself limited to R&D undertaken in the UK or falling within section 1138A.
- CTA 2009 s1042G — the 20% relevant percentage.
- CTA 2009 s1042H — the expenditure credit brought into account as a receipt in calculating the profits of the trade.
- CTA 2009 s1042I — the seven payment steps.
- CTA 2009 s1042K — the notional tax deduction at step 2, computed at the main rate where the company has profits chargeable at the main rate.
- CTA 2009 s1112B — the cap of £20,000 plus three times relevant PAYE and NIC liabilities.
- CTA 2010 s18B — marginal relief reducing the charge by F x (U - A) x N/A.
- CTA 2010 s18D — the £50,000 lower limit and £250,000 upper limit, divided by one plus the number of associated companies.
- Corporation Tax rates and allowances — the 25% main rate, the 19% small profits rate and the standard marginal relief fraction of 3/200.
- Draft guidance: contracting-out and overseas restrictions — the UK-location rule and the qualifying overseas expenditure conditions.
- Check what R&D costs you can claim — the 65% rule and the UK-location rules for contracted-out R&D and externally provided workers.
CIRD150500 is indexed on our CIRD reference index, with HMRC’s own title for it, a line on what it says and the date HMRC last revised it.