From 1 April 2024, the UK’s merged R&D scheme brought strict limits on overseas subcontractor and externally provided worker costs. However, the law recognises that in some cases, qualifying R&D activity must take place overseas for valid scientific, environmental, or legal reasons.
Those exceptions are set out in CIRD151000 of HMRC’s Corporate Intangibles Research and Development Manual, which explains when overseas R&D can still qualify for tax relief.
The Legal Basis
The restrictions are governed by CTA 2009, section 1138A(2).
For an overseas cost to qualify, three tests must all be met:
- Necessary conditions for the R&D are not present in the UK.
- Those conditions exist overseas.
- It would be wholly unreasonable to try to replicate them in the UK.
If any of these tests fail, the overseas expenditure does not qualify.
Recognised Conditions
HMRC divides qualifying conditions into two main categories:
1. Geographical, Environmental or Social Conditions
These include factors that physically or naturally prevent the work being carried out in the UK, for example:
- Testing in deep-sea, desert, or tropical environments not available in the UK.
- Research into plants, animals, or diseases only found abroad.
- Accessing natural materials or geological conditions unique to the overseas location.
2. Legal or Regulatory Requirements
These arise where laws or official guidance require the work to be done abroad, for example:
- A foreign regulator mandates that clinical trials take place within its jurisdiction.
- Environmental or trade rules require on-site testing before export or release.
- International treaties or compliance standards restrict the location of research activity.
What Does Not Qualify
HMRC guidance makes clear that convenience or cost does not count.
Examples of non-qualifying reasons include:
- Lower labour or overhead costs overseas.
- Easier access to contractors or facilities abroad.
- General availability of skills or experience outside the UK.
Unless a condition is truly necessary to perform the R&D, the expenditure will not meet the tests in CIRD151000.
Applying the Three Tests
To determine if overseas R&D qualifies, businesses should follow a structured review:
Step 1 – Identify the condition
What is the factor that forces the work to occur overseas?
Step 2 – Confirm it is absent in the UK
Can the same environment, regulation, or material be replicated domestically?
Step 3 – Assess “wholly unreasonable”
Would replicating the condition in the UK be impossible, unsafe, or prohibitively impractical?
If the answer to all three steps supports the overseas work, the costs may still qualify under CTA 2009 s1138A(2) and CIRD151000.
Example Scenarios
- Clinical trials conducted overseas where the disease being studied has no significant presence in the UK.
- Marine engineering testing in deep waters where equivalent UK sites do not exist.
- Agricultural research involving plant species or soil types unique to another country.
- Product safety testing in a jurisdiction where regulatory approval requires local trials.
Each case must be supported by evidence showing that UK replication would be wholly unreasonable.
How to Prepare for a Claim
Before including overseas costs in your R&D tax claim, ensure you:
- Clearly document the condition forcing the work abroad.
- Explain why it cannot reasonably be replicated in the UK.
- Keep technical or legal evidence, such as regulator correspondence or scientific data.
- Identify which elements of the work are overseas and apportion costs accurately.
Why CIRD151000 Matters
CIRD151000 defines the narrow exceptions that preserve eligibility for overseas R&D. It is now one of the most critical sections of the HMRC R&D manual. Businesses that previously outsourced significant R&D abroad must reassess eligibility, document justification carefully, and be prepared to defend any overseas expenditure included in their claim.
For help reviewing or defending overseas R&D activity under the new rules, contact us.
Christopher Toms MA MAAT
Compliance Director, RandDTax