This insight on R&D tax reliefs for foreign companies provides a step by step guide on the tax incentive. It outlines what constitutes an R&D tax relief claim, what qualifies and how to claim for R&D tax relief if you are an overseas company.
What is R&D Tax Relief?
Research and development (R&D) tax credits are a Government incentive launched in 2000, designed to encourage more companies to invest in innovation. The scheme is administered by HMRC.
There are two different schemes, one for SMEs and one for Larger companies.
How does R&D Tax Relief work?
If a company spends money (qualifying expenditure) on projects that are classed as R&D (qualifying activities) then they will most likely be eligible to claim R&D Tax Relief. The benefit received will depend on the company’s financial position and which scheme they will need to claim through. It will either be a cash payment or a Corporation Tax reduction.
How do you qualify for R&D Tax Relief?
- Be a limited company in the UK that is subject to Corporation Tax (you don't need to have paid any Corporation Tax).
- Have undertaken qualifying research and development activities.
- Have incurred qualifying cost for these projects.
What makes you SME or Large (RDEC)?
SME: Fewer than 500 staff and either not more than €100 million turnover or €86 million gross assets.
Large company: 500 staff or more and either more than €100 million turnover or €86 million gross assets.
However, there are a few factors such as grants and subcontracting that can mean an SME will claim through RDEC or both schemes.
Can a UK company claim from a foreign subcontractor?
A UK company can claim for subcontracted R&D work that takes place anywhere in the world, providing that it meets the definition of subcontracted R&D for tax purposes and it is being funded by the UK-based company making the claim.
Subcontracted costs can only be claimed if you are an SME and claiming through the SME Scheme. The claim is limited to 65% of the subcontractor's costs. However, if you have overseas individuals who are working on a qualifying R&D project, you may still be able to include them in your claim as externally provided workers (or EPWs).
An EPW is a different relationship to a subcontractor in that they will usually be working under your company’s direction, supervision and control while carrying out the qualifying work. If your company considers this option there are further rules around EPWs and also connected parties that require consideration and planning to ensure that these costs will be claimable through the schemes.
If the UK company is a subsidiary of a foreign company it can claim R&D tax relief in the UK, but only if it is subject to UK Corporation Tax and qualifying R&D activities are being carried out. When considering which scheme the UK entity will claim through, the size of the foreign company will need to be taken into consideration and not just the UK. The rules and variances noted above will apply.
Can an overseas company claim UK R&D tax relief?
Overseas companies can claim UK R&D tax relief as long as the criteria are met. However, HMRC has previously raised concerns regarding the abuse of the SME payable tax credit, including by companies artificially set up to claim even though they have little or no employment or activity in the UK. So, after April 2020, the cash benefit of R&D claims, whether RDEC or payable credits, will be limited to 3 times the value of their PAYE and National Insurance liabilities for that year. This will clearly affect companies that subcontract their R&D while having minimal UK staff costs.
When companies are planning to set up new companies in the UK to undertake R&D or move the R&D activities to an existing UK entity there are many considerations to establish how and if the expenditure associated with the R&D will be valid for R&D Tax Incentives. We recommend that you take advice to ensure that you can support any claim with the relevant documentation and evidence.