HMRC tightens its overseas R&D raw-materials example

HMRC's overseas R&D guidance now treats the cost of shipping raw materials to the UK as an R&D cost that cannot be considered when deciding whether the overseas-conditions exception appliesGOVGOV. In its revised raw-materials example, maintaining a steady supply may be relevant if it was necessary to carry out the work overseas to secure that supply. The wider facts still determine whether the statutory test is met.

The example concerns materials available only overseas, where bringing them to the UK for testing would involve substantial shipping costs and a carbon footprint. The earlier wording said transport could not be considered if it was part of the R&D cost, and identified overriding environmental concerns and steady supply as potentially relevant. The revised example states directly that transport is an R&D cost and links the supply consideration to the necessity of working overseas.

For companies relying on the conditions route in section 1138A(2), the necessary R&D conditions must be absent from the UK and present where the work takes place. The third requirement concerns conditions “that it would be wholly unreasonable for the company to replicate in the United Kingdom”. The statute includes geographical, environmental and social conditions, and legal or regulatory requirements preventing UK performance. It excludes conditions insofar as they concern the cost of the R&D or the availability of workers to carry it outLegislation. Environmental conditions therefore remain expressly recognised in the legislation despite the change to this particular example.

HMRC also distinguishes the cost of R&D activity from expenditure qualifying for relief: laboratory rent can be an R&D cost even though it is not qualifying expenditure. The presence of cost or staffing considerations alongside significant other factors does not itself disqualify overseas expenditure. But if cost or worker availability is the only obstacle to carrying out the R&D in the UK, the expenditure will not qualify under this conditions testGOV.

Timing can be relevant where a necessary UK facility cannot be developed in time. Urgency caused solely by staff availability cannot satisfy the test, while wider timing issues may do so. For a raw-materials claim, the relevant assessment is therefore why the work needs to take place overseas to maintain supply, alongside the full statutory conditions.

The statutory basis is section 1138A(2) and (3) of the Corporation Tax Act 2009.