R&D tax relief

Overseas R&D costs: what still qualifies after April 2024

For accounting periods beginning on or after 1 April 2024, contracted-out R&D and externally provided worker costs carried out overseas generally stopped qualifying for relief. There's a genuine exception, and it isn't a rigid checklist, but HMRC is explicit that cheaper overseas labour on its own doesn't clear it.

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What's new

The restriction is narrower than "no overseas costs", but it's real

Before this reform, where overseas R&D activity happened didn't generally affect whether the cost qualified. For accounting periods beginning on or after 1 April 2024, that changed for two specific cost categories: payments for contracted-out R&D, and payments for externally provided workers (EPWs, typically agency staff). Where the R&D activity itself takes place outside the UK, those costs generally no longer qualify, subject to a narrow exception (see gov.uk, "Check what R&D costs you can claim", and HMRC manual CIRD151000). For EPWs specifically, there's a separate route in as well: earnings that go through UK PAYE and Class 1 National Insurance still qualify regardless of where the work happens.

Worth knowing first: your own UK-payroll staff aren't affected by any of this. The restriction is about payments to contractors and externally provided workers, not your employees' salaries. A UK employee who travels abroad for genuine R&D work is still a normal staff cost, claimed as before.

The exception

Three things all have to be true, and it's fact-specific, not a checklist

Under CTA09/S1138A(2), overseas contracted-out or EPW costs can still qualify where all three of these hold: the conditions necessary for that R&D aren't present in the UK, those conditions do exist where the work actually happens, and it would be wholly unreasonable to expect the company to replicate them in the UK. HMRC's own manual describes the categories of "necessary conditions" as fairly wide, and deliberately doesn't reduce them to a fixed list. Broadly, they fall into two groups (CIRD151000):

Geographical, environmental or social conditions: things that physically or naturally can't be replicated in the UK. Examples are disease prevalence or specific patient populations for a clinical trial, particular animal or plant distributions, deep-sea, desert or high-altitude environments, access to a specific geological feature, or a concentration of specialist expertise (a particular university research group, say) that genuinely doesn't exist here.
Legal or regulatory requirements: where a law, regulator or accreditation body genuinely requires the activity to happen in a specific place, or requires a process that can only be satisfied there.

What HMRC says explicitly doesn't count: lower labour or overhead costs overseas, easier access to contractors or facilities abroad, and the general availability of skills or experience outside the UK. HMRC's own guidance is direct about this: had the primary reason for the overseas location simply been lower cost, that wouldn't satisfy the test. A genuinely cheaper overseas team is a real commercial reason to use them, but it isn't a reason the restriction is written to accommodate.

Worked example, from HMRC's own guidance

Same trial, two locations, two different answers

HMRC's manual gives a pharmaceutical example that shows the distinction well: a company runs part of a clinical trial in Germany because German regulators require in-country trial data before they'll grant local price reimbursement approval. That's a genuine legal and regulatory necessity: the trial can't be replicated in the UK and still satisfy the German approval process, so the overseas cost can qualify. Contrast that with a company running the same trial in a lower-cost jurisdiction purely because it's cheaper to recruit participants and staff there, with no regulatory requirement forcing the location. Same activity, different reason, different answer.

Decision helper

Your situationUsually meansNot this

Own UK-payroll staff doing R&D abroad occasionally→Not affected by this restriction at all→Assuming any overseas work disqualifies the cost

Contracted-out R&D or agency staff overseas, chosen for a genuine regulatory or environmental reason→Worth testing against CIRD151000; may still qualify→Assuming it's automatically excluded

Contracted-out R&D or agency staff overseas, chosen mainly for cost or convenience→Generally doesn't qualify from periods beginning 1 April 2024→Assuming a hedge word like "partly for cost" changes the answer

Alternatives and limitations

Whether the location genuinely satisfies the exception is a fact-specific judgement HMRC expects to be argued on the actual circumstances, not asserted. If overseas costs are a meaningful part of a claim, that's worth a proper review rather than a guess either way. This page doesn't cover who's entitled to claim contracted-out R&D in the first place. That's a separate question: see contracted-out R&D: who claims. And if you're not sure which scheme applies to the period in question, start with the scheme checker.

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What happens next

A person on our team reads it. A sentence or two is enough to start.
If we can help, we may introduce you to a provider and tell you who they are.
No charge and no obligation at any point. You decide whether to go further.

Adam Parker

Founder of Muswell Rose Consulting Ltd, which trades as Established Finance · former Managing Director of Penny, an invoice finance business, working in mortgages, commercial finance and fintech lending since 2010 (career history).

Last reviewed: 15 September 2026

Practical questions

Before you get in touch

Do UK-payroll staff doing R&D work abroad lose relief under this rule?

No. The restriction only covers payments to contractors and externally provided workers. Your own employees working abroad are still a normal staff cost.

Does cheaper overseas labour qualify for the overseas exception?

No. HMRC's guidance is explicit that lower cost, easier access to contractors abroad, or the general availability of skills overseas don't meet the exception.

What has to be true for overseas contracted-out R&D costs to still qualify?

The necessary conditions must be absent from the UK, present where the work happens, and wholly unreasonable to replicate here. It's a fact-specific test under CTA09/S1138A(2).

What information do I need?

To start, just a description of what’s actually happening in the business. If it progresses, the provider will ask for the usual things: recent accounts, a sense of turnover and trading history, and details of the specific need.