Significant changes to the rules for research and development (R&D) tax reliefs apply for accounting periods beginning on or after 1 April 2024. The changes include: 

• restricting R&D tax relief for contractor payments and payments for externally provided workers (EPWs) where the R&D activity takes place overseas; and
• introducing new rules for contracted-out R&D. 

HMRC has published draft guidance for consultation on the above changes. It intends to publish guidance on all of the changes later in 2024. 

The consultation is open until 1 March 2024. If you have comments on the proposals that could contribute to a response from ICAEW, please contact Richard Jones.  

Overseas expenditure 

The restrictions for overseas expenditure apply as follows:  

• for contractor payments, by reference to the location of the R&D; and
• for EPWs, through a requirement that the EPW’s earnings are subject to pay as you earn (PAYE) and class 1 national insurance contributions (NIC). 

The restrictions are subject to exceptions where certain conditions are met. Broadly, this is the case where the activity necessarily takes place abroad.  

The draft guidance explains what is meant by the location of R&D and discusses cases where exceptions apply. 

Contracted-out R&D 

New rules give the customer the right to claim relief for contracted-out R&D, subject to certain exceptions. R&D is treated as contracted out where it is reasonable to assume that the customer intended or contemplated the form of R&D carried out by the contractor.  

The draft guidance explains how the rules apply, including the circumstances in which a customer ‘intended or contemplated’ that R&D would be done.