Overseas costs restrictions in R&D tax relief: what you need to know

Here at WhisperClaims, we receive frequent questions about the overseas cost restrictions and how they apply to R&D tax relief claims costs.

These restrictions form part of the new merged RDEC and ERIS schemes, and limit when companies can include costs relating to R&D activity carried out overseas. As more claims are being prepared under the new rules, we’re seeing growing uncertainty about how the restrictions should be applied in practice.

What are the rules?

Under the merged RDEC and ERIS schemes payments to overseas EPWs and subcontractors are generally not allowable for R&D tax relief unless specific exemption criteria are met.

For EPWs, the key points are as follows:

Only payments subject to UK PAYE can be included in R&D claims.

The location of EPW is irrelevant, so claimants could include payments to EPWs based overseas if they are subject to UK PAYE.

Where payments to an EPW are partly subject to PAYE, the costs should be split and apportioned appropriately, so that only the portion subject to PAYE is included.

For subcontractors, things are a little different. The key points are:

Only payments made for subcontracted work carried out in the UK can be included.

The usual location of the subcontractor, the country to which the payment is sent and the currency of the payment are irrelevant.

For these purposes, the UK means England, Scotland, Wales and Northern Ireland. Work undertaken in UK overseas territories does not qualify.

What are the exemptions?

Northern Ireland Companies

Companies claiming under NI-ERIS are exempt from the overseas cost restrictions. However, if a Northern Ireland company instead claims under RDEC, the overseas restrictions apply.

R&D necessarily undertaken overseas

Overseas EPW and subcontractor costs may still qualify where the conditions required for the R&D:

Are not present in the UK

Are present where the R&D is carried out

Would be wholly unreasonable to recreate in the UK

The conditions could refer to legislative requirements, geographical circumstances, social conditions – almost any factor relating to the R&D. HMRC’s guidance contains a long list of examples, but even this is non-exhaustive.

What information must be provided to HMRC?

For each project included in the claim, you’ll need to think about whether any overseas EPWs or subcontractors were used, what they were used for and why the company chose to outsource this aspect of the R&D. You’ll then need to work out whether these costs meet the criteria for exemption.

Having done that, to fill out the Additional Information Form (AIF), you’ll need to provide HMRC with details about the location of subcontractors, the PAYE references for EPWs, and the reasons why the claimant believes that included overseas costs are exempt from the restrictions.

Does this affect any other aspect of an R&D claim?

No, these rules only affect subcontractor and EPW costs.

WhisperClaims supports overseas cost qualification

In summary, the new merged and ERIS schemes introduce tighter restrictions on overseas costs, with only UK-based subcontractor work and EPW payments subject to UK PAYE being allowable – unless specific exemption criteria are met.

When preparing a claim, it’s crucial to gather clear evidence on the location of the work, the PAYE status of EPWs and any justification for claiming an exemption under the new rules. This will ensure that you’re providing HMRC with the necessary detail in the Additional Information Form to support your claim.

We’re covering overseas costs, subcontractors and EPWs in detail in our upcoming webinar, “Subcontracted R&D, EPWs & overseas costs under the merged RDEC scheme“, and we’d love you to join us.

Wed 11 Feb 2026 | 12 noon

Register your place

And, for a more in-depth exploration about how WhisperClaims can support your in-house R&D tax service, why not book a demo?

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