Claiming R&D tax relief under the new (merged) RDEC and ERIS schemes: What you need to know about overseas expenditure

Author: Jen Badger Published: 14^th March, 2025

In this series of blogs, we’ll be taking you on a deep dive into the main differences between the SME and RDEC schemes and the new RDEC and ERIS schemes for R&D tax relief, making sure you know what additional information you’ll need to gather to prepare a claim under the new regime.

This week it’s the turn of overseas costs. We’ll cover what costs are and are not allowed under the new rules, how to apply them and what information you’ll need to give HMRC.

What’s changed?

Under the new RDEC and ERIS schemes, payments made to overseas EPWs and subcontractors are no longer allowable costs for R&D tax relief, unless the exemption criteria have been 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?

Overseas EPW and subcontractor costs can be included in a claim if the conditions necessary for the purposes of the R&D are:

Not present in the UK;
Present in the location where the R&D is carried out, and;
It would be wholly unreasonable to recreate the conditions 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 whole list of examples, but even this is non-exhaustive.

One of the main things to bear in mind is that HMRC does list two conditions that cannot be used to claim an exemption – the cost of the R&D activity or the availability of workers to undertake the R&D.

This means that a company cannot carry out R&D overseas solely because it is cheaper to do so, or use overseas workers because they are struggling to hire in the UK, and include those costs in their R&D claim.

What information do I need to give 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 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.

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.

Next week, we’ll be focusing on subcontracting under the new merged scheme regime, covering what’s changed and how to approach subcontractor costs in your R&D claims – don’t miss it!

If you’d like to find out how WhisperClaims can help your firm with an efficient, robust and risk-aware approach to R&D claim preparation, why not book a demo today!

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