11 May 2023

Qualifying Overseas Expenditure

Ian Davie
Senior Consultant

Foreign Subcontractor and EPW Costs in an R&D claim 

It is vital that companies understand the implication of changes on the treatment of subcontractor and EPW (Externally Provided Workers) on their R&D claim. 

It was announced during budgets and by HMRC that expenditure on subcontractors or Externally Provided Workers is required to be in the UK, foreign costs will no longer be allowed in an R&D claim from 1st April 2024 

There are some conditions that can apply that certain Qualifying Overseas Expenditure (QOE) can still be utilised in an R&D claim after 1st April 2024. These are as follows: 

  • the first factor is that conditions necessary for the R&D are not present in the UK 
  • the second is that the conditions are present in the location where the R&D is undertaken 
  • the third factor is that it would be wholly unreasonable to replicate the conditions in the UK 

 What conditions are considered in these points? 

The legislation is not exhaustive in listing the sort of conditions that might be relevant, but these can include geographical, environmental, and social conditions. 

  • Geographical – does the geographical feature that needs to be present not exist in the UK? This could include volcanoes, glaciers or deep sea conditions. 
  • Environmental – Does the environmental condition such as plant or animal availability exist in the UK? 
  • Social – This considers availability of certain groups or diseases where testing is required and not present in the UK. 

 What is wholly unreasonable

There are a number of factors to consider for it to be wholly unreasonable.  For example, if a company wants to test a new product in a test laboratory or facility then if those test facilities exist in both the UK and abroad then the activity would not qualify or if the cost, timescale and ability to replicate the facility in the UK is reasonable.  If the company, or their UK subcontractor, does not have the expertise, or similar facilities that cannot be reasonably adapted, or would be little used, or would take too long to adapt, or are fully booked for a long period, then it is wholly reasonable to say that such facilities do not exist or available in the UK. 

 What is not a QOE

The guidance states that cost and availability of workers are not factors on their own that would constitute a foreign cost being a Qualifying Overseas Expenditure. 

What about if the expert in the field is not in the UK? This is covered in the legislation as not having availability of workers in the UK, so if the expert is not in the UK, that still does not make the activity a QOE. Harsh, but HMRC wants to focus on UK R&D expertise. 

What if company staff or EPWs are located aboard? 

In most circumstances then those staff or EPWs would be paid locally in the country they live in, which would mean they are not a QOE for an R&D claim. 

If the staff or EPWs are located abroad but are paid through UK PAYE payroll, then those that are completing qualifying R&D activities, direct or indirect, then because they are on UK payroll then these costs would qualify, as UK based costs. 

 What about legal and regulatory requirements? 

If for any legal or regulatory reason the R&D activity can’t take place in the UK, then that activity may be a valid QOE, an examples of which is If testing for a new drug must be done by an agreed method through a regulatory body. Even though not bound in legislation this would mean the activity would qualify as a QOE. 

These are principles that can be specified via regulatory bodies, national legislation, international agreements or treaties. In order to prove that the activity is QOE then correspondence or independent evidence needs to be shown. 


If the company is using overseas subcontractors then you have time to establish what is going to be the most beneficial approach, continue subcontracting abroad as this is the best option, move subcontracting to the UK or build the evidence as to why you contact abroad and can prove this a QOE. 

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