Kirk Rice Blog

How can overseas companies maximise R&D tax relief when setting up a UK subsidiary?Written on April 22, 2026 by Gauhar Chaudhary

Key Points:

• For accounting periods beginning on or after 1 April 2024, most businesses now claim under the merged R&D expenditure credit scheme.
• The UK subsidiary must usually be the company entitled to claim. It is not enough for the wider group to be carrying out innovative work elsewhere, the UK company must typically decide that the R&D is needed and plan the work.
• Overseas R&D costs are now more restricted. Subcontracted R&D and externally provided worker costs carried out outside the UK will generally only qualify where specific statutory conditions are met.
• Overseas groups can run into issues by claiming the wrong costs, relying on outdated SME rules, or missing claim notification and additional information requirements. HMRC continues to review R&D claims closely.
• Defining the UK company’s role early, tracking qualifying costs separately and keeping clear records from the outset may help reduce compliance issues and improve the value of future claims.

Expanding into the UK can create valuable opportunities for innovation-led businesses. One of the most attractive tax incentives is the UK’s R&D tax relief regime. For accounting periods beginning on or after 1 April 2024, the previous SME and RDEC regimes have largely been replaced by a merged R&D expenditure credit scheme, while a separate enhanced regime remains available for certain loss-making R&D-intensive SMEs.

For finance directors and tax managers establishing a new UK subsidiary, it is important to understand which company is entitled to claim, which costs qualify, and how the overseas restrictions now operate. Getting this right from the outset can make a significant difference to cash flow and reduce the risk of problems later.

This guide explains the key points overseas-owned UK subsidiaries should consider when claiming R&D tax relief under the current rules.

Who Can Claim R&D Tax Relief?

To qualify, the UK subsidiary must be within the charge to UK corporation tax and incur qualifying expenditure on projects that seek an advance in science or technology by resolving scientific or technological uncertainty.

It is not enough for the wider group to be carrying out innovative work somewhere in the world. The UK company must be the entity entitled to claim under the current contracting rules. In practice, this means identifying which company decided that the R&D was needed and planned the work.

A UK company that operates only as a sales, marketing or routine service entity will not usually qualify unless it is itself carrying on qualifying R&D activity or is otherwise the company entitled to claim under the subcontracting rules.

How the Current R&D Relief Works

For accounting periods beginning on or after 1 April 2024, the main regime is the merged R&D expenditure credit. This provides a taxable above-the-line credit equal to 20% of qualifying expenditure.

A separate enhanced regime is still available for certain loss-making R&D-intensive SMEs. Broadly, eligible companies may claim an additional deduction of 86% of qualifying R&D expenditure and a payable credit at 14.5% of the surrenderable loss.

The current rules also mean that subsidised expenditure is no longer restricted in the same way it was under the old SME regime.

What Costs Can Qualify?

Depending on the facts, qualifying expenditure may include:

• staff costs
• externally provided worker costs
• subcontracted R&D costs, subject to the entitlement and overseas rules
• consumable items such as fuel, materials, power and water used up in the R&D
• software licence fees used for R&D
• data licence and cloud computing costs, where used directly in resolving scientific or technological uncertainty
• payments to clinical trial volunteers

As a practical point, certain categories of expenditure must actually have been paid before the claim is made.

Costs that do not qualify include capital expenditure, land, patent and trade mark costs, and rent, rates or leasing costs.

Overseas Expenditure: A Key Issue for International Groups

One of the most important changes for overseas-owned groups is the restriction on overseas R&D expenditure.

For accounting periods beginning on or after 1 April 2024, relief for subcontracted R&D and externally provided workers is generally restricted where the R&D activity takes place outside the UK, unless a statutory exception applies.

Overseas R&D can still qualify where:

• conditions necessary for the R&D are not present in the UK
• those conditions are present where the R&D is undertaken
• it would be wholly unreasonable for the company to replicate those conditions in the UK

Relevant conditions may include geographical, environmental or social conditions, as well as legal or regulatory requirements. However, cost and the availability of workers do not count as qualifying reasons for carrying out the work overseas.

This means overseas groups should not assume that work performed by parent-company teams or non-UK contractors will qualify simply because the group already has capability abroad. The key question is whether the statutory conditions are met.

Contracted R&D: Which Company Gets the Relief?

This is an area where overseas groups often get caught out.

Under the current rules, only the company that decided the R&D was needed and planned that R&D can generally claim for contracted-out work.

If the UK subsidiary contracts out its own R&D, it may usually claim:

• 65% of payments to unconnected contractors
• for connected contractors, the lower of the amount paid and the contractor’s relevant qualifying costs

If the UK subsidiary is carrying out work under contract for another group company, entitlement will depend on the facts. The analysis will usually focus on who initiated and planned the R&D, whether the customer knew that R&D would be needed to fulfil the contract, and how the parties actually operated in practice.

Written contracts matter, but they are not the whole story. HMRC will also look at factors such as autonomy, financial risk, whether the R&D is incidental to supplying a product or service, and who retains the resulting intellectual property.

Claim Process and Compliance Requirements

R&D claims are still made through the company tax return, but the compliance requirements are now more demanding.

A company may need to submit a claim notification if it is a first-time claimant or has not claimed in the previous three years. Broadly, the notification window runs from the start of the accounting period to six months after the end of that period.

In addition, an additional information form is required for a valid claim. This includes details of expenditure categories and project descriptions.

The normal amendment window also remains important. In most cases, companies can make or amend an R&D claim within two years of the end of the relevant accounting period.

There are also restrictions on how credits are paid. The right to an R&D expenditure credit or R&D tax credit cannot be assigned, and HMRC will generally not pay the credit to a nominee except in limited circumstances.

Common Pitfalls for Overseas-Owned Groups

Foreign-owned groups commonly run into difficulty in the following areas:

• assuming that any R&D connected with the UK business is automatically claimable by the UK subsidiary
• claiming overseas subcontractor or externally provided worker costs without meeting the statutory overseas conditions
• failing to distinguish between qualifying R&D and non-qualifying commercial, production or support work
• missing claim notification or additional information requirements
• applying outdated assumptions from the old SME regime, particularly around grants and subsidies
• keeping poor evidence of the scientific or technological uncertainty and the work undertaken to resolve it

HMRC continues to scrutinise R&D claims closely, particularly where companies are first-time claimants or where the facts around subcontracting and overseas activity are unclear.

How to Maximise Relief from Day One

When setting up a UK subsidiary, overseas groups should take practical steps early to improve the quality and value of any future claim.

This includes:

• clearly defining the UK company’s role in the R&D model
• ensuring intercompany arrangements reflect which entity decides on, controls and funds the R&D
• tracking qualifying and non-qualifying costs separately from the outset
• keeping contemporaneous technical records of the uncertainties addressed and the work undertaken
• reviewing any overseas R&D activity carefully before including it in a claim
• diarising claim notification and additional information deadlines early

Good structuring and record-keeping at the start can prevent costly rework later and reduce the risk of HMRC challenge.

Final Thoughts

UK R&D tax relief can still provide valuable support for overseas groups establishing a UK subsidiary, but the rules are now more targeted and more compliance-heavy than under the previous regimes.

In particular, the merged scheme, the revised subcontracting rules and the restrictions on overseas expenditure mean that entitlement depends much more closely on which entity actually plans and commissions the R&D, and where that work is carried out.

With the right structure, documentation and cost tracking from the outset, overseas-owned UK subsidiaries can still access meaningful support and improve cash flow as they grow their UK innovation activity.

If you’d like to explore UK R&D tax relief in more detail, contact us via info@kirkrice.co.uk. Learn more on our R&D Tax Relief page. 

Please note: This article is correct as at the publication date. The answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. The information is based on current tax legislation which may change in future. Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of relief from taxation are subject to change. The Financial Conduct Authority does not regulate tax planning.