We often encounter foreign companies who want to know how they can benefit from R&D Tax credits. Sometimes they have Research & Development operations in the UK but often they do not.
In this article, we explain how we help foreign, overseas and multinational companies benefit from the UK R&D tax scheme.
R&D is an increasingly competitive international activity. Many countries now offer schemes that are designed to attract companies with R&D activities to their shores.
The UK R & D Tax Relief scheme is no exception, offering a generous incentive to UK companies who are carrying out Research & Development. The benefits of the UK R&D scheme, include up to 33.4% cashback on the costs of R&D carried out.
Frequently overlooked is that the R&D does not need to take place within the UK to attract the relief. This is because the scheme was designed to benefit the UK economy through incentivisation of informal knowledge transfers (‘R&D spill-overs’) which can occur even when a company is based in the UK, and the R&D activity is being carried out overseas.
Many UK companies offshore their R&D, and there are 2 categories in the UK R&D tax relief legislation that allow costs of R&D carried out by another entity to be reclaimed. These allowable categories are subcontracting (for SMEs) and Externally Provided Workers (contract staff), where 65% of the eligible costs can be allowable for the relief. This is typically claimed when a company has an R&D centre in Eastern Europe or India.
In a simple scenario of unrelated international business parties therefore, there are a number of ways where both the overseas partner and the local UK company can benefit from the R&D tax relief scheme. One such method is for the UK company to formally subcontract its R&D to the overseas partner so that it is able to then claim for subcontracted R&D. In this case, the overseas partner provides the necessary supporting information to ensure the claim’s success. The benefits of an R&D tax relief claim can then be shared amongst both parties.
However, the rules can even apply if the R&D activities are taking place within different members of a multinational group although in this case it should be noted both that the 65% example above will change, and that generally, international tax structuring is a complex area, with many factors to take into consideration including Double Tax Relief and Transfer Pricing. Thus, assuming that there is a genuine commercial reason for doing so, an overseas company may choose to direct its R&D from within the UK, together with, for example, its sales and marketing, while the bulk of the actual R&D work happens overseas. The benefit of claiming relief on the R&D subcontract costs could be used to offset against the profits from the sales and marketing, or could be claimable as a cash repayment in the event that the UK company was loss-making.
Please note that this article is not intended to be a substitute for formal professional advice or a professional opinion. It deals in broad terms only and is intended to merely provide a brief overview and give general information.