UK Research and Development Tax Credits for Internationally Operating Companies

The UK's Research and Development (R&D) tax credit regime is among the most generous in the developed world. For companies that qualify, R&D relief can reduce the effective cost of innovation spending by 25% or more, and loss-making companies can convert credits into cash repayments from HMRC. For internationally operating companies — whether UK companies with overseas operations, foreign companies with UK R&D teams, or holding structures with multi-jurisdiction IP development — navigating the R&D rules requires careful attention to the restrictions on overseas activity and the changes introduced by the merged R&D scheme from April 2024.

Overview of UK R&D Tax Reliefs (Post-April 2024: The Merged Scheme)

From 1 April 2024, the UK's two previous R&D schemes — the SME scheme and the Research and Development Expenditure Credit (RDEC) for large companies — were merged into a single scheme known simply as the Merged R&D Scheme, with RDEC-style above-the-line credit mechanics.

The key features of the merged scheme as of 2026:

• Credit rate: 20% above-the-line credit on qualifying R&D expenditure
• Effective benefit (tax-paying companies): The 20% credit is taxable, so the net benefit for a 25% taxpayer is approximately 15% of qualifying expenditure
• Loss-making companies: The credit can generate a payable repayment (subject to conditions and caps)
• R&D-intensive SMEs: A separate, enhanced rate applies to "R&D-intensive" SMEs — those with qualifying R&D expenditure constituting more than 30% of total expenditure. These companies benefit from an effective rate of approximately 27% of qualifying R&D costs

The pre-April 2024 SME scheme applied to accounting periods beginning before 1 April 2024; the merged scheme applies from that date. Companies with straddling accounting periods may need to apportion.

What Qualifies as R&D?

HMRC's definition of qualifying R&D for tax purposes follows the BEIS guidelines (the "Frascati Manual" approach). Qualifying activity must:

• Seek to resolve a scientific or technological uncertainty (i.e., not be something that a competent professional in the field could easily resolve)
• Be part of a project that seeks an advance in overall knowledge or capability in a field of science or technology (not just the company's own knowledge)
• Be carried out by the company or by a subcontractor on behalf of the company (subject to restrictions — see below)

Routine software development, modifications to existing products, and market research do not generally qualify. Genuinely novel technical challenges — in software, engineering, biotechnology, pharmaceuticals, or advanced manufacturing — frequently do.

The costs that qualify include:

• Staff costs (wages, NIC, pension contributions) for employees directly and actively engaged in qualifying R&D
• Subcontractor costs (with restrictions)
• Software costs used in qualifying R&D
• Materials consumed in qualifying R&D
• Utilities (power, water, fuel) consumed in qualifying R&D

The Overseas Activity Restriction

One of the most significant changes introduced by the Finance Act 2024 (effective for accounting periods beginning on or after 1 April 2024) was the restriction on overseas R&D activity in the merged scheme. Under the merged scheme, expenditure on overseas workers (whether directly employed or through subcontractors) is generally not qualifying unless the R&D activity cannot reasonably be carried out in the UK due to:

• The unavailability of the necessary conditions in the UK (e.g., specific climate, geology, or patient population)
• Regulatory or legal requirements that mean the activity must be carried out overseas
• The need to test in the specific environment where the product will be used, and that environment is overseas

Cost alone is not an acceptable reason for overseas activity; choosing to use cheaper overseas subcontractors simply to reduce costs is excluded.

This restriction significantly impacts internationally operating companies that had previously included overseas subcontractor costs in their R&D claims. Companies with R&D teams in India, Eastern Europe, or the Americas — common for UK tech companies — must now review whether their overseas activity meets the new qualifying conditions.

Subcontractor Rules Under the Merged Scheme

Under the merged scheme:

• Where the claimant company subcontracts R&D to an unconnected third party, 65% of the payment to the subcontractor qualifies for R&D relief (provided the work is genuinely qualifying R&D and meets the new overseas restriction)
• Where the claimant subcontracts to a connected party (e.g., a group company), the qualifying amount is the lower of the actual payment and the underlying costs of the subcontractor

For internationally operating groups with inter-company R&D services arrangements, this connected party rule must be carefully considered. If a UK parent company pays a US subsidiary to conduct R&D on its behalf, only the lower of the payment and the US subsidiary's actual costs qualifies — and the overseas restriction may also apply.

R&D for Non-UK Companies with UK R&D Activity

Non-UK companies with UK permanent establishments — for example, a US tech company with a UK office conducting genuine software R&D — can claim UK R&D credits through their UK corporation tax return. The R&D must be attributable to the UK permanent establishment.

For international groups considering where to locate R&D activity, the UK merged scheme credit rate (net benefit approximately 15% of qualifying costs for large companies, higher for intensive SMEs) compares favourably with other G7 nations, though this must be assessed alongside local tax rates, IP regimes, and the interaction with the Patent Box.

Interaction with the Patent Box

The UK Patent Box regime allows companies to apply a reduced 10% corporation tax rate to profits attributable to qualifying IP. R&D expenditure that leads to a UK (or qualifying European) patent can therefore benefit from R&D credits on the development costs and from Patent Box treatment on the resulting profits — an effective double benefit.

For internationally mobile IP holders, the combination of UK R&D relief and Patent Box can make the UK a genuinely competitive jurisdiction for IP development. The interaction between the two regimes requires careful planning — see the separate Patent Box guide.

Administrative Requirements and HMRC Scrutiny

R&D claims have attracted significantly increased HMRC scrutiny since 2021, following abuse of the SME scheme by claims for non-qualifying activity. The merged scheme includes enhanced compliance requirements:

• R&D claim notification: Companies that have not claimed R&D in the preceding three years, or whose claim period has changed, must notify HMRC of their intention to claim within six months of the end of the accounting period
• Additional information form: A detailed additional information form (AIF) must be submitted with all claims, setting out qualifying projects, costs, and the scientific or technological uncertainties addressed
• Named responsible officer: Each claim must identify a named senior company officer taking responsibility for the claim

HMRC's dedicated R&D compliance units actively challenge claims that appear to be inflated or that include non-qualifying activity. Companies using R&D specialist advisers or claims management companies should ensure those advisers apply proper technical standards and do not include activity that clearly does not meet the BEIS criteria.

How Global Investments Can Help

Global Investments advises internationally operating companies on UK R&D tax credit eligibility, including the application of the overseas activity restriction to their R&D model, the treatment of inter-company R&D arrangements, and the interaction with Patent Box planning. We work with specialist R&D tax advisers to identify genuinely qualifying projects, prepare compliant claims, and manage HMRC enquiries. This guide reflects the merged scheme position as of 2026; R&D legislation changes frequently and professional advice specific to your company's activities is essential before making a claim.