The reforms to the UK’s R&D tax relief regime have introduced far-reaching restrictions on subcontracted R&D expenditure, particularly where overseas suppliers are involved. Historically, businesses could claim qualifying subcontractor costs with relatively limited geographical restrictions, provided the activity met the core definition of R&D. Under the unified regime, however, this position has shifted significantly.

For accounting periods beginning on or after 1 April 2024, relief for subcontracted R&D is now generally limited to activities performed physically within the UK. Overseas subcontracted work is, by default, excluded from eligibility unless highly specific exemptions apply. These exemptions are tightly framed and require businesses to demonstrate that it was genuinely not possible to conduct the work within the UK due to factors such as:

• Legal or regulatory requirements that mandate the work be conducted abroad;

• Material environmental or geographical conditions that prevent UK-based research;

• Ethical or practical constraints that necessitate overseas facilities.

Importantly, cost-based considerations, such as lower labour costs or historical supplier relationships, do not qualify as valid reasons to engage overseas subcontractors where UK alternatives are technically feasible.

This change reflects HMRC's broader policy objective of ensuring that the tax relief directly incentivises R&D activity contributing to UK-based innovation, employment, and economic development. As a result, companies that rely heavily on international delivery models, offshore technical partners, or global research facilities will need to carefully assess the structure of future projects to preserve eligibility.

Businesses are now advised to:

• Re-evaluate existing subcontractor agreements and delivery models;

• Bring R&D functions in-house or onshore where possible;

• Maintain comprehensive documentation demonstrating due diligence and justification for any overseas activity claimed.

The tightened subcontractor rules mark one of the most material shifts in the R&D regime’s technical eligibility criteria. Proactive restructuring of delivery models and transparent, contemporaneous evidence gathering will be critical to sustaining claim integrity under HMRC’s evolving approach to compliance.

At Westlock Partners, we work closely with businesses to assess their subcontractor arrangements and advise on how to remain compliant with the new rules, while optimising the available relief within permitted boundaries.