HMRC’s Subcontractor & Overseas Expenditure Rules: A CFO Guide for UK Tech Businesses.

HMRC’s Subcontractor & Overseas Expenditure Rules

For UK SaaS, software and technology businesses, outsourcing development can create a significant R&D tax-relief issue.

From accounting periods beginning on or after 1 April 2024, the merged R&D Expenditure Credit (RDEC) and Enhanced R&D Intensive Support (ERIS) introduced new rules around contracted-out R&D and overseas R&D expenditure.

The key management question is no longer simply:

“Did we pay a developer or technology vendor to perform R&D?”

The more important questions are:

Who decided that the R&D needed to be carried out? Where was the R&D physically performed? What does the contract say?

HMRC states that, under the current rules, the company that decides R&D needs to be undertaken and plans the R&D can claim qualifying contracted-out R&D costs, subject to the detailed conditions.

For CFOs managing distributed engineering teams, offshore development partners or specialist technical vendors, contract design and project documentation have become important parts of R&D tax planning.

Structure Technical Vendor Contracts Around R&D Ownership

A technology vendor agreement should clearly document the commercial relationship.

For R&D-sensitive projects, management should consider documenting:

• Which company identified the need for the R&D
• Which company defined the technical objectives
• Which company planned the R&D programme
• The specific technical work being commissioned
• The responsibilities of the UK company and contractor
• Where the development and R&D activities will physically take place
• How technical progress and uncertainties will be documented
• How project records, reports and technical evidence will be retained

HMRC’s current guidance focuses on the company that made the decision that R&D needed to be carried out and planned the R&D. Evidence supporting those decisions can therefore be important when determining which company is entitled to claim.

CFO Tip: Avoid Generic Development Contracts

A generic agreement stating that a vendor will “develop software” may not provide enough clarity for an R&D claim.

A stronger commercial record should distinguish ordinary development from work involving technological uncertainty, investigation, experimentation or advancement in the relevant field of technology.

The objective is not to rewrite a normal supplier agreement simply to obtain tax relief.

The objective is to make the actual commercial and technical responsibilities clear before the work starts.

The UK-Conducted R&D Requirement

The location of R&D activity is particularly important under the post-April-2024 rules.

For contracted R&D and relevant externally provided worker expenditure, HMRC generally restricts relief where the R&D activity takes place overseas.

For UK technology businesses, this creates an important distinction:

The location of the supplier is not necessarily the same as the location of the R&D.

A UK company can work with an international supplier, but the physical location where the relevant R&D activity is actually performed needs to be considered.

For example, if a UK SaaS company contracts a UK technology business that performs qualifying R&D through engineers working overseas, the location of those activities can affect the company’s R&D claim.

This makes project-level location records increasingly valuable.

When Can Overseas R&D Still Qualify?

The overseas restriction is not absolute.

HMRC’s rules provide an exception where the conditions for the R&D are not present in the UK and cannot reasonably be replicated in the UK because of geographical, environmental or social conditions.

Importantly, lower overseas labour costs or the availability of workers abroad are not sufficient reasons for the exception.

For a UK tech company, this means outsourcing development overseas simply because it is cheaper does not, by itself, protect the related R&D expenditure for tax-relief purposes.

CFOs should therefore identify overseas work before the project begins and document why the location is technically necessary where an overseas exception may be relevant.

Protect Cross-Border R&D Claims With Better Documentation

A defensible R&D file should connect three areas:

1. Commercial evidence

Maintain:

• Supplier contracts
• Statements of work
• Purchase orders
• Invoices
• Change requests
• Project ownership records

2. Technical evidence

Maintain:

• Technical specifications
• Architecture documents
• Development records
• Experiment results
• Testing records
• Engineering reports
• Records of technical uncertainties and attempted solutions

3. Location evidence

Maintain evidence showing:

• Where relevant engineers performed the work
• Which activities were performed in the UK
• Which activities were performed overseas
• The allocation of work between locations
• Why qualifying overseas activity may meet an applicable exception

This creates a clearer audit trail between the R&D decision, the technical activity, the supplier and the expenditure.

Subcontractor Costs: Don’t Assume the Entire Invoice Qualifies

Another important consideration is the amount of a subcontractor payment that can be included.

For an unconnected subcontractor, HMRC’s rules generally restrict the qualifying expenditure to 65% of the relevant payment under the merged scheme. Connected-party rules operate differently and require additional calculations.

For example:

Subcontractor invoice: £200,000
Potential qualifying amount at 65%: £130,000

The £200,000 invoice should not automatically be treated as £200,000 of qualifying R&D expenditure.

The actual calculation depends on the nature of the work, the relationship between the companies and the relevant R&D rules.

Easy R&D vs Tax Software for UK R&D Tax Claims

For a UK SaaS or technology business with complex subcontractor arrangements, specialist R&D claim platforms can help management organise project and expenditure information.

Two platforms worth researching are Easy R&D and Tax Software.

Easy R&D’s UK platform is designed to help eligible UK limited companies identify and claim R&D tax relief.

Looking to review your company’s R&D claim?

Explore Easy R&D for your UK technology business

CEO & CFO Checklist for Cross-Border R&D

Before submitting an R&D claim involving external developers or international vendors, ask:

• Who decided the R&D needed to happen?
• Who planned the R&D project?
• Does the contract accurately reflect that commercial relationship?
• Where was the R&D physically performed?
• Which activities took place in the UK?
• Are any overseas activities potentially covered by an exception?
• Can the technical uncertainty and advancement be evidenced?
• Has subcontractor expenditure been correctly calculated?
• Are connected-party relationships identified?
• Can invoices be matched to specific R&D projects?
• Are technical, commercial and location records retained?

For businesses using international development teams, these questions should be considered before the R&D expenditure is incurred, rather than reconstructed when the Corporation Tax return is prepared.

The Key point for UK IT, SaaS & Technology Businesses

HMRC’s subcontractor and overseas expenditure rules make contract structure, R&D ownership and physical work location important considerations for UK technology companies.

The core framework is straightforward:

Identify the R&D → establish who decided and planned it → document the technical work → establish where it was performed → calculate qualifying subcontractor expenditure → retain supporting evidence.

For UK SaaS and IT businesses using external developers, getting these elements right can make the difference between a well-supported R&D claim and expenditure that cannot be included.

If your business uses subcontractors, offshore development teams or specialist technology vendors, reviewing the R&D position early can help your finance team identify potential issues before they reach the Corporation Tax return.

Explore Easy R&D for your UK R&D tax claim

This article is for general information only and does not constitute tax, accounting or legal advice. HMRC’s R&D rules are detailed and subject to change. Eligibility, subcontractor treatment and overseas expenditure should be reviewed against the current HMRC rules and the company’s specific facts.