Updated draft guidance on contracted out and overseas R&D published

HMRC published draft guidance for consultation on 9 February 2024 in relation to the reforms to the Research & Development (R&D) tax incentives regarding contracted out R&D and overseas R&D expenditure, under the ‘new’ merged R&D claims regime, effective for accounting periods beginning on or after 1 April 2024 (more details can be found in our previous article). The outcome of this consultation and the resulting updated draft guidance was published by HMRC on 27 March 2024.

HMRC have sought to update and enhance the original draft by clarifying and expanding upon the draft guidance and providing additional examples and scenarios to assist claimants to better understand the reforms and apply these to their own fact patterns.

In addition to a number of expanded examples, HMRC have clarified, in particular, that:

• On the basis that R&D is often undertaken under overarching Master Service Agreements (MSAs) and subsequent Statements of Works (SOWs), as opposed to a single contract, HMRC will have regard to not only the MSA or the original contract between the parties, but also to the relevant SOWs under which the R&D activity was undertaken. Additionally, HMRC will have regard to any amendments/addendums to the original contract, where that original contract had been renegotiated or extended, in determining whether R&D activity has been contracted out from the customer to the supplier. If it is concluded that the R&D activity has been contracted out, the expenditure attributable to the contracted out R&D activity would be claimable in the hands of the customer;
• Whilst there must in fact be a contract for R&D between the two parties in order for R&D to have been ‘contracted out’, the contract does not need to be a written one; it also includes verbal contracts and/or implied contracts. A slightly expanded example is also provided of a scenario in which “while there was no written contract, in law the conditions for a verbal contract for services did exist”, thereby satisfying the requirement for a contract between the two parties; and

• They acknowledge that “third parties may consider some information to be sensitive and may not share it” in relation to evidence to support whether R&D activity was undertaken by a third party contractor in the UK or overseas on the claimant’s behalf. There is also some clarification that HMRC would expect claimants to apportion their claim where some of the activity is undertaken in the UK and some of it is undertaken overseas, and examples of how claimants might do so is provided.

HMRC will incorporate the guidance into the Corporate Intangibles Research and Development Manual in due course. It is clear that these rules are complicated and detailed consideration will be required of the new rules and how they apply to individual scenarios. If you have any queries or concerns in relation to the reforms, or the updated guidance published by HMRC, please speak to the authors or your usual KPMG in the UK contact. 

For further information please contact:

• Carol Johnson
• Patrick Fletcher