Executive Summary
Yes. A UK subsidiary can claim R&D tax relief even if it is wholly owned by an overseas parent.
Foreign ownership does not disqualify the company. The UK subsidiary must be trading, subject to UK Corporation Tax and undertaking or commissioning a qualifying project that seeks an advance in science or technology.
The main issues for international groups are:
- Which group company decided and planned the R&D;
- Whether the UK subsidiary bears the relevant costs;
- Where employees and contractors perform the work;
- Whether overseas expenditure is restricted;
- Whether another group company can claim; and
- Whether the UK company meets the relevant scheme conditions.
| Question | Why it matters |
| Is the UK company subject to Corporation Tax? | Only companies within UK Corporation Tax can claim |
| Is there a scientific or technological advance? | Commercial innovation alone is insufficient |
| Did the UK subsidiary decide to undertake the R&D? | Determines which company may claim |
| Where was the work performed? | Overseas contractor costs may be restricted |
| Is the company part of a large international group? | Group figures can affect ERIS eligibility |
| Are records available? | HMRC requires technical and financial evidence |
What Qualifies as R&D for UK Tax Purposes?
A project must seek an advance in a field of science or technology by attempting to resolve scientific or technological uncertainty.
An uncertainty exists where a competent professional cannot readily determine whether something is technically possible or how it can be achieved using publicly available knowledge. The advance must benefit the wider field, not merely improve the company’s own knowledge or commercial position.
Qualifying projects may involve:
- Developing new software architecture;
- Improving manufacturing processes;
- Creating new materials or products;
- Solving engineering limitations;
- Improving energy efficiency;
- Developing medical or scientific technology; or
- Integrating systems where the technical solution is not readily available.
Routine product updates, cosmetic changes, ordinary configuration work and purely commercial uncertainty do not normally qualify.
Which R&D Scheme Applies?
For accounting periods beginning on or after 1 April 2024, the previous SME and RDEC schemes were replaced by:
- The merged R&D expenditure credit scheme; and
- Enhanced R&D intensive support, known as ERIS.
Merged R&D expenditure credit
The merged scheme is available to qualifying trading companies subject to UK Corporation Tax, regardless of whether they are independently small or part of a large international group. The credit is treated as taxable trading income.
Enhanced R&D intensive support
ERIS is available only to loss-making, R&D-intensive SMEs.
For a foreign-owned subsidiary, the SME and R&D-intensity tests can require figures from connected companies throughout the worldwide group. A small UK subsidiary may therefore fail the SME or intensity conditions because of the size or expenditure of its overseas parent and related companies.
Which Company in the Group Can Claim?
Under the current contracted-out R&D rules, the company that decided that R&D was required and planned the work will generally have the right to claim.
This is particularly important where:
- The foreign parent designs the project;
- The UK subsidiary performs development services;
- The UK company hires group or external contractors;
- The customer contract includes technical development; or
- Several group companies contribute to the same project.
HMRC will consider the contract and the surrounding commercial circumstances. The company performing the work does not automatically own the claim if another group company commissioned and intended the R&D.
Example
A US parent specifies a technical problem, controls the development strategy and contracts its UK subsidiary to provide routine engineering support.
The US parent may be treated as the company that decided and planned the R&D. As it is not within UK Corporation Tax, the UK subsidiary may not be able to claim merely because its employees performed the work.
However, if the UK subsidiary independently identifies a technological uncertainty and decides how to undertake additional R&D to fulfil a broader commercial contract, it may have a supportable claim. The contractual and operational facts must be reviewed carefully.
Which Costs Can Qualify?
Qualifying costs may include an appropriate proportion of:
- Employee salaries and employer contributions;
- Externally provided workers;
- Consumable materials;
- Software licences;
- Cloud-computing costs;
- Data licences;
- Utilities used in R&D;
- Payments to qualifying contractors; and
- Payments to clinical-trial volunteers.
Only costs relating to qualifying R&D activities can be included. Costs must have been paid before the claim is made.
Costs that are generally outside the relief include:
- Capital expenditure;
- Land;
- Patent and trademark costs;
- Rent and rates;
- Production and distribution costs;
- Routine administrative work; and
- Commercial or marketing activity.
Are Overseas R&D Costs Eligible?
Overseas contractor and externally provided worker costs are now generally restricted for accounting periods beginning on or after 1 April 2024.
An exception may apply where conditions necessary for the R&D are not present in the UK and it would be wholly unreasonable to replicate them here.
Potential examples include:
- A specific geographical environment;
- Unique environmental conditions;
- Access to a particular population;
- Regulatory requirements; or
- Special facilities unavailable in the UK.
Lower overseas costs or access to overseas employees are not, by themselves, sufficient reasons.
Group development teams
Foreign-owned subsidiaries often use developers, engineers or scientists employed by overseas group companies.
The UK company should determine:
- Whether the individuals are employees, externally provided workers or contractors;
- Where they physically perform the R&D;
- Which company controls their work;
- Which entity pays the costs;
- Whether the parties are connected; and
- Whether an overseas expenditure exception applies.
Practical Examples
UK software subsidiary
A UK subsidiary employs developers who create a new processing system and overcome limitations that could not readily be resolved using existing technology.
The UK payroll costs, software and qualifying cloud-computing costs may be eligible, provided the technical advance and uncertainties are properly documented.
UK subsidiary using an overseas development centre
A UK company plans an R&D project but contracts most coding work to a connected company overseas.
The project may qualify, but the overseas contractor costs could be restricted. The group should not assume that an intercompany invoice makes the expenditure eligible.
Foreign manufacturer with a UK engineering team
A foreign group’s UK subsidiary develops an improved manufacturing process for its British facility.
The UK company may claim if it decided and planned the R&D, incurs the qualifying costs and can demonstrate the scientific or technological uncertainties addressed.
UK subsidiary performing customer work
A customer hires a UK company to deliver a product but does not expect or commission R&D.
During the project, the UK company encounters a technological uncertainty and independently decides to carry out R&D. The subsidiary may be entitled to claim if it can evidence that it initiated and planned that R&D.
Claiming the Relief
The claim is made through the UK subsidiary’s Company Tax Return.
A company may also need to submit a claim notification form if it is claiming for the first time or has not made a qualifying recent claim. Where notification is required, it must generally be completed within six months after the end of the relevant period of account.
Every new claim must be supported by an additional information form containing details of the projects, qualifying expenditure, competent professional and senior company officer responsible for the claim.
The additional information form must be submitted before, or on the same day as, the Company Tax Return. If the tax return is submitted first, HMRC can reject the R&D claim.
Records the UK Subsidiary Should Keep
A defensible claim should include:
- A description of the scientific or technological advance;
- The uncertainties encountered;
- Evidence that competent professionals could not readily solve them;
- Project plans and technical reports;
- Testing and development records;
- Employee time allocations;
- Payroll information;
- Contractor agreements;
- Intercompany agreements;
- Cloud and software invoices;
- Evidence of where the work was performed; and
- Reconciliations to the statutory accounts and tax return.
The technical analysis should be prepared with input from the engineers, developers or scientists who worked on the project—not solely by the finance team.
Common Mistakes
- Assuming every software-development project qualifies.
- Describing a commercial challenge instead of a technological uncertainty.
- Claiming because the UK company paid an intercompany invoice.
- Failing to identify which company decided and planned the R&D.
- Including overseas contractor costs without reviewing the restrictions.
- Ignoring worldwide group figures when assessing ERIS.
- Using estimated staff percentages without supporting evidence.
- Including all cloud, software or engineering costs automatically.
- Missing the claim-notification deadline.
- Filing the tax return before the additional information form.
Risks of an Incorrect Claim
An unsupported claim can result in:
- HMRC enquiries;
- Reduction or rejection of the relief;
- Repayment of credits received;
- Interest and penalties;
- Extended Corporation Tax reviews;
- Audit adjustments;
- Problems during investment or sale due diligence; and
- Increased scrutiny of future claims.
HMRC now requires detailed project and cost information, including endorsement by a named senior officer, before accepting an R&D claim.
Action Plan for Foreign-Owned Subsidiaries
- Identify potential R&D projects before year-end.
- Confirm that the UK company is within Corporation Tax.
- Determine which group company initiated and planned the R&D.
- Separate technological uncertainty from commercial difficulty.
- Identify qualifying UK and overseas costs.
- Review overseas contractors and group employees.
- Assess merged scheme and ERIS eligibility.
- Prepare technical evidence with competent professionals.
- Check whether claim notification is required.
- Submit the additional information form before the tax return.
Frequently Asked Questions
Can a wholly foreign-owned UK company claim R&D relief?
Yes. Foreign ownership does not prevent a UK company from claiming if it is subject to UK Corporation Tax and meets the project and expenditure conditions.
Must the intellectual property belong to the UK subsidiary?
Not necessarily. However, ownership, contractual arrangements and which company decided to undertake the R&D can affect entitlement.
Can the subsidiary claim overseas development costs?
Sometimes, but contractor and externally provided worker costs relating to overseas R&D are generally restricted unless a statutory exception applies.
Can a loss-making subsidiary claim?
Potentially. It may claim under the merged scheme or, if it satisfies the SME and intensity conditions, under ERIS.
Does receiving a group grant prevent a claim?
Not necessarily under the merged scheme, but the payment, accounting treatment and contracted-out R&D rules should still be reviewed.
Can two group companies claim for the same R&D?
They cannot both claim the same expenditure. The group must establish which company has the right to claim under the applicable rules.
Does routine software development qualify?
Not automatically. The work must seek a genuine advance in technology and address uncertainty that a competent professional could not readily resolve.
Conclusion
Foreign-owned UK subsidiaries can qualify for R&D tax relief, but group structure is often central to determining the correct claim.
The most important questions are:
- Did the UK subsidiary decide and plan the R&D?
- Was there a genuine scientific or technological uncertainty?
- Which costs did the UK company incur?
- Where was the work performed?
- Do overseas expenditure restrictions apply?
- Does the worldwide group affect ERIS eligibility?
These points should be reviewed before the Corporation Tax Return is prepared.
Professional R&D Tax Support
FKGB Accounting assists foreign-owned UK companies with:
- R&D eligibility reviews;
- Technical project assessments;
- Merged scheme and ERIS claims;
- Overseas expenditure reviews;
- Contracted-out R&D analysis;
- Qualifying cost calculations;
- Additional information forms;
- Corporation Tax Returns;
- HMRC enquiries; and
- R&D claim documentation.
Book a consultation here
Email us: David.levy@fkgb.co.uk
Suggested Lead Magnets
- Foreign-Owned Company R&D Eligibility Checklist
- Overseas R&D Cost Review
- R&D Project Documentation Template
- Contracted-Out R&D Decision Guide
Important Notice
This article provides general information and does not constitute tax, legal or investment advice. Eligibility depends on the project, contractual arrangements, group structure, expenditure and accounting period.
