Quick answer: The UK subcontractor rule, introduced under the merged scheme from 1 April 2024, restricts qualifying subcontractor expenditure to work performed in the UK. Overseas work only qualifies in narrow cases where the necessary conditions do not exist in the UK, exist only overseas, and it would be wholly unreasonable to replicate them here. Cost savings alone are not sufficient.
What is the UK subcontractor rule?
The UK subcontractor rule, introduced under the merged scheme for accounting periods beginning on or after 1 April 2024, restricts qualifying subcontractor expenditure to work performed in the United Kingdom. Overseas subcontracted work is only eligible where the conditions necessary to carry out the R&D are not present in the UK, are present only in the overseas location, and it is wholly unreasonable to replicate them in the UK. Cost differentials and workforce availability are explicitly insufficient justifications. The rule is mirrored for externally provided workers.
How does HMRC define the UK subcontractor rule?
HMRC guidance on the UK subcontractor rule is at CIRD90200 of the CIRD Manual, with detailed examples at CIRD90220. The legislation is at section 1138A of the Corporation Tax Act 2009 as amended by Finance (No. 2) Act 2023. Transitional rules for straddling periods are at CIRD90110.
What does the UK subcontractor rule look like in practice?
A company subcontracts work to an Indian development house to save cost. Under the merged scheme the subcontracted cost is excluded, since cost differentials are not an acceptable justification. If the same company subcontracted to a specialist deep-sea testing facility in Norway because no equivalent facility exists in the UK, the cost may qualify under the narrow exception, subject to evidence.
Related terms
- Externally Provided Workers (EPWs)
- Qualifying Expenditure
- Merged R&D Scheme
- Contracted-Out R&D
- Qualifying Body
Frequently asked questions
The UK subcontractor rule, introduced under the merged scheme for accounting periods from 1 April 2024, restricts qualifying subcontractor expenditure to work carried out in the United Kingdom.
Only in narrow circumstances: where the conditions necessary to carry out the R&D are not present in the UK, are present only in the overseas location, and it is wholly unreasonable to replicate them in the UK. Cost differentials and workforce availability are not acceptable justifications on their own.
Yes. The same UK-location restriction is mirrored for externally provided workers, so both subcontracted R&D work and staff supplied through a staff provider are generally limited to work carried out in the UK.
No. The UK-location restriction on subcontracted R&D and externally provided workers applies only to accounting periods beginning on or after 1 April 2024, alongside the wider merged-scheme changes. Expenditure incurred under the pre-April 2024 SME and RDEC rules is assessed under the rules that applied at the time, without this UK-location test.
Independent of the UK-location rule, the underlying qualifying-cost restriction still applies: generally only 65% of the amount paid to a subcontractor or staff provider is treated as qualifying expenditure, an arm's-length restriction carried into the merged scheme. Connected-party arrangements are assessed differently and can produce a different qualifying figure.
HMRC's published guidance gives geographical, environmental or regulatory conditions not present in the UK as examples, such as research requiring a specific overseas geological formation, a deep-sea environment, or a clinical trial population that cannot be recruited in the UK. Cost savings, workforce shortages or convenience are explicitly stated not to qualify as a justification on their own.