Written by LimestoneGrey.
Many companies working within the Med-Tech and life sciences sectors are tackling global challenges such as antimicrobial resistance, ageing populations and chronic disease management. Addressing these complex issues often requires research that extends beyond the UK’s borders.
However, as part of major reforms to R&D tax relief, the government has now imposed strict limits on the eligibility of overseas expenditure. The new rules aim to encourage domestic innovation, meaning that, by default, most overseas R&D activity no longer qualifies for tax relief.
Yet, for companies operating in highly regulated, globally interconnected industries like Med-Tech and Life Sciences, the door is not entirely closed. Where R&D must occur overseas due to genuine necessity (environmental, geographical, or otherwise) there remains a narrow but viable path to include those costs. Understanding and navigating this exception demands sector-specific expertise.
The New Default: A ‘UK-Only’ System
For accounting periods beginning on or after 1 April 2024, the rules are clear: subcontracted R&D and Externally Provided Workers (EPWs) must carry out their activities physically in the UK to qualify for relief.
So, if your company engages an overseas CRO (Contract Research Organisation) to run a pre-clinical study or contracts a medical device engineer based abroad, those costs are generally disallowed under the new regime unless strict criteria are met.
The Exception: The Three-Part Test for ‘Qualifying Overseas Expenditure’
The legislation provides a tightly defined exception for Qualifying Overseas Expenditure (QOE). All three of the following criteria must be met:
1. Necessary conditions for the R&D do not exist in the UK
2. These conditions do exist in the overseas location where the R&D takes place
3. It would be “wholly unreasonable” to replicate those conditions in the UK
This is a high bar. The R&D must genuinely require overseas conditions that cannot be realistically duplicated domestically.
Understanding “Wholly Unreasonable”
What qualifies as “wholly unreasonable”? HMRC’s guidance specifies that the necessary conditions must relate to physical, geographical, environmental or social factors. Crucially, cost savings or access to overseas talent are not valid justifications.
Sector-Specific Examples for Med-Tech and Life Sciences
For companies in the Med-Tech and Life Sciences sectors, the QOE exception may apply in several legitimate scenarios
• Medical Device Testing in Specific Environments
A company developing a wearable cardiac monitor may need to test its functionality at high altitudes to simulate stress conditions for patients with hypoxia—conditions not replicable in the UK. This would fall under a geographical/environmental necessity.
• Clinical Trials Requiring Diverse Genetic Populations
A med-tech firm working on a diagnostic tool for diabetes may be required by FDA or EMA regulations to conduct trials in countries with high incidences of the condition in specific ethnic groups. The need for a globally representative sample would count as a regulatory condition.
• Infectious Disease Research
A life sciences company investigating treatments for mosquito-borne diseases may need to conduct fieldwork in countries where these diseases are endemic. The presence of the disease and patient population constitutes a necessary environmental and social condition.
Evidence is Critical
Claims for overseas R&D costs are likely to be scrutinised in detail by HMRC. To succeed, clear, contemporaneous evidence is vital. Examples include:
• Reports showing the absence of relevant test environments or patient populations in the UK
• Correspondence from international regulatory bodies (e.g. FDA, WHO, EMA) mandating overseas trials
• Internal documentation detailing why the overseas conditions were essential for the study
A strong audit trail and technical justification are essential for demonstrating that the QOE conditions are genuinely met.
A Narrow Path Best Navigated with Specialist Advice
The tightening of rules around overseas expenditure has added significant complexity to the R&D tax credit regime. While a generalist adviser may incorrectly advise that all overseas costs are ineligible, this is not always the case, particularly in the highly regulated, globally oriented world of Med-Tech and Life Sciences.
The key is to identify where an overseas activity is genuinely necessary for scientific or technological advancement and to provide robust, well-documented reasoning for its inclusion.
Navigating this requires not only a deep understanding of tax legislation but also insight into the real-world operational and regulatory environment. This is where specialist, sector-aware advice is not just helpful but critical.