Definition
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 HMRC defines it
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.
Practical example
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.