Module 4: Contractors and overseas costs

Externally sourced costs are where the seven schemes differ most, and where one contract can fail a claim outright. After this module you will be able to label every contractor, agency and overseas cost correctly, answer the two questions that decide its treatment under every scheme, and hold the records that support the figure claimed.

What this module covers

Four kinds of externally sourced cost and why the label matters.
Who claims: the company that commissions the work or the one that does it.
Where the work was done, and how to evidence it.
The records to hold, and the seven schemes compared.

Four kinds of externally sourced cost

Label each cost first: schemes attach different percentages, caps and location tests to each label.

Kind	What it is	Typical treatment	Questions to settle
Subcontracted work	Another business does part of the work on your behalf	A fixed percentage of the payment, a cap relative to your own spend, or a requirement that the work be done in the country	Who bears the risk and owns the results; where the work is done; whether the provider is connected to you
Externally provided or agency workers	People supplied by a staffing business, working under your direction	A percentage of the payment to the provider, or contract costs, not your own staff costs	Who employs them; where they work; the provider's connection to you
Universities and research bodies	An institution does defined work for you, or you contribute to its research	Separate caps or percentages	Your rights to the results; whether the body is in the country
Your own employees abroad	Your payroll staff do part of the work outside the country	Excluded, a small percentage allowed, or unrestricted	Where the work was physically performed; how it relates to the work at home

Who claims

Most schemes allow only one party to claim for the same work, and the same tests recur in deciding which: who bears the financial risk, meaning who pays whether or not the work succeeds; who owns or has substantial rights to the results; and whether the customer intended or contemplated that such work would be done. Review every vendor contract for three clauses: payment terms (a fixed or milestone fee as against payment contingent on success), rights to the results, and scope. Record the conclusion in the claim file. Applied in reverse, the same tests decide whether work you do for a customer can be claimed by you (module 5).

Where the work was done

Location rules attach to where the work is physically performed, not to where the contractor is incorporated or the invoice is addressed. The schemes range from excluding foreign work, through home country restrictions with narrow exceptions, regional tests and small percentage allowances, to a lower benefit for overseas work; the table below gives each rule in its own words. So the contract should state the place of performance, and location evidence should be collected during the work.

The records

Record	What it shows	When to collect it
Signed agreement dated before the work starts, with statements of work	Scope and project, work done on your behalf, payment not dependent on success, who holds the rights, place of performance	At engagement
Invoices coded to the project, with proof of payment	Period and description, tied to the project code	Monthly
Location evidence	Where each part of the work was physically performed: activity logs, site and travel records	During the work
Notifications and applications	Telling the subcontractor you are claiming, or applying for a finding, where the scheme requires it	By the scheme's deadline

Illustrative example

Illustrative example. Harbour Robotics Ltd, a hypothetical company, pays an unconnected engineering firm 100,000 under a fixed fee agreement, signed before the work started, to design and test a sensor housing for an eligible project; the agreement says Harbour Robotics owns the results and the firm works at its own premises in the same country. Harbour Robotics bears the risk and owns the results, so it claims, and the work is domestic. In the United Kingdom, 65 percent of payments to an unconnected subcontractor for contracted out R&D qualify, so 65,000 (United Kingdom). In Canada, only 80 percent of arm's length contract payments are included in qualified expenditures, so 80,000 (Canada). The benefit on those amounts is calculated at that country's rate. Had the firm tested at a laboratory abroad, the same invoice could enter at zero under schemes that restrict external work to the home country. Its own engineers' time at an overseas test site falls under the own-staff rules, which differ again.

Across the seven countries

Each cell uses the scheme's own wording; the linked page holds conditions and exceptions.

Country	Subcontracted and agency work	Overseas work	Detail
United States	Contract research: 65% of amounts paid for qualified research performed for you. The agreement must be entered into prior to the performance of the research, the research performed on behalf of the taxpayer, and the taxpayer bears the expense even if the research is not successful.	Research conducted outside the United States is among the exclusions. Contract research expenses qualify only to the extent the research is conducted within the United States.	Qualified research expenses
United Kingdom	65 percent of payments to an unconnected subcontractor for contracted out R&D qualify, and 65 percent of payments to an unconnected staff provider for externally provided workers.	For accounting periods beginning on or after 1 April 2024, relief for contracted out R&D and externally provided workers is generally limited to work carried out in the UK; the restriction does not apply to the claimant company's own staffing costs. Overseas work qualifies only where conditions necessary for the R&D are not present in the UK, are present where the work is done, and it would be wholly unreasonable to replicate them in the UK.	Subcontracting and overseas costs
Ireland	Expenditure on R&D activities carried on by an unconnected person on behalf of the company qualifies up to the greater of 15 percent of the company's own qualifying expenditure and €100,000, provided the person does not also claim. The company must notify that person in writing that it is claiming the credit.	Expenditure qualifies where the R&D activities are carried on within the State or another EEA state, and the expenditure is not relieved against tax in another territory.	Eligible expenditure
Canada	Only 80 percent of arm's length contract payments and third-party payments for SR&ED are included in qualified expenditures. A contract payment received by a performer reduces the performer's qualified expenditures, so that the payer rather than the performer claims the credit.	Salary or wages for SR&ED carried on outside Canada by employees resident in Canada can be included to the extent they do not exceed 10 percent of the total salary or wages for SR&ED carried on in Canada in the year, where the work outside Canada is part of the SR&ED carried on in Canada.	Eligible expenditure
Australia	Expenditure is not eligible where the R&D activities are conducted to a significant extent for another entity, or where another entity bears the financial risk and effectively owns the results.	R&D activities conducted outside Australia are eligible only where covered by an Overseas Finding that the activity has a significant scientific link to Australian core activities, cannot be conducted in Australia for a listed reason, and the expenditure on overseas activities is less than the expenditure on Australian activities. The application must be made before the end of the income year in which the activities are conducted.	Advance and overseas findings
New Zealand	Expenditure on a contractor performing R&D on behalf of the claimant is eligible for the claimant; the contractor cannot claim for the same activities. Expenditure on R&D performed for another person is ineligible.	Eligible expenditure on R&D performed outside New Zealand is limited to 10 percent of the total eligible expenditure for the year and must relate to R&D that is integral to a core activity performed in New Zealand.	Eligible expenditure
Singapore	For R&D outsourced to an R&D organisation in Singapore, IRAS treats a fixed portion of the fee (60 percent) as qualifying staff costs and consumables.	Whether R&D is carried out in Singapore is determined by where the R&D activities are physically performed. Expenditure on R&D undertaken outside Singapore is deductible at 100 percent under section 14C where the R&D is related to the trade, and does not qualify for the additional deductions under section 14D. Only qualifying expenditure on R&D carried out in Singapore may be converted into the EIS cash payout.	R&D done in Singapore vs overseas

Where to go next

United Kingdom: subcontracting and overseas costs: a location restriction and its exceptions in full.
Australia: advance and overseas findings: the step that must happen before year end.
United States: funded research exclusion: the risk and rights tests from the contractor's side.
In-House Finance Team Program: the overview and module list.