---
title: "Software R&D Projects: Do Overseas Subcontractor Costs Still Qualify?"
description: Understand what qualifies as R&D for tax purposes, common mistakes to avoid and practical guidance for UK companies.
---

<https://www.greenuna.co.uk/greenuna-tax-ltd-blog>

# [Software R&D Projects: Do Overseas Subcontractor Costs Still Qualify?](https://www.greenuna.co.uk/greenuna-tax-ltd-blog/software-rd-projects-do-overseas-subcontractor-costs-still-qualify)

 Written by [Yashwanth S](https://www.greenuna.co.uk/greenuna-tax-ltd-blog/author/yashwanth-s) | Aug 24, 2026, 2:24:56 PM

For many years, businesses carrying out research and development (R&D) overseas subcontractors were often able to include subcontractor costs within their UK R&D tax relief claims. However, for accounting periods beginning on or after **1 April 2024**, the rules changed significantly.

The overseas expenditure restrictions introduced under the merged R&D scheme mean that overseas subcontractor costs will **generally no longer qualify** for R&D tax relief unless a specific legislative exception applies.

If your business uses overseas developers, engineers or consultants, it is important to understand how these changes may affect your next claim.

**The General Rule**

The key consideration is **where the R&D activity is physically undertaken**.

This is different from:

For example, appointing a UK subcontractor does not automatically make the expenditure eligible if the underlying R&D activity takes place overseas. Equally, using an overseas subcontractor does not automatically prevent relief if the R&D activity is physically carried out in the UK.

**Are There Any Exceptions?**

Yes—but only in limited circumstances.

HMRC recognises that certain R&D activities genuinely need to take place outside the UK. In these situations, overseas subcontractor costs may still qualify where all of the following conditions are met:

HMRC identifies four categories of qualifying conditions:

These exceptions apply only where the location itself is fundamental to carrying out the R&D activity.

**Overseas Software Development**

One of the most common questions software businesses ask is whether overseas software development still qualifies.

In most cases, the answer is **no**.

Commercial reasons such as lower labour costs, access to overseas developers, existing offshore teams or faster delivery are **not** qualifying conditions.

However, overseas software development may still qualify where the work must genuinely be undertaken overseas because of a qualifying geographical, environmental or legal/regulatory condition.

Examples may include software that must be developed or tested using location-specific infrastructure, regulated overseas systems or physical assets that cannot reasonably be replicated in the UK.

The determining factor is not **who** performs the work, but **why the activity must be carried out in that location**.

**What Doesn't Qualify?**

Businesses should not assume overseas expenditure qualifies simply because it is commercially beneficial.

The following factors, on their own, will not justify claiming overseas subcontractor costs:

HMRC expects R&D activities to be undertaken in the UK wherever it is reasonably possible to do so.

**Evidence Is Essential**

Where overseas expenditure is included within an R&D claim, businesses should retain clear evidence demonstrating either:

Useful evidence may include contracts, statements of work, technical documentation, project records and evidence explaining why the qualifying condition could not reasonably be replicated in the UK.

**Questions to Ask Before Claiming Overseas Costs**

Before including overseas subcontractor costs within an R&D claim, businesses should consider:

If these questions cannot be answered clearly, the expenditure is unlikely to qualify under the post-April 2024 rules.

**How We Can Help**

The overseas expenditure restrictions represent one of the most significant changes introduced under the merged R&D scheme. Businesses that have historically claimed overseas subcontractor costs should not assume those costs continue to qualify.

At Greenuna Tax Ltd, we can help you:

If your business uses overseas developers, engineers, consultants, we recommend reviewing these arrangements before submitting your next R&D claim.

[View full post](https://www.greenuna.co.uk/greenuna-tax-ltd-blog/software-rd-projects-do-overseas-subcontractor-costs-still-qualify)

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