Technology and scientific engineering expertise is in high demand. Businesses operating in the UK might typically engage some of this talent on a contractor basis overseas in order to manage costs, retain flexibility and access skills that can be hard to source in the UK. However, incoming changes might now mean that such talent is nudged to come to the UK.
Research and Development (R&D) tax credit changes might drive the move
Historically, R&D tax credits have been a prized relief for companies investing in innovation, allowing businesses to reduce corporation tax charges or, if loss-making, receive a payable credit, based on a percentage of qualifying R&D expenditure. This expenditure includes costs such as staff wages, subcontractor fees and materials directly related to R&D activities.
However, the UK Government is now ring-fencing this relief to domestic activities. Changes have been proposed, intended to take effect from 1 April 2024, that will affect future claims for R&D tax relief concerning non-UK development costs.
Key Changes
- Restriction on Overseas Expenditure: The Government is tightening the rules on what qualifies for R&D tax credits when it comes to overseas expenditure. The aim is to ensure that the relief primarily supports R&D activities conducted within the UK. This means that costs incurred for developers working outside the UK may no longer be eligible for the same level of tax relief.
- Subcontractor Costs: If a UK company subcontracts R&D work to non-UK entities, these costs will be under increased scrutiny. The company will need to demonstrate that there is a substantial reason why the work could not be conducted in the UK, such as the need for specific geographical conditions or expertise that is not available domestically.
Implications for Businesses
Businesses that rely heavily on non-UK developers and researchers might reassess their R&D tax credit strategies, including:
- Reviewing current and planned R&D activities to determine the impact of these tax changes;
- Restructuring R&D operations to maximise the claimable tax relief within the new framework; and
- Maintaining detailed records to substantiate the necessity of any non-UK R&D costs.
The changes to R&D tax credits for non-UK developers' costs reflect the UK Government's focus on domestic investment and growth. While this may pose challenges for businesses accustomed to outsourcing R&D work abroad, it also presents an opportunity to build and enhance local capabilities.
One action for employers to consider now might therefore be to assess whether there is merit in relocating some of their overseas R&D talent to the UK.
Immigration visa considerations – The Global Talent visa route
The Global Talent Visa route replaced the Tier 1 (Exceptional Talent) route on 20 February 2020. This route is for highly skilled individuals in specific, recognised fields who wish to work in the UK. Unlike other immigration routes, the Global Talent route is very flexible as it does not require a job offer or sponsorship from a UK employer, and, for the initial visa, there are no English language or financial requirements to be met. The Global Talent route also allows applicants to apply for settlement in the UK after three or five years in the UK. Family members can accompany/join applicants in the UK.
Eligibility Criteria
To be eligible for the Global Talent Visa, applicants must be aged 18 years or over and must already be internationally recognised as leaders (exceptional talent) or have demonstrated exceptional promise and are likely to become future leaders (exceptional promise) in certain fields, which in this technology and life-sciences context, include:
- Science;
- Research;
- Engineering;
- Medicine; and
- Digital Technology
Application Process
There is a two-stage application process
Stage One – Endorsement Application
Applicants must first apply for an endorsement to an Endorsing Body to demonstrate their credentials. The endorsement is a critical part of the application and requires substantial evidence of the applicant's work and recognition in their field.
Some of the relevant Endorsing Bodies approved by the Home Office are:
- The Royal Academy of Engineering will endorse applications in the engineering field;
- The Royal Society will endorse applications in the natural sciences and medical science research fields;.
- UK Research and Innovation will endorse applications in the science and research fields; and
- Tech Nation will endorse applications in the digital technology field.
Applicants who have won a Prestigious Prize do not require an endorsement from an Endorsing Body and can directly apply to the Home Office for the Global Talent visa (Stage Two).
Stage Two – the visa application
Once endorsed, applicants need to apply to the Home Office for the Global Talent visa (this must be done within three months of endorsement).
Applicants are not required to meet an English language requirement or demonstrate that they have a certain level of funds to meet a financial requirement (these requirements only apply at settlement stage).
Will the Global Talent visa cover all R&D individuals?
The UK Global Talent visa offers a unique opportunity for highly skilled professionals to contribute to the UK's knowledge economy. Individuals considering this route should carefully review the specific requirements of the endorsing bodies and prepare a robust application to demonstrate their outstanding skills. This route might therefore apply to lead subject matter experts who are known internationally and are highly regarded within their industry or for those individuals who have the potential to become experts in their industry in the future, but other immigration routes might be needed for more broad-based talent.
Alternatives to the Global Talent visa route
Applicants who don't meet the Global Talent visa requirements might consider alternative immigration routes, including:
- Graduate route (unsponsored route) – This route is open to individuals on a Student visa who successfully complete a UK Bachelor’s degree or above at a UK higher education institution. Applicants do not require a job offer or sponsorship from a UK employer to apply. Graduate visa holders can work/look for work in the UK in any role for a period of two years (if awarded a Bachelor's or Master's degree)) or three years (if awarded a PhD or other doctoral qualification). It is not possible to apply for an extension under this route, so Graduate visa holders must either switch into another immigration route or depart the UK prior to the expiry of their visa. This immigration route does not lead to settlement in the UK.
- High Potential Individual route (unsponsored route) – This route is open to overseas students who have graduated in the last five years from an eligible university overseas. Applicants do not require a job offer or sponsorship from a UK employer to apply. High Potential Individual visa holders can work or look for work in the UK in any role for a maximum period of two years (if awarded a Bachelor's or Master's degree)) or three years (if awarded a PhD or other doctoral qualification). Prior to the expiry of their High Potential Individual visa, holders must switch into another immigration route or depart the UK. This immigration route does not lead to settlement in the UK.
- Skilled Worker route (sponsored route) – This replaced the Tier 2 (General) route on 1 December 2020. This route is sponsored and therefore requires applicants to have a job offer from a UK employer holding a sponsor licence. While there is no limit on the number of applications that can be submitted under this route, Skilled Worker visas can be granted for a maximum period of five years at a time. This immigration route can lead to settlement in the UK – this is subject to visa holders having spent a continuous period of five years in the UK under the Skilled Worker route and meeting other immigration requirements.
Individuals applying under any of the above three routes may be accompanied/joined by their partner and children, subject to eligibility.
What might this mean for the contracting relationship between the parties?
When weighing up the potential R&D tax benefits of bringing such talent to the UK and when assessing which immigration route is most appropriate, regard should also be had to the wider contracting relationship between the two parties. If an individual needs to be moved on to an employment contract for employer visa sponsorship purposes, then a contract of employment will need to be prepared and the employer will need to take into account associated issues, both in relation to rights and responsibilities under UK employment law and also tax treatment. If the individual is to stay as a self-employed contractor then there should also be a review of the facts and circumstances of their role to ensure that such status is defensible for UK tax purposes.
What about equity incentives for such key talent?
UK boards of privately owned innovation companies are sometimes perplexed to hear that their non-employee contractors (whether in the UK or abroad) are not eligible to participate in a share option plan or other equity incentive offer to help with their talent attraction and retention. UK securities laws include regulations that mean only certain profiles of individuals can accept an invitation for such equity. For non-employees, this typically includes high net worth individuals and sophisticated investors (for an explanation of those criteria see here) – categories that might capture a Non-Executive Director perhaps but not necessarily a software developer or pharmaceuticals researcher.
If an individual's employment status is going to change from contractor to employee, this opens up the possibility of inclusion in an employees' share scheme award.
Managing the equity incentive awards to such global talent needs careful consideration, especially if an individual's role will involve undertaking work duties both in the UK and abroad. Many countries, including the UK, charge a portion of a share-based payment to tax if the employee has undertaken work days in that country at any time during the award vesting period. These trailing liabilities in multiple jurisdictions can be complex for employers and cross-border working employees to manage and can sometimes lead to double taxation. Careful planning at the outset can minimise risk and optimise outcomes for both parties.
Next steps
Our employment team is multi-disciplinary, including employment law, immigration, reward incentives and tax experts. If you're contemplating a relocation of talent into (or from) the UK, for whatever reason, then please get in touch.
For further information contact:
Liz Hunter
Partner, Incentives.
Roberta Imperial
Associate, Business Immigration