UK R&D credits and US tax rules: key strategies for multinationals

For US-headquartered multinationals with UK subsidiaries, the UK’s Research and Development Expenditure Credit (RDEC) regime provides a valuable incentive encouraging innovation. However, its interaction with US international tax rules – particularly Global Intangible Low-Taxed Income (GILTI)/Net CFC tested income or NCTI) and recent changes to foreign tax credit (FTC) limitations – introduces complexity that finance professionals must navigate to optimise global tax efficiency.

The UK RDEC regime

RDEC provides an above-the-line benefit, meaning it is recognised as income rather than simply reducing tax liability. This enhances EBIT, which is appealing for performance metrics and internal reporting. RDEC can be offset against tax liabilities, and loss-making UK entities can receive cash payments, making RDEC a genuine source of funding.

The current RDEC rate is 20% of qualifying R&D expenditure, subject to UK corporation tax. After tax, the net benefit is approximately 15-16.2%, depending on circumstances. For businesses investing heavily in innovation, this is a significant factor in the cost-benefit analysis of that investment.

Interaction with US tax rules

While RDEC aims to encourage innovation in the UK, its impact on US tax calculations is less clear. The credit boosts the UK subsidiary’s income, which flows into the US parent’s GILTI/NCTI calculation. This additional income can increase the US tax burden, even though the UK credit is meant as an incentive.

FTC rules add further complexity. The US foreign tax credit rules were overhauled in the 2022 FTC Final Regulations and reaffirmed by the IRS in 2023, subject to some transitional rules. These changes redefine what counts as creditable foreign income tax, notably revising the compulsory payment rule by excluding liabilities that could be settled by a subsidy, incentive or credit rather than a cash payment.

This means US companies may still claim FTCs for net UK taxes paid, even if some tax is offset via RDEC. Recent US reforms have changed the GILTI/NCTI calculation and improved FTC use by allowing 90%, not the former 80%, making UK taxes more creditable.

Strategic implications for finance leaders

To maximise the benefit of RDEC while managing US tax exposure, businesses should consider the following:

• Run integrated models: Assess the combined effect of RDEC on UK tax, US GILTI and FTC positions. Include scenarios under current law and anticipated changes, such as the shift from GILTI to NCTI from 2026.
• Balance cash flow and effective tax rate: While RDEC boosts UK EBIT and provides cash refunds, it can also raise the US tax burden. Evaluate whether the global benefit outweighs the incremental US tax.
• Leverage FTC improvements: With the FTC haircut reduced and allocation rules clarified, US multinationals can better offset GILTI exposure. Compliance with OECD Pillar Two guidance will be critical.
• Monitor legislative changes: US tax reform continues to evolve. Changes to expense allocation rules and the move to NCTI will affect planning from 2026.

Key actions for multinationals

Finance leaders should start by identifying eligible UK projects, as RDEC applies broadly to technological and scientific innovation. Coordination between UK and US tax teams is essential to ensure that RDEC claims do not inadvertently trigger unfavourable US tax outcomes. Robust documentation for both UK R&D claims and US FTC positions will help withstand scrutiny from HMRC and the IRS.

How Moore Kingston Smith can help

UK R&D credits remain a compelling incentive for US-parented companies when managed strategically. By modelling the interplay between UK benefits and US international tax rules, finance professionals can unlock innovation funding while minimising global tax leakage.

Our specialist R&D team works closely with international tax experts to help you capture every opportunity. From identifying qualifying projects to ensuring compliance across jurisdictions, we provide tailored advice that maximises benefits and mitigates risk.

Contact our R&D team today to discuss how we can support your business.