Externally provided workers are temporary hires, supplied by a third party, who work under the direction and supervision of your team. Subcontractors are paid to work autonomously on an area of R&D for which you have a lack of expertise. EPWs and subcontractors have different cost and eligibility profiles, which we outline in this guide.
What is an EPW?
EPWs are temporary workers supplied by a third-party. The third-party will be paid by you, not the individuals doing the work. EPWs also cannot be on your payroll. If they were, they would be included in your staff costs.
EPWs work under your technical guidance, supervision and management. They can be viewed as an extension of your existing workforce. Common examples of third-party EPW include:
- Staffing agencies
- A Personal Service Company (PSC)
- Connected companies
Please note payments to self-employed consultants are not categorised as payments to EPWs, as there is no contractual agreement between the consultant and a third party.
What is a subcontractor?
Subcontractors are engaged to carry out a particular service, relating to the R&D project as there may not be the in-house expertise to complete it. They are often experts in their field.
They are typically paid directly, and would not be hired via a third party such as a staffing agency,
Unlike EPWs, subcontractors work with a high level of autonomy and you would have a minimal level of supervision and control over them. You would most often invoice subcontractors for payment on all the work undertaken, rather than at an hourly rate. Although that is not always the case, and not an essential criterion.
Are EPW costs qualifying?
Under the SME scheme, where the staff provider is unconnected (as in the majority of cases), 65% of qualifying Externally Provided Worker costs can be included in your claim. HMRC has capped this to account for the staff provider’s profit margin.
Where the staff provider is connected you may claim 100% of the lesser of:
- Payment to the staff provider
- Or relevant expenditure of the staff provider in paying EPWs
Under the RDEC scheme, 65% of Externally Provided Worker costs can be included in the claim.
Are subcontracting costs qualifying?
The answer to this question depends on two factors:
- Which R&D tax credits scheme you are claiming under (RDEC or SME)
- Whether the subcontracting party is connected or unconnected
Under the SME scheme, where the subcontractor is unconnected, the company can claim 65% of the qualifying R&D payment made to the subcontractor.
However, where the subcontractor is connected, you may claim 100% of the lesser of:
- The R&D payment made to the subcontractor
- Or, the relevant expenditure in the connected party’s accounts
Generally, you cannot claim subcontractor costs under the RDEC scheme, whether connected or unconnected. The exception to this rule is where the work has been contracted to “a qualifying body”, “an individual” or a “partnership made up wholly of individuals”. In this case, 100% of the costs to those parties can be included.
Examples of qualifying bodies include:
- Higher education institutions
- Health service bodies
- Scientific research organisations
In most cases, the qualifying body needs to be headquartered in the UK. HMRC does identify, however, some overseas qualifying bodies which are eligible.