Externally Provided Workers or “EPWs” are temporary workers supplied by a third party, who work under the direction and supervision of your team. Subcontractors are typically employed to work autonomously on an area of R&D for which there is a lack of expertise within your team. The distinction between EPWs and subcontractors is important when making an R&D tax credit claim because they have a different cost and eligibility profile, which we outline in this guide.
What is an EPW?
EPWs are temporary workers supplied by a third party. Where any third parties such as staff providers have provided you with staff and are paid via invoice, as opposed to being on your payroll, these associated costs would be categorised as EPW costs.
EPWs work under your technical guidance, supervision and management. They can be viewed as an extension of your existing workforce. Common examples of staff providers include:
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 staff provider.
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.
Unlike EPWs, subcontractors work with a high level of autonomy and you would have a minimal level of supervision and control over them. Payment would often be invoiced on their whole work undertaken.
The difference between EPWs and subcontractors can often be ascertained from the contractual agreement between the parties.
Are EPW costs qualifying?
Under the SME scheme, where the staff provider is unconnected (as in the majority of cases), 65% of qualifying EPW costs i.e. work undertaken by the EPW which directly relates to the R&D project, 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:
Under the RDEC scheme, 65% of EPW costs can be included in the claim.
Are subcontracting costs qualifying?
The answer to this question depends on two factors:
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:
As a general rule of thumb, Subcontractors cannot be claimed for under the RDEC scheme whether connected or unconnected. As an exception to this rule where the work has been contracted to a qualifying body, an individual or a partnership made up of wholly individuals, 100% of the costs to these parties can be included.
Examples of qualifying parties include: