If you are a business that engages the services of externally provided workers (EPWs), you may be wondering if you can include the costs in your R&D tax credit claims.
We explore what EPWs are for the purposes of R&D tax relief claims and how much can be claimed. We also explore the difference between a subcontractor and an EPW, as well as detailing the requirements for businesses documenting EPWs on the Additional Information Form (AIF).
What are EPWs?
Externally provided workers are individuals that you bring in to supplement your employee workforce. Expenditure you incur on such individuals could potentially be included in an R&D tax relief claim if certain criteria are met.
EPWs and research and development (R&D) tax relief claims
An EPW must be an individual, who is not a director or employee of the company claiming R&D tax relief. The individual must be provided by a staff provider, or an intermediary. Often, that intermediary will be a company, such as an agency, or other group company.
Broadly, EPWs work like regular employees but are engaged through a third party staff provider. It is this provider who in turn invoices your company for their services, as opposed to the individuals being on your own payroll.
Common examples of EPW arrangements include:
- A staffing agency: Companies pay staffing agencies to provide workers for them. The agency reviews the available workers and supplies them to the company.
- A personal service company (PSC): Individual workers engage with their clients through their own limited companies. These are called personal service companies, or PSCs. A PSC is typically a limited company that has a sole director who owns most or all of the shares in that company.
- A connected company: Where two companies are controlled by the same person or in the same group they are ‘connected’. In a group of companies, one company may employ staff, and those staff are then provided to another group company to work on an R&D project of that other group company.
How much can you include in a claim?
There are specific rules around the amount of EPW costs that can be included in your R&D claim. These depend on the relationship you have with the staff provider. Let’s explore this in more detail.
Click through for more on qualifying costs.
Under the SME and RDEC incentives, if your company is not connected to the EPW provider, you cannot include the full amount of the agency fee for work undertaken by EPWs. Only 65% of the payment can be included in your claim.
If you and the staff provider are connected, however, the amount of expenditure that you can include in your claim is different. In this case, the amount you can include is restricted to the lower of the payment made by you to the staff provider, and the actual cost of labour incurred by the staff provider.
The expenditure to be included in the claim should then be apportioned to reflect the amount of time spent by the EPW working on R&D.
The value of the benefit you could receive depends on whether you are claiming under the RDEC or SME incentive. If the latter, the benefit is dependent on whether you are profit or loss making and the amount of loss you decide to surrender.
Click through for more on SME R&D tax relief.
What is the difference between a subcontractor and an EPW?
It is important to consider whether the characteristics of the relationship between your company and the third party involved in R&D activities point more towards being a subcontractor relationship, or that of a provision of workers. Let’s look closer at those characteristics.
Subcontractor relationship
A subcontractor relationship exists where there is a contract between persons for R&D activities to be carried out by one for the other. Hallmarks of such a relationship could include the agreement to deliver a specific scope of work or specific deliverables. Typically, the contract may refer to the work being undertaken by the third-party entity as a whole, rather than referencing specific individuals or the necessary skillset of individuals to be provided.
EPW relationship
In an EPW relationship, a staff provider would be responsible for providing individuals to you who then work under your supervision, direction and control. Other indicators could include the requirement for the individual to provide services personally (rather than being free to further subcontract that work), maintain timesheets, and charge you for their time spent.
As you can see, you may engage with a third party in a way that has the characteristics of both a subcontractor and an EPW. It is therefore important to consider the hallmarks of each and come to a reasoned conclusion.
What if our R&D happens elsewhere?
The crucial difference between a subcontractor and an EPW is how they are treated for claims under the RDEC incentive.
The SME R&D tax credit scheme and RDEC treat subcontracted work differently. Large companies and SMEs claiming RDEC can only recoup their subcontractor costs in very limited circumstances.
No such distinction exists for EPWs. A company using either incentive can claim for costs associated with an EPW.
It is therefore important to understand whether work has been contracted out to a third party, or whether that third party is simply providing workers to the company as EPWs.
Changes for accounting periods beginning on or after 1 April 2024
For accounting periods beginning on or after 1 April 2024, most companies will claim for R&D tax relief under the ‘new’ RDEC incentive. This is standard for all claimants unless the company meets the eligibility criteria to claim under Enhanced R&D Intensive Support (ERIS).
For claims made under both the new merged RDEC scheme and ERIS, the definition of what is an EPW remains the same. However, under both the merged RDEC scheme and ERIS, expenditure on overseas EPWs is generally not eligible for relief, unless certain, limited exceptions apply.
EPW costs included within an R&D claim must be subject to UK PAYE and NIC. This is to restrict the use of overseas EPWs within R&D claims going forward, with the broad objective of refocusing R&D activity in the UK.
Click the link for more on overseas R&D restrictions.
EPWs and the Additional Information Form
When submitting your R&D claim on the mandatory Additional Information Form (AIF), you must now include the number of EPWs that are included with your reported R&D expenditure.
You must also give the employer’s PAYE reference, if available, up to a maximum of 10. If this is not possible, the form allows you to describe why this is the case. If your R&D claim includes more than 10 EPW providers, you must include PAYE references for the 10 employers that provided the largest number of EPWs that are included with your claim.
For the statutory detail, click to read SI 2023 No 813.
Now you have a better understanding of externally provided workers for R&D, read about subcontractors in our KnowledgeBank article ‘Can I claim R&D tax credit relief on subcontractors?‘