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What are externally provided workers (EPWs)?

Joanne Chance
Tax Manager
(Last updated on )

If you are a business that uses externally provided workers (EPWs), you may be wondering if you can include the costs in your R&D tax credit claims.

What are EPWs?

EPWs are temporary workers provided by an external company. EPWs work like regular employees but are paid via invoice to a third-party staff provider as opposed to being on your payroll.

Common examples of staff providers include:

  • A staffing agency: Companies pay staffing agencies to find workers for them. The agency interviews the job seekers and places them in appropriate positions.
  • A personal service company (PSC): Many contractors work for clients using their own limited companies. These are called personal service companies, or PSCs. The generally accepted definition of a PSC is a limited company that typically has a sole director who owns most or all the shares.
  • A connected company: Where two companies are controlled by the same person or in the same group they are ‘connected’. In some groups of companies, one company employs staff but then provides them to another group company to work on an R&D project. An inter-company charge is made between the two group companies.

EPWs and research and development (R&D) tax credits

There are specific rules around the inclusion of EPW costs in an R&D claim. These depend on the incentive you are using and the relationship you have with the EPW provider. Let’s explore this in more detail.     

Click through for more on qualifying costs.

Can you claim R&D tax credits for externally provided workers? 

Under the SME R&D tax credit scheme, you cannot usually include the full amount of the agency fee for work undertaken by EPWs in your claim. Only 65% of the payment can be used towards your R&D tax credit calculation. The other 35% is to account for the external company’s profit margin. This is set by HMRC.

If you and the provider are connected, however, the rules are different. There is no 65% restriction. You claim R&D tax credits on either the payment made to the external agency or the actual cost of labour to the staff provider. Whichever is the lower amount is the one used for your R&D tax credit claim.


Large companies (or any SMEs) using the research and development expenditure credit (RDEC) can claim for EPW costs. As in the SME R&D tax credit scheme, only 65% of the payment can be used towards the R&D tax credit calculation.

What is the difference between a subcontractor and an EPW?

A subcontractor provides services and an EPW provides labour with supervision, direction and control remaining with the business.

Subcontracted work happens when you engage someone else to carry out a particular service on your behalf in exchange for payment.

What if our R&D happens elsewhere?

R&D projects often require work to be outsourced to other parties. This does not prevent you from claiming R&D tax credits, but there are a number of important things to consider.

From the outside looking in, an EPW can easily seem like a normal employee. But this person is paid via invoice from a staff provider as opposed to being on your payroll. If there is no third-party staff provider alongside the individual, there is no EPW.

Another crucial difference between a subcontractor and an EPW is how they are treated for R&D tax incentives.

The SME R&D tax credit scheme and RDEC treat subcontracted work differently. Large companies (and any SMEs) claiming under 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.

Changes for accounting periods beginning on or after 1 April 2024

For accounting periods beginning on or after 1 April 2024, 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 objective of refocusing R&D activity in the UK.

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?‘

This article was last updated on