Externally provided worker costs (EPWs) and R&D tax relief claims
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When supporting our users in preparing R&D claims for their clients, we tend to notice the areas of the scheme that cause the most confusion. One of the worst of these is how to treat externally provided worker (EPW) costs, which is definitely more complicated than it needs to be!
In the spirit of helpfulness, here’s our guide to EPWs and R&D tax relief.
First of all, what is an EPW?
Put simply, an EPW is an individual that is paid by a third party to work temporarily for the claimant company. In general, these are workers provided by employment agencies to provide services to the claimant company, or, in the case of group companies, workers paid by one member of the group that then work for another member of the group.
No matter the scenario, HMRC expect to see a tripartite agreement between the individuals, the staff provider, and the claimant company, whereby the individuals are employed and paid by the staff provider and work for the claimant company.
Top tip: Company directors cannot be treated as EPWs for the purposes of R&D tax relief.
Ok, seems straightforward! So, can I include all EPW costs in an R&D claim?
Unfortunately, it’s a little more complicated than that! First of all, you need to think about whether the EPWs were involved in any eligible R&D work. As long as they carried out eligible activities on these projects, you’ll be able to include some of the costs. In general, you can apportion EPWs in the same way you would direct staff, so looking at what proportion of their time was spent on eligible activities versus everything else!
Right, I know which EPWs were involved in R&D! Can I include the costs now?
Just about! The last thing to think about is whether the staff provider is connected to the claimant company. To do this, you need to look at the ownership of both entities, and look for any people in common, or connections between individuals. For example, if the director of the staff provider supplied staff to their spouse’s company, you ‘d have to treat this as a connected staff provider scenario. In group situations, the two companies are always connected.
Ok, I think I have all of the information I need. How do I calculate the costs?
The first key point to remember here is that, under the rules of the SME scheme, for unconnected staff providers the maximum amount that can be claimed is 65% of the relevant payment made to the staff provider. For example, a claimant company spends £30,000 on EPWs in the claim year, of which 20% related to the R&D projects. The total they can include in their claim is:
£30,000 x 20% (amount that relates to R&D) x 65% (cap on subcontractor costs) = £3,900
The second key point to remember is that the rules are completely different for connected staff providers. In this scenario, you can include the lower of either the payment to the connected staff provider, or the relevant costs of the staff provider. For example, a claimant company spends £30,000 on EPWs from a connected company in the claim year, of which 100% relates to the R&D projects. The relevant costs of the connected subcontractor are £25,000. The total they can include in their claim is therefore £55,000.
Is there any way to avoid the 65% cap on EPW costs?
Nope! That’s the rule for unconnected staff providers, and there are no exceptions to it.
Is it worth including EPW costs in an R&D tax relief claim?
Definitely! Much as EPWs aren’t generally heavily involved in R&D projects, for any company that makes any use of agency staff on their projects it can give a welcome and entirely eligible boost to a claim.