It’s important to understand which costs qualify for RDEC claims — especially when it comes to Externally Provided Workers (EPWs). EPWs can sometimes represent a significant portion of R&D staffing cost, but the rules around claiming them have specific conditions that need careful attention. This article and summary video, outline who qualifies as an Externally Provided Worker, what costs can be claimed and how to ensure compliance under the updated RDEC rules, effective for accounting periods starting from 1st April 2024 onwards.
What Are Externally Provided Workers?
Externally Provided Workers are individuals who are supplied to your company by a third-party staff provider to work on your R&D projects. They are not your direct employees, but they should be people that work under your supervision, direction and control.
The key distinction here is control. For a worker to qualify as an EPW, your company must direct and supervise their R&D work as if they are part of your in-house team — even though they remain on the payroll of another organisation.
Typically, EPWs are sourced through:
Specialist staffing agencies
Group companies
Consultancies or umbrella companies.
Importantly:
If the provider is contracting their R&D services to you, or is providing your company with outcomes rather than time and labour, then the cost should be considered under contracted out R&D, not EPWs.
If a worker is not subject to payroll taxes being deducted, via a provider agency, they cannot be classified as EPWs.
Where the provider is based abroad and does not operate UK payroll for the EPWs, the associated costs will be subject to the restrictions on claiming R&D on overseas expenditure.
A person cannot be an EPW if they are a director of the claimant company, or also on the payroll of the claimant company.
What Costs Can Be Claimed?
Under the RDEC scheme, you can claim 65% of the payment made to an unconnected third-party staff provider for the EPW’s time spent on qualifying R&D activities (for connected parties see more below).
The Payment Must Be Apportioned for R&D Time Only
Only the proportion of the EPW’s time spent on qualifying R&D activities can be claimed as R&D expenditure.
Thus if an EPW spends 50% of their time on eligible R&D, then only 50% of their cost is a relevant R&D cost.
Once you have assessed the relevant portion of time on R&D:
If the EPW is supplied by an unconnected party, to get to the final claimable R&D cost, you then apply the 65% rule.
If the EPW is supplied by a connected party, to get to the final claimable R&D cost, you then work out the lower of:
The relevant portion of the payment made to the connected party for the EPW, and
The relevant portion of the staff cost of the connected party.
This ensures that claims are based on the actual cost, not intercompany markups.
It is worth noting that the claimant company and EPW provider can elect to be connected, but such an election is irrevocable. In some cases this may improve the R&D claim value.
Documentation and Record-Keeping
To support your RDEC claim, keep detailed records that demonstrate:
The contract or agreement with the staff provider.
The hours or percentage of time the EPW spent on qualifying R&D.
Evidence that your company had control and supervision of the worker’s R&D activities.
Also, retain calculations showing how you applied the 65% cap and any apportionments made based on R&D time.
Common Mistakes to Avoid
Confusing EPWs with Contractors: The distinction lies in control and the deduction of payroll taxes. If your business doesn't supervise the worker day-to-day or the worker is not subject to payroll taxes in the staff provider, you likely can’t treat them as an EPW.
Over-claiming by failing to identify and apportion costs accurately: Such as including non-R&D time or entire contract values.
Ignoring connected party rules: Always check whether your staff provider is connected to your business — this impacts how much you can claim.
Final Thoughts
Externally Provided Workers can be a valuable part of your R&D team, and their costs are eligible for relief under the RDEC scheme — but only if the rules are followed closely. Accurate record-keeping, clear contracts and correct categorisation are essential to making a robust claim.
If you’re unsure whether your staffing arrangements qualify under the EPW rules, it’s worth seeking specialist advice to avoid errors and maximise your eligible R&D expenditure.
See HMRC guidelines on Claiming EPW Costs.