Quick answer: An externally provided worker (EPW) is staff supplied to a company by a third-party agency to work on R&D, rather than direct employees or self-employed consultants. Where the company, agency and worker are not all connected, HMRC allows 65% of the qualifying payment as R&D expenditure, reduced further for overseas workers outside UK PAYE.
Agency-supplied staff working on R&D projects are one of the categories most often miscategorised in claims, because the qualifying percentage is not simply the invoice total. HMRC's own manual sets out exactly how externally provided worker (EPW) costs are treated, and the rules changed slightly under the merged scheme for periods on or after 1 April 2024.
What Is an Externally Provided Worker (EPW)?
An externally provided worker is staff supplied to a company by a staff provider under a contract, rather than employed directly or self-employed. The definition excludes pure recruitment introductions and self-employed consultants working on their own account. The worker has to be under the claimant company's direction on the R&D project, supplied through an intermediary staff provider such as an agency.
How Does the EPW Rule Work for UK R&D Claims?
Where a company, its staff provider, and any staff controller are not all connected to each other, 65% of the amount paid to the staff provider is potentially eligible to be treated as qualifying expenditure. Under the reformed rules for accounting periods on or after 1 April 2024, that 65% specifically applies to the portion of the payment attributable to "qualifying earnings", not simply to the whole invoice.
Does My Company Qualify to Claim for Externally Provided Workers?
Any company running a qualifying R&D project can claim EPW costs if it uses agency-supplied staff on that project, subject to the same wider eligibility rules that apply to any R&D claim. Our eligible expenditure guide covers how EPW costs sit alongside staff costs, consumables and subcontractor costs in a claim, and our glossary defines related terms such as "staff provider" and "staff controller".
How Much Can I Claim for Externally Provided Workers?
HMRC's own worked example shows the mechanics: where 60% of a staff provision payment is attributable to qualifying earnings, the qualifying expenditure works out at 65% multiplied by 60%, or 39% of the total payment [own-analysis]. On a £50,000 payment to a staff provider with that same 60% qualifying-earnings split, that is around £19,500 of qualifying expenditure before the merged scheme or ERIS rate is even applied [own-analysis].
What Happens When an EPW Works Overseas?
Qualifying earnings for an overseas EPW are restricted to earnings that are either subject to UK PAYE and National Insurance, or fall within a specific overseas exemption under CTA09/S1138A. In HMRC's own example, a company using workers in Mexico who were not on UK PAYE found that only the UK PAYE-covered portion counted, cutting the qualifying-earnings percentage to 60% and the overall qualifying expenditure to 39% of the payment. Companies with offshore teams should also read our guide to the merged scheme for how overseas subcontractor costs are treated separately.
Does the Connected-Party Election Change Anything?
A company can make an irrevocable joint election with its staff provider and any staff controllers to be treated as connected, which removes the 65% restriction and moves the calculation onto the staff provider's actual relevant staff costs instead. The election must be made to HMRC in writing within two years of the end of the accounting period in which the contract was entered into, with no provision for extending that deadline.
Get a Written View, No Call Required
EPW costs are one of the categories most often miscategorised in R&D claims, because the 65% and overseas restrictions are easy to apply to the wrong base figure. Try our free R&D tax credit calculator for an indicative range, or see our statistics page for the wider claim data context. No call required; reply for a written view within 48 hours [own-analysis].
Frequently Asked Questions
An EPW is staff supplied by an agency to work under the claimant company's direction, while a subcontractor is a separate business engaged to carry out and deliver R&D work itself. The HMRC manual treats the two cost categories differently.
No, HMRC's definition of an EPW excludes self-employed individuals working on their own account. They generally fall to be considered under the subcontractor rules instead.
Where the parties are not connected, 65% of the payment attributable to qualifying earnings is potentially eligible, before the merged scheme or ERIS rate is applied on top.
Yes, only earnings covered by UK PAYE and National Insurance, or a narrow statutory exemption, count as qualifying earnings for an overseas EPW, which can significantly reduce the qualifying percentage.
It depends on the actual cost structure. The election is irrevocable and time-limited to two years from the end of the relevant accounting period, so it needs a proper comparison of both calculation routes before deciding.
The 65% (or overseas-adjusted) qualifying expenditure figure is calculated first, then the merged scheme's 20% credit rate or ERIS's 186% deduction and 14.5% payable credit are applied on top, exactly as with any other qualifying cost category [own-analysis].
Yes, reply for a written review within 48 hours, no call required [own-analysis].
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