Definition
Externally provided workers, abbreviated EPWs, are individuals whose services are provided to a company under the terms of a contract between the company and a staff provider. Their time on qualifying R&D work is a category of qualifying expenditure. Only 65% of the payment to the provider is eligible, on the basis that the balance represents the provider's margin. Where the company and the staff provider are connected parties, the full cost to the provider may be claimable subject to an election.
How HMRC defines it
HMRC guidance on EPWs is at CIRD84000 onwards of the CIRD Manual. The legislation is at section 1127 of the Corporation Tax Act 2009 for the 65% rule and at sections 1129 to 1131 for connected-party elections. From 1 April 2024 the merged scheme introduced UK-workforce conditions for EPWs, requiring the worker's earnings to be subject to PAYE and NIC in most cases.
Practical example
An engineering company pays a specialist contractor agency £100,000 for the time of a structural engineer who spends 80% of her time on a qualifying R&D project. The EPW qualifying cost is 65% of £80,000, which equals £52,000, assuming the UK workforce conditions are met.