This post looks at the key factors to consider when hiring agency staff (EPWs) to work on your R&D projects. It links to our last post which highlighted some pointers on Claiming the Costs of Subcontractors in R&D Tax Credit Claims.
The two topics are closely related as it’s not always immediately obvious whether the contractual relationship is one of subcontracting or the provision of workers (EPWs) to work on a project. Both large companies claiming under RDEC and Small and Medium Enterprises (SMEs) can claim relevant costs of using EPWs. It’s particularly important for large companies to come to the correct judgment as in general, they are not permitted to include subcontractor costs in R&D claims. If you need assistance identifying what can be included in your R & D tax credits claim, contact RandDTax.
The definition of EPWs links to income tax rules for agency workers. These rules require staffing providers to operate PAYE in relation to individual workers supplied to clients.
In common with subcontract relationships, the staff provider may be connected or unconnected to the R&D claimant company and depending which applies, the claimant company can include either 100% or 65% of the relevant costs of using EPWs on R&D projects (if connected 100% applies, if no connection 65% applies).
Identifying whether workers should be classified as EPWs
The judgement about whether a third party is providing EPWs is based on whether certain conditions are satisfied in the relationship between the workers, the external third party company and the R&D claimant company – these include:-
- That the third party agency has an employment contract with and is paying the respective workers (operating PAYE) and invoicing the R&D claimant company for the provision of the workers.
- That the workers are indeed workers – the conditions to test this include that each individual worker is treated in a way that indicates s/he is a worker, such as being supervised, directed and controlled (or at least these rights exists even if not exercised), in regard to how s/he personally provides an agreed level of service.
One mistake we frequently come across is where a director of the R&D claimant company is deemed to be an EPW because s/he is invoicing the R&D claimant company from another company. This is not permitted. A director or employee of the R&D claimant company cannot be an EPW (the relevant portion of their salary costs paid by the claimant company can be claimed).
Note – there is nothing to prevent a third party agency from supplying its own directors as EPWs, providing the EPWs have an employment contract and are salaried (PAYE) staff within the third party agency.
Clearly, given the above rules, a self-employed individual cannot be an externally provided worker although they may be deemed to be undertaking subcontracted activities, depending on the specific circumstances – Read more on Claiming R&D Tax Credits on Subcontracted Activities
Linda Eziquiel, Regional Director