How are Externally Provided Workers handled in an R&D tax relief claim?

It takes a village to raise a child a child and it also takes a diverse team of talented individuals to make innovation possible.

Not every innovative business is going to have all of the talent they need in-house at all times, so they frequently need to leverage the skills of Externally Provided Workers (EPWs).

When this happens, it is vital that it is represented in an R&D tax relief claim to avoid a compliance issue.

What are Externally Provided Workers?

As with all other facets of R&D tax relief claims, Revenue has a distinct definition that needs to be kept in mind.

EPWs are temporary workers provided by an external company.

Although they may work alongside your regular team, EPWs are paid by a third-party staff provider and are not included in your own payroll calculations.

There are many ways to source EPWs, but the most common include using a staffing agency, a  Personal Service Company (PSC), or through a connected company.

For Revenue to consider them relevant, they have to be working under the supervision and control of the innovative business.

What EPW costs can be included in an R&D tax relief claim?

For the most part, EPW costs are treated in the same way as employee salary expenses.

This means that only the work done towards R&D can be included in the R&D tax relief claim.

However, the origin of the EPW is important to consider when knowing how to manage their expense.

If the agency that provides the EPW is not connected to the claimant company, only 65per cent of the money that is paid to the EPW can be treated as qualifying expenditure.

The remaining amount that is paid is viewed as a commercial expense, hence why it cannot be included in an R&D tax relief claim.

However, if the innovative business and the agency are connected, then different calculations have to be used.

It will only be possible to claim the lower of 100 per cent of the payment made to the agency or the actual cost of the relevant staff incurred by the staff provider. 

This rule is in place to prevent connected companies from artificially increasing the costs of EPWs in order to claim more during an R&D tax relief claim.

What is the most effective way to handle EPWs in an R&D tax relief claim?

As with other qualifying expenditure, it is possible to estimate the amount of time a person has spent conducting R&D work.

Where possible, it is best to document the time that individuals spend working on R&D projects so that calculations can be more accurate.

This should be easier to do with EPWs than with regular staff, as their time is more dependent on specific tasks and time tracking will likely play a more significant role in how they are managed.

Not knowing how to correctly calculate EPW costs can result in R&D tax relief claims needing correction if an enquiry reveals the figures are inaccurate or a loss of funds if they are mistakenly excluded.

We work to ensure that accountants and innovative businesses understand the full extent of costs that can be included in an R&D tax relief claim.

For expert support in managing EPW costs and anything else R&D tax relief related, be sure to speak to our team today.

Adam Bointon