Author: Adam Spriggs
When looking at eligible expenditure for R&D Tax claims there is one category that often strikes initial confusion – EPW’s. EPW stands for Externally Provided Workers, which still doesn’t shed too much light on what they are as it’s a phrase that doesn’t exist outside the world of R&D Tax. Whilst you can infer what it covers, the existence of a separate cost category – subcontractors – begs the question why it’s needed; and if you utilise external labour which one are they?
R&D Tax regimes exist around the world, however we are the only country that has two external worker/contractor categories. Some differentiate between domestic and foreign subcontractors and might restrict foreign based subcontractors, Canada for instance restricts foreign subcontractor costs to 10%. However, the UK schemes differentiate based on how you work with external labour.
What is an EPW?
An Externally Provider Worker is an individual who works under your ‘supervision, direction and control’ on your R&D project. An EPW cannot be a company as it specifically covers individual workers and there must also be a minimum tri-partite relationship ie an intermediary labour provider or that individual’s personal service company. An EPW also cannot be an employee or a director of the claiming company, to deter the structuring of certain commercial arrangements.
Some key pointers that might indicate a working relationship is an EPW one include:
– Contract is a for a set period of time or on a Time and Materials (T&M) basis.
– The engagement references specific people rather than a deliverable.
– Generally paid on a hourly or daily basis and if any additional, or remedial, work was required you would cover those costs.
Example 1: ABC Ltd wishes to engage the services of John Smith for a period of 3 months to aid with their project. They sign a contract with John’s company, John Smith Ltd, to provide ABC Ltd with John’s time.
Example 2: A construction company needs 20 additional workers to help them deliver a job within a time frame and so go through a labour provider to provide the labour. They will all report to employees of the company.
What is a subcontractor?
Unlike EPW’s, a subcontractor can be a company, an individual or a partnership, and you don’t need to supervise their day to day activities; as a result the engagement is generally task driven. Indicators that a subcontractor relationship may exist rather than an EPW one include:
– Contract is for a deliverable and normally for a fixed cost.
– Any remedial work required is normally at a cost to the subcontractor.
– The subcontractor is responsible for how the work is carried out.
Example 1: ABC Ltd engage an external agency to test the nutritional properties of fitness meals being developed. The external agency would be a subcontractor assisting with ABC’s R&D project.
Example 2: A construction company who engages with a specialist piling company to complete the piling on a building project before the rest of the construction can continue.
Whether external costs are categorised as EPWs or subcontractors, both are restricted to 65% of the total costs. The rationale behind this is to strip out a profit margin that would be factored into the cost charged by an external company, so that only a perceived ‘true cost’ of the work undertaken is claimed; and a 35% profit margin was what HMRC settled on. Companies are however able to avoid this restriction if the labour has been provided by a connected party and the actual costs are claimed. In all cases, an apportionment to represent the level of involvement in the R&D activity will still be required.
Example: ABC Ltd owns DEF Ltd. DEF Ltd is undertaking an R&D project and ABC Ltd has provided its employees to assist on the project for 6 months and DEF Ltd has covered the salaries and other associated costs of those workers through an intercompany recharge. These workers would be classed as connected party EPW’s and wont be subject to the 65% restriction.
There are two regimes in the UK, the SME and the RDEC schemes. Under the SME scheme, companies can claim EPWs and subcontractors. However, those claiming under RDEC are only able to claim EPWs and certain subcontractors – qualifying bodies (universities), individuals and partnerships where all members are an individual. Due to this restriction, in nearly all cases this effectively means companies claiming under RDEC are unable to claim subcontractors.
Whilst it is important that costs are accurately analysed and claimed under the correct cost category, whether a cost is claimed as an EPW or subcontractor has no real impact on the claim value for SMEs. However, for those failing to meet the SME requirements or have received some form of subsidy or grant that means they must claim under RDEC, its important to understand the working relationship so that costs can be correctly classified.