What is an externally provided worker for R&D purposes?
Answered 17 March 2026
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What is an Externally Provided Worker for R&D Purposes?
What the law says
The definition of an externally provided worker (EPW) is set out in CTA 2009, s.1128. A person is an externally provided worker in relation to the claimant company if all of the following conditions are satisfied:
| Condition | Requirement |
|---|---|
| A | The worker is an individual (not a company) |
| B | The worker is not a director or employee of the claimant company |
| C | The worker personally provides, or is under an obligation personally to provide, services to the company |
| D | The worker is subject to (or to the right of) supervision, direction or control by the company as to the manner in which those services are provided |
| E | The worker's services are supplied through a staff provider (whether or not they are a director or employee of the staff provider, staff controller, or any other person) |
| F | The worker provides those services under the terms of a contract between the worker and a person other than the company (the "staff controller") |
| G | The provision of those services does not constitute the carrying on of activities contracted out by the company |
HMRC Guidance / Practice
Basis of the definition
The EPW definition is based on the income tax rules for agency workers at Section 44, Income Tax (Earnings and Pensions) Act 2003, which require staffing providers to operate PAYE in relation to individual workers supplied to clients. The key difference is that the EPW rules also apply where the worker is an employee of the staff provider.
What is excluded
- Recruitment costs of staff provided by employment agencies do not qualify
- Where the contract is for more than the provision of workers and amounts to subcontracting of part of the R&D activity, the EPW rules do not apply — that falls under the subcontracting rules instead
- Payments to self-employed consultants are excluded
- Before FA 2012, a worker providing services through a personal service company that contracted with the staff provider would not qualify as an EPW, as the tripartite arrangement was required
FA 2012 changes (expenditure on or after 1 April 2012)
FA 2012 removed the tripartite restriction, allowing relief where more than three persons are involved in the contractual arrangements. The term "staff controller" was introduced to represent any persons between the staff provider and the EPW in the contractual chain.
Engagement requirement
The workers must be directly and actively engaged in the R&D, including qualifying indirect activities. If only partly engaged, an appropriate proportion of the qualifying expenditure should be used.
Practical check
HMRC advises that the claimant company does not normally need to examine the detailed terms of the contract between the staff provider and the worker. A straightforward way to verify the conditions are met is to ask the staff provider or staff controller whether it is operating PAYE in relation to the worker — if so, the claimant can assume conditions (3) to (7) are satisfied.
Group company situations
Where the staff provider or staff controller is in the same group as the claimant company, and an individual is a director or employee of both companies, that individual cannot be an EPW for the claimant company (Condition B). However, their normal staff costs paid by the R&D claimant may still qualify for R&D relief under CTA 2009, s.1123.
Citation sources
the claimant company and an individual is a director or employee of both companies. The individual cannot be an externally provided worker for the claimant company because of point (2), but his normal staff costs (as defined by CTA09/S1123) paid by the R&D claimant may qualify for R&D relief. Point (6) sets out the need for a contract between the individual worker and the staff provider (the company paid by the claimant company). If the worker provided their services through a contract between
CTA09/Ss1127 - 1132 Qualifying expenditure on externally provided workers may qualify for R&D tax relief where it is incurred on or after: 27 September 2003 for the SME scheme, and 9 April 2003 for Research & Development Expenditure Credit (RDEC) Externally provided workers (EPWs) are defined at CIRD84100. This category of qualifying expenditure addresses the situation where a staff provider is contracted to supply external workers. This does not include the recruitment costs of staff provide
The definition of externally provided workers is based on the income tax rules for agency workers at Section 44 Income Tax (Earnings and Pensions) Act 2003 which require staffing providers to operate PAYE in relation to individual workers supplied to clients. The main difference is that the externally provided worker rules also apply where the worker is an employee of the staff provider. A person is an externally provided worker in relation to the claimant company if the following conditions are
nal service company that contracts with the staff provider for the supply of his or her services to the R&D company, then the worker will not qualify as an externally provided worker. FA12 removed the tripartite restriction for expenditure incurred on or after 1 April 2012 allowing relief where more than three persons are involved in the contractual arrangements. CTA 2009 S1128 (7) is amended replacing the term ‘staff provider’ with ‘a person other than the company’. The term ‘staff controlle