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Costs: What is the Difference Between Externally Provided Workers and Subcontractors?

This article explains what an externally provided worker and subcontractor is, why it is important to determine the difference and the impact these costs can have on your R&D claim.

When completing your R&D claim's costs, it is important to include all of your staff expenditure for those that worked on your R&D project; this can include employees, subcontractors and externally provided workers.

To ensure that you are completing your staffing costs correctly, it is crucial that you are familiar with the types of workers you can include as well as the impact these can have on your total claim benefit. 

Below, you can find out the difference between externally provided workers and subcontractors.


What is an externally provided worker?

An externally provided worker is an individual who is not directly employed by a company but rather, provides services or performs specific tasks on behalf of that company. They cannot be a director or employee of the claimant company, and the worker’s services must be supplied to the company by or through an intermediary staff provider or staff controller. 

While these workers can be supplied through a third party, such as a recruitment or staffing agency, it is no longer required that there is a tripartite arrangement between the R&D company, the staff provider and the individual worker. It's important to note that these workers are typically managed by the claiming company and are under their supervision.

While externally provided workers are not typically considered fully independent in their work, they can still contribute significantly to the company's R&D project. Therefore, it is important to include all of your externally provided workers' costs if they are working on R&D, as you will be able to claim all or part of their costs from HMRC.
 

💡 Example

Company 'A' hires company 'B', a third party agency. Company 'B' provides company 'A' with a small team of workers to perform specific tasks related to their R&D project. Company 'A' has a contract with company 'B' to pay 'X' amount for the staff, who are then paid by company 'B' for their work.

In this example, these staff would be externally provided workers.



Are externally provided worker costs capped?

This depends on the type of externally provided worker and which scheme your claim falls under.

Externally provided workers can generally be defined as either:

An unconnected externally provided worker: This is an individual who does not have any significant relationship or influence on the company they are working for. Under the SME scheme, unconnected externally provided workers can claim for 65% of their costs - HMRC has capped this to account for the staff provider’s profit margin.

A connected externally provided worker: This is an individual that has a 'close relationship' with the company they are working for. This relationship could be through ownership, control or financial ties, resulting in a potential influence on the company. Under the SME scheme, you  may claim for 100% of the lesser of:

  • The payment to the staff provider.
  • OR the relevant expenditure of the staff provider paying the externally provided workers.


💡 Under the RDEC scheme, you can claim for 65% of externally provided workers' costs.


What is a subcontractor?

A subcontractor is an individual or company that is hired by a company to provide services or perform specific tasks that contribute to their project. Subcontractors are usually specialists in their field and have the necessary skills and expertise to fulfil their role's responsibilities. Unlike externally provided workers, they usually work with a high level of autonomy and can bring expertise to the project that was not otherwise available 'in house'.

💡 Example

Company 'A' has hired individual 'B' to carry out some specialist work on their R&D project. This individual works autonomously on the project, providing expertise knowledge that company 'B' did not have 'in-house'. Individual 'B' invoices company 'A' for the entirety of their work, company 'A' then pays them directly.

In this example, individual 'B' would be a subcontractor.



Are subcontractor costs capped?

This depends on the type of subcontractor and which scheme your claim falls under.

Subcontractors can generally be defined as either:

A connected subcontractor: This is an individual or company that has ownership, control or financial ties to the claiming company. For example, 50% or more shares and/or voting rights. Under the SME scheme, you can claim for 100% of the lesser of:

  • The payment made to the subcontractor.
  • OR the relevant expenditure in the connected party’s accounts.

An unconnected subcontractor: This is an individual or company that does not have any significant relationship or influence on the company they are subcontracting for. Unlike connected subcontractors, unconnected subcontractors' costs are capped at 65%.


Under the RDEC scheme, you generally cannot claim for subcontractors' costs. However, the exception is when the work has been contracted to “a qualifying body”, “an individual” or a “partnership made up wholly of individuals”.

Here's some examples of qualifying bodies:
  • Charities.
  • Higher education institutions.
  • Health service bodies.
  • Scientific research organisations.

In most cases, the qualifying body needs to be headquartered in the UK. However, HMRC does identify some overseas qualifying bodies which are eligible.


⬆️ In the above examples, you can claim for 100% of the costs associated with those parties under the RDEC scheme.


My subcontractors / externally provider workers are from overseas, can I still claim for these?

Yes, you can. While HMRC previously disclosed that they were planning to disqualify overseas workers' costs, this has now been postponed until April 2024. 


Question not answered?

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