Externally Provided Workers in an R&D Claim
Written and reviewed by the R&D Tax Accountants editorial team. Last reviewed 8 August 2026.
Externally provided workers are people who work on a company's R&D without being its employees, supplied through another party. Agency contractors and staff supplied by a service company are the usual examples, and their cost is claimable but not in full.
This is one of the categories HMRC looks at hardest, partly because the restriction is easy to miss and partly because the arrangements behind it are often documented thinly.
The 65% Restriction on Unconnected Providers
Where the provider is not connected to the claimant company, the claim is restricted to 65% of the payments made. A company that paid £100,000 for externally provided workers on a qualifying project claims £65,000, not £100,000.
The same 65% restriction applies to payments to unconnected subcontractors carrying out R&D. The two categories are distinct in law and it is worth being clear which one a given arrangement falls into, because the evidence that supports each is different, but the percentage restriction is the same.
Connected Party Providers
Where the parties are connected, the restriction is replaced by a different measure: the claim is the lower of 100% of the payment made and 100% of the provider's own qualifying costs. In effect the group cannot claim more than the cost that was genuinely incurred somewhere inside it.
A group that supplies its own development staff through a service company therefore needs the service company's cost figures, not just the intercompany invoice. This is also where the interaction with Enhanced R&D Intensive Support bites, because payments to connected companies are excluded from relevant R&D expenditure when the 30% intensity ratio is calculated.
Why This Category Attracts Questions
Two reasons. The first is arithmetic: a claim that includes external labour at full cost rather than at 65% is overstated by a visible amount, and that is a straightforward correction for a compliance officer to make. The second is that heavy use of external labour with a small payroll runs into the PAYE and NIC cap, so the same facts affect two parts of the claim.
The statutory definition of an externally provided worker and the conditions attaching to the supply arrangements are set out in the legislation and in HMRC's Corporate Intangibles Research and Development Manual rather than summarised in the headline guidance, so borderline arrangements need checking there rather than reasoned from the label on the invoice. HMRC's overview of which R&D costs can be claimed covers the categories, and the British Business Bank publishes a plainer summary for companies new to the relief.