GUIDE • MERGED SCHEME • Article Date: July 2024
Subcontractors, EPWs & overseas work: what typically trips claims up
The merged scheme has made “who did the work, under what arrangement, and where” a focal point. This guide sets out the practical tests, evidence expectations, and the most frequent areas of challenge we see in practice.
Key takeaways
1) Classify by contractual reality
Job titles and invoices don’t decide treatment. The contract chain and who bears financial risk does.
2) Don’t mix EPW and subcontractor logic
EPWs and subcontracted R&D can be treated differently. Inconsistency across report/AIF/costs is a common trigger.
3) Overseas needs a clear position
If any qualifying activity happens overseas, you need an explicit narrative and clean cost exclusion/inclusion logic.
Why this area causes problems (even for “good” claims)
HMRC processing teams and compliance teams look for clear answers to three questions: who performed the R&D, under what type of engagement, and where it took place. If the submission is ambiguous (or inconsistent across your report, AIF and computation), it can be delayed, queried, or partially disallowed.
Common trigger
“Reverse-engineered” claims where costs drive the narrative rather than qualifying activity driving cost mapping.
Common trigger
Contractor confusion (EPW vs subcontractor vs employee) and totals not reconciling between schedules.
Common trigger
Overseas work present in delivery, but not addressed explicitly (or excluded cleanly) in the claim.
Definitions (practical, not textbook)
In practice, the cleanest approach is to document your labour supply model and map each person/company into one bucket. The buckets below are framed as operational tests you can evidence.
Employees
- On payroll (PAYE) and directed/controlled internally.
- Evidence: employment contracts, payroll records, role descriptions.
- Risk: low, provided you can map time/activity to qualifying R&D.
Externally Provided Workers (EPWs)
- Individuals supplied by an agency/umbrella/provider and working under your direction.
- Evidence: agency agreement, invoices, timesheets/SoW, org chart, supervision details.
- Risk: medium when contracts are unclear or workers operate like subcontractors.
Subcontracted R&D
- A third party contracted to deliver a defined scope or output (often with delivery responsibility).
- Evidence: SoW, deliverables, acceptance criteria, milestone payments, IP clauses.
- Risk: high when it’s really staff augmentation or scope is not clearly R&D.
Overseas activity
- Activity performed outside the U.K. by third parties to the company, such as contractors or EPW.
- Overseas activity performed by third parties is generally no longer eligible under the merged scheme, unless an exception applies.
- Risk: high if not addressed appropriately, and any exceptions to the general rule not made explicitly clear, or well documented.
Positioning point: Our preference is to build a single “engagement map” that shows (i) the contractual chain, (ii) where direction/control sits, and (iii) where work is performed. It becomes the anchor for the narrative, AIF disclosures, and cost schedules.
Overseas work: how to handle it cleanly
The introduction of the merged RDEC regime brought a material change to how overseas R&D activity carried out by third parties is treated for U.K. R&D tax purposes. In particular, the rules now place tighter constraints on when costs associated with subcontracted work and externally provided workers can qualify where the underlying activity is performed outside of the U.K. As a result, it's no longer sufficient to treat "overseas" as an insignificant factor in the background, location and delivery model now form a core part of the eligibility analysis.
If any part of your qualifying activity is performed overseas, you should address it explicitly. Even where the overseas element is minor, ambiguity can lead to delays or broad-brush disallowances.
1) Identify where the activity happened
- List the roles/teams involved and their working locations.
- Separate “UK-led” activities from overseas execution.
2) Decide your treatment
- Identify whether any of the exceptions to third party overseas costs apply to the company.
- Ensure any disclosures regarding exceptions to the overseas third-party cost restrictions are made and consistent across the AIF and report.
What “good” looks like: a short paragraph in the report explaining the presence (or absence) of overseas activity, what it related to, and the exact cost treatment applied, with the cost schedule clearly showing the excluded amounts.
Evidence pack: what strengthens contractor & overseas positions
Evidence doesn’t need to be heavy, it needs to be targeted. The goal is to support the reality of delivery: supervision, responsibility, uncertainty, experimentation, and where the work occurred.
Contract chain
- Agency/umbrella agreements
- SoWs and amendments
- Invoices + rate cards
Delivery reality
- Sprint boards / tickets
- PR reviews / approvals
- Team org charts
Location clarity
- Working location records
- Travel evidence (if relevant)
- Time logs by region
Tip
Curate, don’t dump. 8–15 high-signal artefacts beat 300 pages of exports with no narrative link.
Tip
Link evidence to claims. Reference the evidence categories in your report so the reader understands why it exists.
Pre-submission checklist (quick, high impact)
Want a partner-led review of your contractor and overseas position?
We’ll stress-test classification, ensure AIF/report/computation consistency, and tighten the narrative so it’s processing-friendly and defensible.