Subcontractors / EPWs / overseas work: what typically trips claims up

Published 8 February 2026

Contractor and third-party costs are one of the most sensitive areas in any R&D claim, and under the merged scheme, the compliance lens is tighter.

In practice, we see many claims that are strong technically but become exposed because the contractor position is:

  • poorly documented,

  • inconsistently categorised, or

  • based on assumptions rather than actual working practices.

Below are the most common pitfalls, and how to avoid them.

First principles: why HMRC focuses here

Contractor/EPW claims can be vulnerable because eligibility often depends on:

  • the contractual chain,

  • who directs and controls the work,

  • where the work is actually performed,

  • and how the individual is engaged/paid.

That’s exactly where “shortcuts” tend to appear. Below, we outline some of the key points which trip companies up when preparing claims, and how to avoid them.

1) Confusing subcontractors with workers (and vice versa)

Teams often label any external resource as a “contractor,” but eligibility depends on what they are in substance.

How to avoid: define categories upfront:

  • Subcontracted R&D activity (project outcome delivered)

  • Externally provided workers / labour-like arrangements
    Then apply the rules consistently.

2) Weak evidence of direction/control

If you claim third-party costs, you should be able to show:

  • who set tasks,

  • who reviewed outputs,

  • and who carried risk for success/failure.

How to avoid - keep simple proof point:

  • Statements of work

  • Tasking artefacts (tickets, sprint planning)

  • Acceptance criteria and review logs

3) Contracts don’t match working reality

A contract might say one thing, but delivery in practice looks different, and HMRC will consider reality.

How to avoid: sanity-check:

  • Are deliverables fixed-price outcome-based?

  • Or is the person embedded like staff augmentation?

  • Who provides tooling and working supervision?

4) Overseas work assumed eligible when it isn’t

Where work is performed can materially affect eligibility. Many companies only realise late that a large portion of contractor spend was overseas.


How to avoid: tag contractor spend by:

  • location of work performed, and

  • where the individuals are based/operating
    and keep it consistent with evidence.

5) EPW classification uncertainty

Externally Provided Workers are often misunderstood, especially where agencies/umbrella companies are involved.

How to avoid: keep a clear record of:

  • who the contractual supplier is,

  • who pays the individual,

  • whether there is an agency/umbrella in the chain,

  • and how the work is supervised.

6) Applying broad-brush R&D percentages without support

A “60% across all contractors” approach rarely survives scrutiny unless there’s a robust method behind it.

How to avoid: build a role-based and project-based methodology:

  • Which workstreams were truly uncertain?

  • Which roles were directly resolving uncertainty vs supporting delivery?

  • Do the percentages match evidence?

A contractor/EPW evidence checklist (fast and practical)

For each contractor/third party included, you ideally want:

  • Contract/SOW (or at least purchase docs)

  • Clear description of what they did (mapped to projects)

  • Evidence of supervision/control (tickets, reviews, acceptance)

  • Work location confirmation (UK vs overseas)

  • A defensible R&D percentage basis (role + workstream logic)

Westlock note: We typically run a contractor “eligibility and defensibility” review early in the process because this is where claims are most commonly weakened unintentionally. If you want, we can provide a short contractor scoping template you can send to suppliers to capture the right information upfront.

Key Contact:

Saifur Rahman

Head of Innovative & Emerging Technologies Advisory