IR35: what to do if it applies
Calculate the deemed employment payment, pay any tax and National Insurance due and account for payments if IR35 applies.
Up until 6 April 2017 the intermediary is always responsible for ensuring compliance with the intermediaries legislation (known as IR35). Clients and other parties - like recruitment agencies – are not liable to operate IR35 if a worker is engaged through their own intermediary under a genuine commercial arrangement.
From 6 April 2017, where the intermediary provides a worker to an end client who is defined as a public authority (see HM Revenue and Custom’s (HMRC) Employment Status Manual at ESM 3072) then that end client, or employment agency, will be responsible for the operation of Pay as you earn (PAYE)/National Insurance contributions (NICs) on any payments made to the intermediary.
Further information can be found at Off-payroll working in the public sector: reform of intermediaries legislation.
Where the end client is not defined as a public authority then the rules continue to operate as before and the intermediary must:
- calculate the deemed employment payment and pay any tax and NICs due, at the end of the tax year
- account for those payments correctly
- reassess the IR35 position if your contracts vary or change
- take into account the deemed employment payment when paying Corporation Tax, making distributions or operating the Construction Industry Scheme (CIS) regime
You’ll also need to report information about these engagements on your Self Assessment tax return.
Your intermediary must also operate PAYE on any salary or wages it pays to you during the tax year, however if that income arises as a result of a services provided to a public authority then some, or all, of the PAYE/NIC liability may be offset (see ESM 3083) .
The remaining guidance on this page only relates to those contracts not covered by the new off-payroll working measure, further information and guidance on those contracts can be found at Off-payroll working in the public sector: reform of intermediaries legislation.
The deemed employment payment
The earnings of your intermediary (your personal service company, limited company or partnership) for that engagement are deemed to be the income of the worker. For contracts where the end client is not a public authority this is called the deemed employment payment (DEP). For contracts where the end client is a public authority the deduction of PAYE/NIC is made at source before the intermediary receives the income therefore no DEP calculation is required.
For National Insurance purposes, this is also known as the ‘Worker’s Attributable Earnings’. The term ‘deemed employment payment’ is used to refer to both in this guidance.
If your spouse or relative also works for clients through your company or partnership on contracts that are affected by IR35, then you should work out a deemed employment payment for them too.
The deemed employment payment is usually regarded as having been paid on 5 April at the end of the tax year.
More than one worker under same contract
If a limited company or partnership supplies the services of more than one worker to a client under the same contract, calculate the deemed employment payment separately for each worker.
If a client makes a single payment to a limited company or partnership for 2 or more workers the income received must be split proportionally.
Any allocation of income should be made on a just and reasonable basis. This basis will depend on the facts and circumstances. For example, where each worker has a daily rate it should be straightforward to allocate the income from the contract to each worker.
Where the amount received by the limited company or partnership includes money for other matters, this doesn’t need to be allocated to a worker.
Check if you need to calculate the deemed employment payment
Step 1. Work out how much your intermediary (your limited company or partnership) received in the tax year from engagements that IR35 applies to (include all payments and benefits).
Step 2. Work out how much your intermediary paid you as employment income (on which Income Tax and NICs were deducted and paid to HMRC).
If the figure from Step 1 is:
- greater than the figure from Step 2 then you must calculate the deemed employment payment
- equal to or less than the figure from Step 2, you don’t need to complete the deemed employment payment calculation as there’s no further Income Tax and NICs to be paid on the worker’s deemed employment income
Calculate the deemed employment payment
To help you use the calculator there is guidance below on additions and deductions.
HMRC doesn’t identify who downloads this calculator and can’t see whether figures have been input or not.
If the deemed employment payment is a:
- negative number - you don’t need to do anything more as there’s no further Income Tax and NICs due, but you should keep evidence of your calculation and the supporting data
- positive number - your intermediary must pay Income Tax and Class 1 NICs on this amount
If you use the HMRC calculator to work out the deemed employment payment, at Step 6 you must only enter the employer Class 1 NICs actually paid to HMRC.
For example, if a business was liable to pay £3,500 employer Class 1 NICs on salary, but claimed the full £3,000 Employment Allowance, then only the balance of £500 would actually be paid to HMRC. Therefore, only £500 should be entered at Step 6 of the deemed payment calculation.
If you prefer, you can work out the deemed employment payment manually using the steps in the HMRC Employment Status Manual.
To work out how much tax and NICs need to be paid on the deemed employment payment go to the ‘Employers further guide to PAYE and National Insurance contributions’ (CWG2). The intermediary is responsible for paying the tax and both the employer and employee Class 1 NICs due on the deemed employment payment.
Additions and deductions
The deemed employment payment calculation starts with the amount the intermediary receives from clients for all the relevant engagements.
Relief for expenses: when given
Relief for the expense should be given using the date when the limited company or partnership meets the liability. This is the date when the bill is paid. Therefore there should be no need to split any expenses over tax years.
5% reduction for general expenses
The deemed employment payment calculation allows a flat rate 5% reduction from the total IR35 income received by your limited company or partnership. This allows for the general expense of running a business, such as training costs and the cost of looking for contracts. There’s no restriction on the use of this allowance. You’re not required to demonstrate this expenditure - the 5% deduction will be allowed in all cases.
Other expenses, including travel expenses
The deemed employment payment calculation also allows a deduction for the actual amount of certain expenses paid by your company or partnership in the year.
These are expenses which the worker could have claimed as a deduction under the normal rules if they had been directly employed by the client and the expenses had been met from their earnings. They include expenses met by the worker and reimbursed by your limited company or met by the worker for a partnership in relation to the engagement.
A deduction for the same expenses can only be given in the deemed employment payment calculation once.
From 6 April 2016 when IR35 applies, each engagement that is undertaken will be regarded as a separate permanent employment for the purpose of travel and subsistence expenses. The same rules for travel and subsistence expenses as those that determine the expenses deductions available to direct employees should be applied.
You can find guidance on the application of the travel rules for IR35-affected workers and all others in 490: Employee travel - a tax and National Insurance guide. This includes guidance on company cars.
Deduction for capital allowances
You’re only allowed to make a deduction for capital allowances where the plant or machinery bought is necessary for the performance of the relevant work engagement duties.
This means that relief will only be given if the duties of the engagement meant that your limited company or partnership had to provide the equipment in question. If the company purchases the equipment out of choice then no deduction will be given.
If during the tax year there is a mixture of qualifying and non-qualifying use, you should allocate any capital allowance claim on a just and reasonable basis. This allocation should normally be by reference to the actual use in the year. Non-qualifying use is where you used the asset for private use on contracts that aren’t covered by the IR35 rules or on IR35 contracts where the provision of the equipment was not necessary.
Nothing in the legislation affects the capital expenditure that a limited company or partnership affected by IR35 can make. You’re free to make whatever purchases you want but relief will only be given under the IR35 rules.
You should account for salary payments, the deemed employment payment and any tax and NICs due as part of the normal payroll summaries you need to report to HMRC.
You should report salary payments made by the company to the worker during the year on a Full Payment submission (FPS) on or before the time of payment. If no payment is made in a period then return an Employer Payment summary (EPS).
The deemed employment payment should be reported on an FPS on or before 5 April. The normal end of year payment rules apply to PAYE and NICs due on the deemed payment. You don’t have to identify the deemed employment payment and any tax and NICs due on it separately.
Also include the deemed employment payment on the P60 form, which your limited company or partnership, must issue to employees by 31 May after the end of the tax year.
If you can’t accurately calculate the deemed employment payment by the end of the tax year, your intermediary will have until the following 31 January to submit final figures and pay any balance of tax and NICs due provided:
- a provisional calculation of the deemed employment payment is reported on an FPS on or before 5 April
- the appropriate payment of tax and NICs is made on that provisional return
- the final figures for the deemed employment payment are reported on an Earlier Year Update (EYU) submitted on or before the 31 January following the end of the tax year
- any balance of tax and NICs based on the final figures is paid on or before 31 January following the end of the tax year
In these circumstances, interest will be due on the balancing payment but no late payment penalty will be due. This concession on penalties will be reviewed annually and notice will be given if it’s to be withdrawn.
Your company may be able to claim the Employment Allowance to reduce its secondary Class 1 (employer) National Insurance payments. However, the Employment Allowance cannot be claimed against any liability arising on a deemed employment payment.
From 6 April 2016 the Employment Allowance is not available to companies where the director is the sole paid employee.
For more information see Employment Allowance.
The deemed employment payment is treated as your employment income from your company or partnership. You should include it with any other employment income on your self-assessment tax return. The tax and NICs are treated in exactly the same way as if they were paid under PAYE.
If you receive a salary from your limited company or partnership, your intermediary will need to give you a P60 form. The pay, tax and NICs details on the P60 given to you by your company or partnership should include the deemed employment payment and tax and NICs paid on it - you don’t need to enter the figures separately on the employment page. Enter the total P60 pay, tax and NICs figures in the relevant boxes.
If only a provisional amount of tax and NICs has been paid when you get your P60, you should receive a revised one when the correct deemed employment payment is calculated and the total tax and NICs accounted for. In such a case, you should use the figures on the revised P60.
Calculate Corporation Tax
When calculating Corporation Tax liability, your company may deduct the amount of the deemed employment payment and any Class 1 employer’s NICs due on it. This deduction in the accounts is only allowed in calculating the taxable profits for the accounting period in which the deemed payment is treated as paid.
It doesn’t affect your company’s tax computations for other purposes, which should only show any salary payments it has actually paid.
IR35 legislation doesn’t affect the operation of VAT.
Fees charged by a limited company or partnership for providing personal services remain subject to VAT, even when these services fall squarely within the IR35 rules. This is because it’s still the company that is contracting to provide services to its clients and as such the supply remains within the VAT regime. VAT is charged as appropriate on any supplies and input tax recovery is subject to the normal rules.
Published: 14 June 2014
Updated: 6 April 2017
- Rates, allowances and duties have been updated for the tax year 2017 to 2018.
- Rates, allowances and duties have been updated for the tax year 2016 to 2017.
- Rates, allowances and duties have been updated for the tax year 2015 to 2016.
- First published.