ESM10019 - off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2021): basic principles: operating PAYE

When the deemed employer operates PAYE, it should do this through payroll. The deemed employer can add deemed employees to its existing payroll or they can set up a new payroll or PAYE scheme for deemed employees if they wish. When operating PAYE the following is applicable:

  • workers should be added to payroll like any other starter would be. They should be issued a starter checklist so they can provide the deemed employer with the information it needs to run payroll. The student loan portion of starter checklist is not required to be completed as the deemed employer is not responsible for collecting student loans from a deemed employee.
  • the declaration the worker chooses on the starter checklist will determine their tax code. Usually this will be declaration C as the worker will already have a primary employment with their intermediary. This would mean that tax code BR is allocated by the deemed employer. 0T week 1 / month 1 would apply if the worker does not return the starter checklist. HMRC can then issue another tax code if it is required
  • workers will mostly be employed by their own intermediary and so wouldn’t provide deemed employers with a P45. In the unlikely event the worker does provide a valid P45, this should be used.
  • devolved powers that affect tax codes would apply as normal, for example Scottish rates of income tax. For HMRC to determine if a Welsh or Scottish tax regime identifier is appropriate, the worker should put their home address and not their business address.
  • when running payroll, the RTI flag (sometimes referred to as the off-payroll worker marker) should be set to show the individual is an off-payroll worker
  • benefits in kind are treated in the same way under the off-payroll working rules as they would with direct employments. Benefits in kind can be reported on a form P11D or eligible benefits can be processed through payroll. Class 1A NICs should be calculated and paid to HMRC by being included in form P11D(b).
  • deemed employees may be given a payslip showing the amounts of the deductions. Alternatively, these can be shown in a different way such as including them on a remittance notice
  • deemed employees may also be taken off the payroll in the same way when the contract ends and given a P45. A leave date will be required to be entered in the deemed employees record so this can be submitted to HMRC.
  • deemed employees may also be given a P60 at the end of the tax year
  • as the payment is subject to Class 1 NICs it is also subject to the apprenticeship levy. You should consider the apprenticeship levy and make any payments necessary.

In addition to making deductions of tax and Primary NICs from the deemed direct payment, deemed employers also need to pay Secondary NICs in relation to the payment. , Secondary NICs are additional to the deemed direct payment.

Class 1 NICs for deemed employees cannot be reclaimed as part of the Employment Allowance and the secondary NICs relating to off-payroll workers doesn’t apply towards the Employment Allowance limit.

Deemed employers are not obliged to operate auto-enrolment or a workplace pension.

Deemed employers should also not deduct student or postgraduate loans. Workers will continue to make repayments through Self-Assessment.

If mistakes are made on the deemed employer’s payroll, such as the RTI flag (sometimes referred to as the off-payroll worker marker) being unchecked incorrectly, this can be corrected within the Full Payment Submission (FPS) in the deemed employer’s next reporting period or a corrective FPS can be submitted for that period. This FPS needs to include the correct year to date figures for the worker involved. For example, where a worker was deemed to be inside the rules, so deductions were made, but that conclusion changes, corrections can be made through the deemed employer's payroll in the next FPS and the worker reimbursed. This can be done by adjusting the worker’s year to date values to zero, setting the worker’s leave date to the same as the start date already used and submitting a corrective FPS or submitting in the next FPS. Simply deleting a worker’s record in payroll would not correct the position as corrective information must be submitted to HMRC through RTI in order to change HMRC’s records.

The off-payroll working rules determine employment status for tax, they do not decide employment status for rights.

For both tax and NICs the legislation treats the payment to the worker as made at the same time as the payment made by the deemed employer. It is the time at which the payment is actually made, not the invoice date, which determines the date the earnings are treated as made. It will be this date used within the payroll. Usual rules around NICs periods apply regarding regular and irregular payments. For example, if payments are made each month, the period is monthly even if in one period two invoices are paid. The NICs period is when the money is made available, so this will also be based on when the payment is made. For more detailed guidance on earnings periods for NICs, please see NIM08000. 

If work is done in one month but not paid until the next then it is the latter month which defines the payment dates as this is when the payment was made.

Where payments are subject to PAYE under Chapter 10 (tax) / Part 2 (NICs) you do not need to consider the Construction Industry Scheme. For more detail see ESM10004A