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HMRC internal manual

Employment Status Manual

HM Revenue & Customs
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Conditions of liability: where the intermediary is a company

Paragraph 3 Schedule 12 Finance Act 2000/Section 51 ITEPA 2003

Regulation 5 SI 2000 No. 727

Where the intermediary is a company, the following conditions must be satisfied for the legislation to apply:

  • the worker (or his or her associates) has a material interest in the company, or
  • the (non-employment income) payment or benefit arising from the relevant engagement is received or receivable directly from the intermediary and can reasonably be taken to represent remuneration for services provided by the worker to the client.

“Material interest” is defined as meaning:

  • Beneficial ownership of, or the ability to control, directly or indirectly more than 5% of the ordinary share capital of the company; or
  • Possession of, or entitlement to acquire, rights to receive more than 5% of any distributions made by the company; or
  • Where the company is a close company, possession of, or entitlement to acquire rights to receive more than 5% of the assets available for distribution to participators in the event of a winding up of the company

The material interest test applies where a worker operates through a one-man service company. Typically in such cases the worker, or the worker and his/her spouse, will own all of the share capital. (NB the definition of associate also includes an unmarried partner - see ESM3125). It will also usually cover the situation where a composite service company is involved.

However, it is possible that the worker’s shareholding will fall below the 5% ordinary share capital. In such situations you will need to consider the second condition of liability shown above, which links the amount received or receivable by the worker to the amount paid by the client for the worker’s services. In such cases see ESM3106.

There is an exception to this condition of liability where the client and the intermediary are associated companies, as defined at S 416 ICTA 1988. In such cases see ESM3108.

For the purposes of the legislation, an unincorporated association is included within the definition of company.

It is important to bear in mind that even if the conditions outlined above are satisfied, the legislation will only apply if the general conditions as set out at ESM3031are also satisfied.