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HMRC internal manual

Employment Status Manual

HM Revenue & Customs
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How to work out the deemed payment: Step One

Paragraph 7 Schedule 12 Finance Act 2000/Section 54(1) ITEPA 2003

Regulation 7(1) SI 2000 No.727

The starting point for working out the deemed payment is the amount received by the intermediary in the tax year in respect of relevant engagements. This may take the form of cash payments or non-cash benefits received by the intermediary.

From this amount a flat rate 5% allowance is deducted. This is to cover other unspecified expenses, such as running costs of the intermediary. This deduction is made automatically without reference to any amounts met by the intermediary and is only given in working out the deemed payment. It is not taken into account in working out the intermediary’s profits.

If the intermediary is within the Construction Industry Scheme, use the gross amount before deduction of tax under that scheme.


Where the intermediary is registered for VAT, use the net income exclusive of any VAT. Where the intermediary has joined the VAT flat rate scheme, which was introduced on 24 April 2002, it is the VAT-exclusive amount (i.e. the gross amount less the amount of flat rate VAT payable) that should be used.


A service company supplies the services of a worker to a client for the 6-month period ended 31 March 2003. It is agreed that it is an engagement to which the service company legislation applies. The service company invoices the client for fees of £40,000 + VAT (17.5%) £7,000. The service company has joined the VAT flat rate scheme and pays VAT on 14.5% of £47,000 i.e. £6,815. The amount to be included at Step 1 is £47,000 less £6,815 i.e. £40,185.

See ESM3266 for guidance on what is meant by “received”.