HMRC internal manual

Employment Status Manual

ESM3535 - Managed Service Companies (MSC): Calculating the Deemed Employment Payment (DEP)


The notional sum paid to the worker (the deemed employment payment) represents both the sum on which PAYE and Class 1 NICs is payable, and the secondary (the employer’s) NICs on that amount. Additionally, part of the payment may not be subject to PAYE or NICs if it represents expenses allowable under the Taxes Acts.

In order therefore to arrive at the sum on which PAYE and NICs is due, it is necessary to undertake a deemed employment calculation.

How to calculate the deemed employment payment

Step One

The starting point for working out the deemed payment is the amount received by the worker in respect of services provided by the worker via the MSC and which are not earnings received by the worker directly from the MSC.

Step Two

Deduct any expenses met by the worker that would have been deductible from the taxable earnings from the employment, which could have been claimed as expenses against income tax if the worker had been an employee of the client and had paid for them himself.

Note, the expenses met by the worker includes, where the MSC is a partnership and the worker is a member of the partnership, expenses met by the worker for and on behalf of the partnership.

Note: If the figure you reach at Step Two is nil or a negative amount, then there is no deemed employment. If the result is positive, move on to Step Three.

Step Three

Assume the amount at Step Two represents an amount together with Employers National Insurance on it. Deduct the amount of the Employer’s NICs on the deemed payment. It is therefore necessary to calculate the amount, which, together with the employer’s NICs on it, equals the result of Step Two.

Step Four

The amount that you are left with is the deemed payment on which tax and NICs are payable.

Additional Information

Expenses met by the MSC

Step Two of the deemed employment calculation provides for a deduction to be made in working out the deemed payment for certain expenses met by the MSC in the year. These are expenses for which the worker could have claimed a deduction against his or her taxable earnings from employment if:

  • he or she had been employed by the client to provide the relevant services, and
  • had met those expenses out of those earnings.

It is important to note that the normal employment income rules apply when working out whether a particular expense can be deducted at Step Two. These rules are very rigorous and many expenses met by the MSC will not satisfy them, see EIM31600.

It is particularly important to note that when calculating allowable expenses, the worker is treated as being employed by the MSC to provide the relevant services. The practical consequence of this is that expenses (particularly but not exclusively travelling and subsistence expenses) which simply put the worker in a position to undertake the duties with the particular end client are not allowable and cannot be deducted when arriving at the sum liable to PAYE and NICs.

Expenses relating to use of a vehicle

A deduction is allowed at Step 2 of the deemed employment calculation for mileage allowance relief if the following applies:

  • the worker would have been entitled to relief in respect of the use of the vehicle had they been employed by the client to provide the services, and
  • the company was not a company vehicle, and
  • the vehicle used is either provided by the MSC for the worker or, where the MSC is a partnership and the worker is a member of the partnership, provided by the worker for the purposes of the partnership.

Calculations Prior to 6 August 2007

As explained above, the amount produced by Step 2 of the Deemed Employment Payment calculation is taken to include both the Deemed Employment Payment and the Employer’s NICs due on it. Once the NICs legislation is enacted, NICs will be due to HMRC with the Deemed Employment Payment, being subject to both Income Tax and NICs.

Until the NICs legislation supporting the tax legislation is introduced, there is no requirement to subject the Deemed Employment Payment to employee’s Class 1 NICs. This means that the Deemed Employment Payment is only subject to Income Tax.

Until 6 August 2007, there is also no assumed amount of employer’s NICs. Consequently, any sum prior to that date classed as an assumed amount of employer’s NICs is not allowable as a deduction from the company’s chargeable profits.

Workers should be aware that if the company does not pay earnings liable to Class 1 NICs, and therefore they pay no NICs, this may affect their entitlement to state benefits.