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HMRC internal manual

Employment Status Manual

Introduction: overview of the legislation

The intermediaries legislation (contained in Chapter 8 Income Tax (Earnings and Pensions) Act 2003) was introduced in April 2000 (see ESM 8015) and applies in the following circumstances;

  • an individual (the worker) provides their services to a client via an intermediary which can be;

    • a company

    • a partnership

    • an unincorporated association, or

    • another individual.

With effect from 6 April 2017 new legislation was introduced at Chapter 10 Income Tax (Earnings and Pensions) Act 2003 which applies to payments made to intermediaries who provide the services of a worker to a client who is a public authority (as defined at ESM9020). Further guidance on the treatment of these arrangements can be found at ESM9000+. Where the client is a public authority the intermediaries legislation at Chapter 8 does not apply and this section of ESM guidance should not be followed. 

Typically, the intermediary is the worker’s own personal service company (PSC) and consists of two Directors or one Director and the Company Secretary (who are often husband and wife). There are normally no other employees and usually only one worker is providing their services to the client.

The intermediary earns all, or almost all, of its income from supplying the worker’s services in circumstances that would be employment if the worker was engaged directly by the client. However, there is no contract between the worker and the client. Instead, there is a contract between the intermediary and the client (either directly or via an agency) and the intermediary is paid to supply the worker’s services. The worker receives (or is entitled to receive) payments or benefits from the intermediary.

These arrangements do not come within the provisions of the Agency legislation (ESM2001) and prior to April 2000 provided an opportunity to disguise what would otherwise be an employment relationship with the client to;

  • reduce or avoid the individual’s liability to pay tax and primary Class 1 NICs, and

  • reduce or avoid employers’ liability to NICs.


Subsequent legislation introduced at Chapter 8, Part 2 Income Tax (Earnings and Pensions) Act (ITEPA) 2003 made the intermediary responsible for the application of PAYE / NICs (ESM 8080 - ESM8280) where the relationship between worker and client would otherwise be one of employment other than for the existence of the intermediary.  


The effect of the legislation

The intermediaries legislation, at Chapter 8 ITEPA 2003, requires the underlying nature of a worker’s relationship with a client to be considered. A crucial factor is whether the worker would have been an employee of the client if they had not been engaged via an intermediary.

When the intermediaries legislation applies the income of the intermediary is regarded as the worker’s earnings from the employment and the intermediary is treated as making a “deemed employment payment” (ESM8730) to the worker which is chargeable to tax as employment income and subject to Class 1 NICs (ESM8245).

From 6 April 2017 onwards, where the intermediary is paid for engagements undertaken with clients who are not public authorities as per ESM9020, there is no change to this treatment.

The intermediaries legislation at chapter 8 ITEPA 2003 does not apply to managed service companies (MSCs) and some composite service companies. An intermediary who may be a MSC must consider whether the legislation at Chapter 9 ITEPA 2003 applies before considering the intermediaries legislation at chapter 8 ITEPA 2003.

The legislation at chapters 8 ITEPA 2003 impacts different areas of taxation and must be taken into account in various situations, such as when dealing with self-assessment or corporation tax returns. Guidance about how these cases are handled, and where HMRC staff can obtain advice, is available at ESM8005. Guidance about how external customers can get advice is at ESM8010.