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HMRC internal manual

Employment Status Manual

Introduction: the position for payments covered by Chapter 8 ITEPA 2003

Income Tax (Earnings and Pensions) Act 2003, Part 2, Chapter 8

Finance Act 2000, Schedule 12

Social Security Contributions (Intermediaries) Regulations 2000

Social Security Contributions (Intermediaries) (Northern Ireland) Regulations 2000

Before 6 April 2000 an individual worker could disguise their employment status by providing their services to a client through an intermediary, either directly or via another party such as an employment agency. These arrangements could avoid or reduce the worker’s personal tax and National Insurance liabilities. In addition, other parties in the contractual chain could also avoid or reduce any liability to employers’ NICs. The intermediaries legislation was introduced from 6 April 2000 to counter this avoidance. It treats income received by an intermediary for a worker’s services to a client as the earnings of that worker which is subject to PAYE and Class 1 NICs.

Certain conditions must be met for the legislation to apply. One aspect concerns the worker’s relationship with the client and we need to consider what that would be if the intermediary did not exist. In this respect, the legislation applies if the relationship would be that of employer and employee if the worker had been engaged directly by the client. The status tests (ESM0500 onwards) are used to decide whether a notional contract of service (employment) is created. If so, and the necessary conditions of liability (ESM8040) are also met, the intermediary is treated as making a payment to the worker based on the income for the worker’s services from all relevant engagements. This is called the “deemed employment payment” for tax and the “worker’s attributable earnings” for NICs. It is calculated in a certain way and is usually treated as paid on 5 April of the tax year the services are provided (ESM8130 onwards).

The intermediary is responsible for operating PAYE on this payment which is chargeable to tax as employment income and subject to Class 1 NICs. It should be returned on the worker’s self-assessment tax return. Where the intermediary is a partnership Class 2 and Class 4 NICs may be due in addition to any Class 1 NICs. Guidance on how to account for this payment is at ESM8245 onwards with information about specific aspects of the tax/NICs rules at ESM8300 onwards.