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HMRC internal manual

Employment Status Manual

Basic principles: how to calculate the deemed payment

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

Regulation 7(1) SI 2000 No.727

The legislation treats the intermediary as having made a payment, called a deemed payment, to the worker, which is taxable as employment income and subject to Class 1 NICs. The deemed payment is treated as earnings from an employment with the intermediary and PAYE should be operated on it.

This deemed payment is based upon the income from relevant engagements less certain deductions. It is calculated as follows:

Step One    The starting point for working out the deemed payment is the amount received by the intermediary in the tax year in respect of engagements to which the legislation applies. From this amount a flat rate 5% is deducted, to cover other unspecified expenses, such as running costs of the intermediary (see ESM8175).

Step Two    Add any payments or benefits received by the worker, or his family, in respect of the relevant engagements from anyone other than the intermediary which are not otherwise chargeable to income tax as employment income but would be if the worker was employed by the client (see ESM8180).

Step Three    Deduct any expenses met by the intermediary, 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 (see ESM8185).

Step Four    Deduct any capital allowances in respect of expenditure incurred by the intermediary that the worker could have claimed if employed by the client and he or she had incurred the expenditure (see ESM8190).

Step Five    Deduct any contributions to an approved pension scheme by the company for the benefit of the worker (see ESM8195).

Step Six    Deduct any employer’s Class 1 and Class 1A NICs paid by the intermediary for that year in respect of salary or benefits in kind provided to the worker during the year (see ESM8200).

Step Seven    Deduct the amount of any salary and benefits in kind received by the worker from the intermediary which are already taxable as employment income. This does not include anything for which a deduction has already been given at Step Three (see ESM8205).

If the figure you reach at Step Seven is nil or a negative number, then there is no deemed payment and no further tax or NIC are payable. If the result is positive, move on to Step Eight

Step Eight    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 Seven (see ESM8220).

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