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HMRC internal manual

Employment Status Manual

Basic principles: how to work out the deemed payment: step two

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

Regulation 7(1) SI 2000 No.727

Any amounts received directly by the worker in the year, in respect of the relevant engagements, are brought into the deemed payment at Step Two if:

  • they are not chargeable to income tax as employment income, and
  • would be if the worker were employed by the client.

This step is included to cover any items paid direct to the worker by the client rather than to the intermediary. Where the intermediary is a company, it is likely that most items paid direct to the worker would be in respect of the worker’s employment and so already be chargeable to tax as employment income and subject to Class 1 NICs. If so, then no further liability will arise at Step Two.

This step is more likely to apply where the intermediary is a partnership, since it is unlikely that any amounts paid by the partnership to the worker will be chargeable to tax as employment income. For NICs purposes, such payments are not subject to Class 1 NICs liability.