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HMRC internal manual

Employment Status Manual

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

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

Regulation 7(1) SI 2000 No.727

A deduction is given at Step Seven for:

  • any amount received by the worker from the intermediary in respect of which the worker is already chargeable to income tax as employment income and subject to Class 1 and/or Class 1A NICs in the year; and
  • for which no deduction has been given at Step Three

This may be:

  • a payment of salary/wages, or
  • from 6 April 2002, approved mileage allowance payments (EIM31205) and passenger payments (EIM31400); or
  • a benefit in kind.

The aim of the legislation is to tax income of the intermediary, which would have been the worker’s personal income if engaged directly, as employment income and to subject it to Class 1 NICs. If that income has already been paid to the worker in such a form then this aim has been achieved. Therefore, if the amount at this point is nil or a negative amount then no deemed payment arises and there is no additional tax and Class 1 NICs liability. So there is no need to move on to Steps Eight and Nine.

No relief is given at Step Seven if a deduction has already been given at Step Three. For example, an expense qualifying for a deduction at Step Three is chargeable to tax as employment income and then subject to a deduction under Part 5 Chapter 2 ITEPA 2003 reducing the amount on which tax is calculated to nil. Although the original amount was chargeable to tax as employment income no further deduction is due at Step Seven and the only relief due is the amount given at Step Three.

Where an amount is credited to the director’s loan account, by way of wages or salary, and the director is free to draw on that amount at that date, then the date of the credit is the date the payment is treated as made and also the date that the payment is treated as received.