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HMRC internal manual

Employment Status Manual

Basic principles: how to work out the deemed payment: step seven - relief for expenses met by the worker - example

Periods up to 5 April 2002

The expenses allowed at Step Three are those met by the intermediary in the year. “Met” means only those expenses incurred and paid for by the intermediary. It does not include expenses that the worker meets personally and for which he or she is then reimbursed by the intermediary.

However, where a worker meets an expense and is then reimbursed by the client company it is likely that a deduction will be available at Step Seven. This will be the case provided the amount reimbursed is chargeable to tax as employment income, although relief may be given under Section 338 ITEPA 2003, or some other section.


Ms H provides engineering services through her personal service company, H services Ltd, to a car manufacturer for 18 months in circumstances where the engagement is caught by the rules. She is a director of her company. Ms H has to provide her services at the client’s premises and travels from her home each day by train. She buys a season ticket costing £1,000 in respect of her travel and is subsequently reimbursed by the client company for this amount.

Ms H is chargeable to tax on the amount of £1,000. She is also permitted a deduction under Section 338 of the same amount in assessing those emoluments. No deduction is given at Step Three since the intermediary did not meet the expense. However, a deduction is given at Step Seven since the payment is chargeable to income tax under the employment income rules, although a deduction is given under Section 338.

The overall effect is to achieve the same result as if the company had met the expense.

Periods on or after 6 April 2002

A deduction is given at Step Three for certain expenses met by the worker and reimbursed by the intermediary - see ESM8185.