MTT32020 - Calculating top-up amounts: Substance based income exclusion: Eligible payroll costs
The eligible payroll costs of a member consist of costs incurred by the member in connection with the employment of an employee.
To be an eligible payroll cost:
- the employee concerned must be employed by the member which incurred the cost
- the employee must be an individual, and
- the cost must not be an excluded cost.
The cost is included in the eligible payroll costs for the period in which it was incurred.
Eligible payroll costs include, but are not limited to:
- salaries, wages, and other expenditure of direct benefit to an employee, such as health insurance or pension contributions.
- payroll and other employment taxes.
- social security contributions.
The eligible payroll cost will be reduced if the employee spends 50% or less of their time in the employer’s territory (see MTT32050).
This is set out in section 196 of Finance (No.2) Act 2023.
Meaning of 'employee'
For the purpose of determining the eligible payroll costs, a person is an employee of a member if they are either:
- regarded as an employee under the law of that member’s territory, or
- participating in the ordinary operating activities of the member (including on a part-time basis).
A person will be considered to meet the second condition if they are an independent contractor participating in the ordinary operating activities of the group, are under the direction and control of the group, and are not an employee of a corporate contractor.
Excluded costs
The following costs are specifically excluded from the allowable payroll costs:
- costs taken into account when calculating the underlying profits of a permanent establishment of the member (see MTT32040).
- costs taken into account in a carrying value used to calculate an eligible tangible asset amount.
- costs that are core or ancillary international shipping costs (see MTT45600+).
Where the member has an ancillary international shipping profit cap adjustment of more than nil for the period, only the eligible proportion of ancillary international shipping costs are to be excluded for the SBIE. See MTT32070 for more details.
Amendment in Finance Act 2025
Section 196 was amended by FA25. This guidance page reflects the current version of the legislation. Consult FA25 for legislation applicable to prior periods if the retrospection election does not apply (see MTT09490).