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 under Schedule E/as employment income and subject to Class 1 NICs. The deemed payment is treated as an emolument of/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 ESM3160). |
| 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 under Schedule E/as employment income but would be if the worker were employed by the client (see ESM3161). |
| 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 ESM3162). |
| 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 ESM3163). |
| Step Five | Deduct any contributions to an approved pension scheme by the company for the benefit of the worker (see ESM3164). |
| 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 ESM3165). |
| Step Seven | Deduct the amount of any salary and benefits in kind received by the worker from the intermediary which are already taxable under Schedule E/as employment income. This does not include anything for which a deduction has already been given at Step Three (see ESM3166). |
| 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 ESM3169). |
| Step Nine | The amount that you are left with is the deemed payment on which tax and NICs are payable |
ESM3146 – How to calculate the deemed payment: step by step guide
The following table provides a step by step guide for working out a deemed payment and secondary Class 1 NICs on that payment:
| Step One | Enter in this box the amount of all payments and benefits received by the intermediary in that tax year in respect of the relevant engagement | 1 |
| Step One | Enter in this box 5% of the amount in box 1 | 2 |
| Step Two | Enter in this box the amount of any payments and benefits received directly by the worker and not otherwise chargeable to tax under Schedule E/as employment income in respect of the relevant engagement | 3 |
| Step Three | Enter in this box the amount of 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. | 4 |
| Step Four | Enter in this box the amount of 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 | 5 |
| Step Five | Enter in this box the amount of any contributions to an approved pension scheme by the company for the benefit of the worker | 6 |
| Step Six | Enter in this box the amount of 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 | 7 |
| Step Seven | Enter in this box the amount of any salary and benefits in kind received by the worker from the intermediary which are already taxable under Schedule E/as employment income (this does not include anything for which a deduction has already been given at Step Three). | 8 |
| Add together the figures in boxes 1 and 3 and enter the sum in this box | 9 | |
| Add together the figures in boxes 2, 4, 5, 6, 7, and 8 and enter the sum in this box | 10 | |
| Deduct the figures in box 10 from the figures in box 9 and enter the answer in this box. If the answer is nil or a negative number there is no deemed payment. Where the answer is a positive number you will need to apportion the amount between the deemed payment and employer’s Class 1 NICs using the stencil at ESM3171. | 11 | |
| Enter the amount of employer’s Class 1 NICs in this box | 12 | |
| Step Eight | Deduct the figure in box 12 from the figure in box 11 and enter the amount you are left with in this box. This amount is the deemed payment | 13 |
Source: HMRC website
