Calculating the deemed employment payment

By Tolley
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The following Employment Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Calculating the deemed employment payment
  • The calculation generally
  • The steps
  • The calculation result
  • Payment to the individual

Many people supply their services to clients, not directly as a self-employed person, but via a company. The tax and NICs advantages of this way of working are significant. See the Personal service companies overview guidance note.

Since April 2000, anti-avoidance legislation, known as ‘IR35’, catches individuals who would be employees or office holders of their clients if they were engaged directly rather than using a service company. See the Establishing employment status guidance note.

The intention of IR35 is to collect roughly the same tax and NICs as would have been paid if an individual was employed directly by his client. The obligation to calculate and pay the tax and NICs rests with the service company and not the client.

The diagram below shows the interaction of the IR35 calculation with a personal service company structure:

Separate legislation exists for tax and NICs. For tax, the calculation is known as the ‘deemed employment payment’ calculation, for NICs it is the ‘attributable earnings’ calculation.

ITEPA 2003, ss 48–61; SSCBA 1992, s 4A; SI 2000/727; SI 1978/1689, Sch 1

In most cases the calculations are identical, but not invariably. Individuals in certain types of work are categorised by NIC regulations as being ‘employed earners’ and may be subject to special rules. The list of categorised workers was historically wider than at present ― now the list only includes certain cleaners, agency workers, certain people working for their spouse or civil partner and certain ministers of religion. Special NIC rules also apply to cross-border workers ― see the Particular NIC points guidance note.

From 6 April 2017 onwards, the IR35 rules do not apply where the client is a public sector body ― see the Service companies and the public sector guidance note.

The calculation generally

If one or more engagements in a tax year are