ESM10003A - off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2021): basic principles: non-material interest in a company intermediary

Section 610, Part 2 Chapter 10 ITEPA 2003

Note - Chapter 10 should not apply where an individual performs services for a client and that individual is already engaged under a contract of employment and their earnings are subject to PAYE by another party, other than that individual’s intermediary, in that supply chain. Similarly, if an individual is treated as holding an employment with the agency under the Agency Legislation (s44 ITEPA 2003) and the income is subject to PAYE, Chapter 10 should not apply. For example, if a worker is engaged under a contract of employment by an agency and that agency operates PAYE on all of the worker’s earnings, Chapter 10 should not be applied where that worker performs services for a client.

When considering whether a company is an intermediary that is subject to Chapter 10, there is a requirement to understand whether the company:

1. is an associated company of the client; and
2. the worker has any interest in that company.

When considering the interest the worker has in the intermediary, there are two different sets of conditions. The first is whether the worker has a material interest, the second set may apply where the worker has some interest which is not enough to be a material interest. If the worker holds no interest in the intermediary, then it will not be an intermediary that is subject to Chapter 10.

If the company is not an associated company of the client and the worker has a material interest (see ESM10003 for further information), then the company is considered to be an intermediary of the worker that is subject to Chapter 10 and the conditions explained below do not need to be considered.

If the company is not an associated company of the client and worker does not have a material interest, the company will be an intermediary that is subject to Chapter 10 if all the following conditions are met:

1. The worker has a non-material interest in the intermediary company;
2. The worker has received, has rights entitling them to receive or expects to receive, a chain payment from the intermediary in respect of services provided by the worker to the client; and
3. The chain payment does not or will not wholly constitute employment income of the worker

NOTE – In practice, knowing the amount of interest the worker holds in the intermediary before addressing this issue, will give an understanding as to whether these conditions need to be considered and if they do, which conditions to consider.

The worker or the worker’s intermediary should provide this information under section 61U of Part 2, ITEPA 2003 (See ESM10022 for further information).

More detail on each of the conditions above is set out below.

1 - The worker has a non-material interest in the intermediary

This condition will be satisfied where the worker holds an interest in the company, but that interest is 5% or less.

The worker is treated as having a non-material interest in the intermediary if:

• the worker alone, or with one or more associates of the worker, or
• an associate of the worker, with or without other associates of the worker

has a non-material interest in the intermediary.

A non-material interest is:

• beneficial ownership of, or the ability to control, directly or through the medium of other companies or by any other indirect means, 5% or less of the ordinary share capital of the company,
• possession of, or entitlement to acquire, rights entitling the holder to receive 5% or less of any distributions that may be made by the company, or
• where the company is a close company, possession of, or entitlement to acquire, rights that would in the event of the winding up of the company, or in any other circumstances, entitle the holder to receive 5% or less of the assets that would then be available for distribution among the participators.

‘Participator’ has the meaning given by section 454 Corporation Tax Act 2010.

Where the worker has a non-material interest

EXAMPLE

Margaret owns 2% of the ordinary share capital in Blue Ltd. Margaret also has rights which entitle her to up to an extra 2% of distributions made by the company in addition to her shareholding. As Margaret has an interest of up to 4% in Blue Ltd, which is 5% or less, she has a non-material interest. As Margaret has a non-material interest, the further conditions must be considered.

Where the worker has no interest

If the worker holds no interest in the capital or rights to income of the intermediary company, the off-payroll working rules will not apply. For example, if a worker is directly engaged by an umbrella company or agency, and that worker holds no interest in the capital or rights to income of those companies, then the off-payroll working rules will not apply.

EXAMPLE

Joanne is employed by Umbrella Ltd. Joanne does not hold any interest in Umbrella Ltd. Umbrella Ltd allocates Joanne to do some work for one of their clients, Customer Ltd. As Joanne does not hold any interest in Umbrella Ltd, neither of the interest conditions are met and Chapter 10 does not apply to the engagement with Joanne. However, please see the obligation on the worker and the worker’s intermediary to provide this information under section 61U of Part 2, ITEPA 2003 (See ESM10022).

2 - The worker has received, has rights entitling them to receive or expects to receive, a chain payment from the intermediary in respect of services provided by the worker to the client

If ANY of the following apply, this condition will be satisfied:

• The intermediary has already made a chain payment to the worker
• The worker has rights which entitle, or in any circumstances would entitle, them to receive a chain payment from the intermediary, or
• The worker expects they will receive a chain payment from the intermediary.

A chain payment is defined at section 61N(2) ITEPA 2003 as:

‘a payment, or money’s worth or any other benefit, that can reasonably be taken to be for the worker’s services to the client’

Note - This definition includes payments made by the intermediary to the worker.

Where payment relates to services provided

EXAMPLE

Bookstore Ltd engages with Agency Ltd for the services of Clara. Clara has a non-material interest in Agency Ltd. Clara performs services for Bookstore Ltd and Agency Ltd invoices for those services. Agency Ltd confirm to Bookstore Ltd that Clara will be paid with that money for the services she provided. Agency Ltd provides this information under the provisions of section 61U ITEPA 2003 (see ESM10022 for further information). As the money that will be paid to Clara is for the services she provided to Bookstore Ltd, it is a chain payment. As Clara will receive this chain payment, this condition is met.

Where the payment does not relate to services provided

If the payment to the worker does not relate to the services provided to the client, then this condition will not be met. For example, a worker may acquire a shareholding as a genuine investment, which is separate from any services that worker provides. If the worker receives a dividend solely because of that shareholding, this would not be a chain payment because the payment is not a consequence of the services provided to the client. For example, a distribution from an employee share scheme would not satisfy this condition if payments from that scheme relate solely to the shareholding and not to work done for a client.

EXAMPLE

Robin is employed by Consultancy Plc. Robin has a non-material interest in Consultancy Plc because Robin is part of Consultancy Plc’s employee share scheme which the company operates to incentivise its workforce. Consultancy Plc send Robin to work at the sites of their clients. Robin is paid a dividend simply because of his share ownership in Consultancy Plc. The dividend is not paid in relation to Robin’s work for Consultancy Plc’s clients. As the dividend cannot be reasonably viewed as being for Robin’ services to a client, then the dividend is not a chain payment.

3 - The chain payment does not or will not wholly constitute employment income of the worker

If a worker receives a chain payment (see definition above), and any part of this payment is paid by way of something other than employment income, this condition will be met. For example, if the intermediary makes a chain payment to a worker wholly as a dividend, this condition is met. If the intermediary makes a chain payment in part by salary, and the rest as a dividend, this condition will also be met because it was not wholly treated as employment income.

Employment income is anything which ITEPA 2003 treats as employment income, including, but not limited to, cash, benefits in kind and vouchers.

Payment does not wholly constitute employment income

EXAMPLE

Technology Ltd engages with Consultancy Ltd to provide the services of Ivo. Ivo has a non-material interest in Consultancy Ltd. When Consultancy Ltd receives payment for those services, it will pay Ivo a small proportion as salary and the rest as dividends. As Ivo will receive the chain payment partly by dividends, that chain payment will not be wholly treated as employment income so this condition is met.

Payment does wholly constitute employment income

If the intermediary treats, or will treat, the whole of the chain payment as employment income, then this condition will not be satisfied, and Chapter 10 will not apply. For example, if a worker operates through an agency or umbrella company and that entity treats all payments made to the worker wholly as employment income, then this condition will not be satisfied and Chapter 10 will not apply.

EXAMPLE

Umbrella Ltd engages Alice under a contract of employment. Umbrella Ltd sends Alice to various clients to perform services as and when required. Those clients pay Umbrella Ltd for Alice’s services and Umbrella Ltd pays Alice a weekly salary. The whole of Alice’s salary from Umbrella Ltd is subject to PAYE and therefore wholly treated as employment income. As such this condition is not met and Chapter 10 will not apply.

Example considering all conditions

Stephen holds 5% of the ordinary share capital of Oak Ltd. There are 19 other shareholders who also each own 5% of the ordinary share capital of Oak Ltd. Oak Ltd sends Stephen to Events Ltd to perform services for them over the summer. Oak Ltd invoices Events Ltd and makes a chain payment to Stephen as a dividend and does not subject any of the payment to PAYE. Stephen has an interest in the intermediary company that is non-material because it is 5% or less. He has received a chain payment from the intermediary as a consequence of the services he provided to the client. The chain payment Stephen received was not wholly treated as employment income. As all the conditions explained above are met, Oak Ltd is an intermediary subject to Chapter 10.

Targeted Anti-Avoidance Rule (TAAR)

The TAAR may apply where an arrangement is entered into and the main purpose, or one of the main purposes, for entering into the arrangement was to secure a tax advantage by circumventing these conditions or those in ESM10003 to avoid the off-payroll working rules(see ESM10003B for further information).