ESM10021 - off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2021): basic principles: deductions from chain payments

Section 61S Chapter 10, Part 2 ITEPA 2003

Regulation 19 Social Security Contributions (Intermediaries) Regulations 2000

The guidance in this page applies if, as a result of the application of the off-payroll working rules, a person (such as an agency in the contractual chain or the client) is treated as making a deemed direct payment and is required to pay income tax and NICs to HMRC.

For the purposes of this page, where we refer to ‘the underlying chain payment’ we mean the gross chain payment value or amount which is used as the starting point by the deemed employer when working out the value of the deemed direct payment (so the amount described at ESM10028 – Step 1). In other words, the value or amount of the chain payment before any deductions have been made for materials or allowable expenses when working out the deemed direct payment amount.

The person may deduct from the underlying chain payment an amount which is equal to the amount payable to HMRC. For example, if the worker’s intermediary invoices an agency (who is the deemed employer) £10,000 in relation to work subject to the off-payroll working rules, then the agency is permitted to deduct the liabilities on behalf of the worker before paying the amount owed to the worker’s intermediary. The intermediary will receive an amount that is £10,000 less the deductions payable to HMRC. This is so the agency does not personally bear the costs of the worker’s liability and still fulfills its obligations in relation to the contract with the worker’s intermediary.

Contractually reduced rates

Where contracts have been negotiated to reduce the contractual rate payable to take into account amounts of tax and NICs that will become payable, this reduction in rate must be considered when making the deemed payment to ensure that the worker is not suffering tax and NICs twice.

EXAMPLE

The worker’s intermediary contracts with a large-sized client to provide the services of the worker. The market value of the worker’s services is £1,000. The client concludes the off-payroll working rules will apply to the engagement and as the deemed employer, the cost of tax and primary NICs will be roughly £200. There are no VAT, expenses or material costs involved and the example does not take into account agency fees.

The client negotiates a contractual rate of £900 with the worker’s intermediary to take into account some of this cost, so the worker is bearing £100 of the cost upfront. When the client works out the deemed direct payment amount it increases the contractual rate of £900 by the £100 reductions to start the calculation with £1,000. The deemed direct payment amount is what it would have been if the burden of some of the PAYE cost had not been passed onto the intermediary up front.

The tax and NICs amounts due from the deemed payment are finally calculated at £200. When the deemed employer pays the worker’s intermediary it cannot take £200 off the contractual rate of £900. As £100 has been borne by the intermediary already, the deemed employer can only take £100 (£200 less £100 already suffered) from the contractual rate of £900. The effect being that the £800 paid equates to the £1,000 market rate less £200 tax and NICs.

Longer contractual chains

Where a person in the chain other than the intermediary receives a chain payment from which an amount has been deducted in relation to PAYE because of these rules (so where the deemed employer is not directly above the worker’s intermediary) that person may deduct the same amount from the chain payment made by them to the next person in the chain.

EXAMPLE

A large-sized client contracts with Agency 1 for the services of a worker. Agency 1 subcontracts with Rita Ltd who provide Rita to perform services for the client. Agency 1 is offshore and so not a qualifying person, so the client is the deemed employer. Agency fees are not considered in this example.

Agency 1 invoices the client £2,500. The client operates PAYE on £2,500 which calculates tax and employee NICs to be £600. The client pays Agency 1 £1,900 as it can reduce the payment so the cost of PAYE is passed down the chain.

Rita Ltd invoices Agency 1 £1,500. Agency 1 can also deduct the cost of PAYE already paid so they don’t suffer the cost. When Agency 1 pays Rita Ltd it can pay £1,500 less the £600 PAYE, this will be £900. Then, ultimately, Rita will be the person who has borne the cost of tax and primary NICs because she will be able to draw £900 from Rita Ltd in relation to this engagement.

The guidance on this page does not apply in cases where the fraudulent information provisions apply (see ESM10023). Where the fraudulent information provisions apply, the services-provider (the worker) is responsible for making deductions and paying these to HMRC, rather than other parties in the contractual chain.