ESM10028 - off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2021): basic principles: how to calculate the deemed direct payment

Section 61Q Chapter 10, Part 2 ITEPA 2003

Regulation 17 Social Security Contributions (Intermediaries) Regulations 2000

The legislation treats the deemed employer as making to the worker a payment which is to be treated as earnings from an employment, called a deemed direct payment. This deemed direct payment is treated as made at the same time as any chain payment (see ESM10027). The payment is taxable in the same way as employment income, and PAYE and NICs should be operated on it.

The deemed direct payment is calculated as follows:

Step One

Identify the amount or value of the chain payment made by the person who is treated as making the deemed direct payment and deduct any amounts in respect of VAT.

Step Two

Deduct from the amount resulting from step one the direct cost to the intermediary of materials used, or to be used, in the performance of the services.

Step Three (optional by the person treated as making the deemed direct payment)

Deduct from the amount resulting from step two the amount as represents expenses met by the intermediary that, under ITEPA 2003, would have been deductible from the taxable earnings of the employment under section 10 ITEPA 2003 in accordance with section 327(3) to (5) ITEPA 2003 if:

• the worker had been employed by the client, and
• the expenses had been met by the worker out of those earnings.

NOTE – the off-payroll working rules do not change any existing rules on expenses.

Step Four

If the amount resulting from step three is nil or negative there is no deemed direct payment, otherwise the resulting amount represents the deemed direct payment.