ESM10033A - Basic principles: off-payroll working from 6 April 2021: statutory payments

Where a worker is an employee of their own intermediary, including those who are also deemed employees of the fee-payer/deemed employer under the off-payroll working rules, they will be eligible for statutory payments where the normal qualifying conditions (including the requisite earnings level) are met. Eligibility for statutory payments arises from the worker’s direct employment with their intermediary and not from the deemed employment with the fee-payer/deemed employer. The off-payroll working rules do not interfere with the nature of a worker’s employment relationship with their intermediary despite the fee-payer/deemed employer being the secondary contributor for the deemed employment.

Statutory payments which a worker may be entitled to claim from their intermediary include Statutory Maternity, Paternity, Adoption, Parental Bereavement and Shared Parental Pay. As the employer, the intermediary can reclaim at least 92% of these statutory payments from the Government. If an intermediary is a small employer, it can claim 100% of these payments plus 3% compensation from the Government.

Employees of intermediaries are also entitled to Statutory Sick Pay (SSP) on the same terms as any other employee. Generally, employers cannot reclaim the cost of SSP from the Government. As the intermediary is the employer it cannot reclaim the cost of these payments.

Where an intermediary makes a payment to its employee, amounts previously treated as deemed employment earnings count as qualifying earnings for statutory payments purposes. Such earnings are protected from being subject to tax/NICs again by the provisions within Chapter 10, Part 2 ITEPA 2003 and the equivalent NICs regulations (see ESM10024). As the earnings paid by the worker’s intermediary are liable to class 1 NICs they can give rise to statutory payment entitlement. The worker is protected from paying NICs again when the earnings are taken from the intermediary. This protection does not remove the possibility of statutory payment entitlement as the earnings are liable to NICs in the first instance.

To be eligible to claim statutory payments the worker must report these non-taxable and non-NICable payments of earnings through the payroll of their intermediary. If the worker takes all remuneration via dividends instead of receiving earnings reported through a payroll, they will not be entitled to statutory payments. Therefore, the intermediary must make payments to the worker and report it on a Full Payment Submission (FPS) in order to be eligible for statutory payments.

As relief is due for tax and NICs to protect workers from double taxation, any payment amounts previously subject to PAYE deductions under the off-payroll working rules should be made as a non-taxable and non-NICable payment in the payroll of the worker’s intermediary. The mechanism used to report non-taxable and non-NICable payments to HMRC is box 58A on the Real Time Information FPS. Making the payment as non-taxable and non-NICable which will consequently lead to amounts showing in box 58A does not amount to a declaration to HMRC that the payment was never liable to tax or NICs, only that those deductions have not been taken in the period the amounts are paid. HMRC has updated its Data Items Guide description of box 58A to reflect that it will be used to record payments previously subject to tax and NICs under the off-payroll working rules.

If a worker has payments from multiple off-payroll engagements in a period, these payments can be combined and reported as one amount in box 58A on a FPS.

In summary, a worker’s eligibility to statutory payments arises through their employment with their intermediary. To be eligible the intermediary must have made payments to the worker through payroll which will be non-taxable and non-NICable. These payments must be reported to HMRC and as a consequence of the payments being non-taxable and non-NICable, they will show in box 58A on a FPS. If the earnings reported are at least the lower earnings level and the worker meets all other qualifying conditions, they will be entitled to statutory payments.

EXAMPLE
  1. A client agreed to pay a worker’s intermediary £1,000 for the services of that worker. The engagement is within the Chapter 10, Part 2 ITEPA 2003 rules. The £1,000 is not earnings from employment as the client is not the employer of the worker. However, under Chapter 10, Part 2 ITEPA 2003, the pay is treated as earnings from employment for tax purposes only. The client, as the deemed employer, deducts Tax/NICs before making a payment to the intermediary. Following these deductions, the client pays £700 to the worker’s intermediary in July 2021.
  2. The intermediary, as the worker’s employer, pays the worker £700 through payroll in August 2021. The £700 is paid as a non-taxable and non-NICable payment as the amount is protected from double taxation. The payment is consequently reported in box 58A on the FPS because tax and NICs have not been deducted in the pay period.
  3. If the worker wishes to claim statutory payments in the future, this payment, along with any other payments of this nature, will count as qualifying earnings for statutory payment purposes. This is because it was a payment of earnings from the worker’s actual employer, the intermediary as the worker’s employer is the secondary contributor and the payment was NICable but for the protection from double taxation.

A worker may receive some earnings that have been subject to deductions under the off-payroll working rules and some that have not. When establishing statutory payment entitlement all earnings in relevant periods are considered, so both off-payroll working income and non-off-payroll working income should be included in those entitlement considerations.

Statutory payments entitlement

Statutory payments legislation specifies that entitlement to statutory payments is based on an individual’s earnings along with other qualifying conditions. The legislation further specifies that ‘earnings’ are the individual’s gross earnings. This includes any remuneration or profit derived from the individual’s employment.

To be entitled to statutory payments an individual has to have gross average weekly earnings of at least the lower earnings limit and meet other relevant conditions. The level of statutory payments can also be based on a percentage of an individual’s earnings. The use of the gross figure of earnings ensures the correct level of entitlement. In addition, with the exception of SSP, employers can recover statutory payments paid. Small employers can recover 100% of any payments plus 3% compensation. Use of the gross figure of earnings ensures the correct level of recovery.

Although actual payroll payments paid by the intermediary to the worker are the net amount, it is the gross amount is derived from the employment with the intermediary. Therefore, the net amount paid to the worker will need to be ‘grossed up’ to ensure the correct levels of entitlement and recovery.

If a worker has multiple off-payroll engagements, as amounts in a period can be combined to be reported as one figure in the FPS, this single figure can be grossed up. If a worker also has salary payments which are paid gross, so not subject to Chapter 10, Part 2 ITEPA 2003, these can be combined with the grossed-up figure to give a total figure on which to calculate statutory payment entitlement.

If amounts of statutory payments were paid based on net figures, the difference that would have been paid under gross figures can potentially still be paid if within statutory payment time limits.

Grossing up

The net amount can be grossed up in any way that is just and reasonable. Examples of ways this could be achieved include (but are not limited to):

  • If a payslip or some other payment documentation has been provided either use the gross pay figure shown or add back the tax and employee NICs shown to the net pay figure.
  • If payment documentation is not provided:
    • Ask the deemed employer, the person who operated PAYE, what the gross pay figure is or what deductions have been made under PAYE and add these back to the net pay figure.
    • The contract for the provision of the worker’s services which the intermediary has with the fee-payer will stipulate an agreed level of remuneration for those services. That figure is likely to be before any consideration for deductions of tax and NICs. This amount less any agency fees or expenses can be used as the gross amount.

Once the gross pay has been identified, this amount should be used when considering statutory payment entitlements.