ESM10020 - off-payroll working legislation: Chapter 10, ITEPA 2003 (from 6 April 2021): basic principles: application of Income Taxes Act and Social Security Contributions and Benefits Act 1992 to deemed employments

Section 61R Chapter 10 Part 2 ITEPA 2003

The Income Tax Acts apply in relation to the deemed direct payment as if the worker were employed by the person treated as making the deemed direct payment, and the services were performed, or to be performed, by the worker in the course of performing the duties of that employment.

The deemed direct payment is treated as taxable earnings from the employment for the purposes of securing that any deductions under Chapters 2 to 6 of Part 5 ITEPA 2003, do not exceed the deemed direct payment.

Section 232 ITEPA 2003 gives effect to mileage allowance relief. This relief is only available if earnings are taxable earnings. For the purposes of section 232 ITEPA 2003, the deemed direct payment is treated as taxable earnings from the employment. For guidance on mileage allowance relief, please see EIM31330.

If the situation was:

  • the client employed the worker,
  • the worker performed the services in the course of that employment, and
  • the deemed direct payment was a payment by the client of earnings from that employment,

and any combination of the following factors would apply:

  • the worker being resident or domiciled outside the UK, or meeting the non-residence requirements of section 26A ITEPA 2003,
  • the client being resident outside, or not resident in, the UK,
  • the services being provided outside the UK,

then the worker is not chargeable to tax, or chargeable to an extent dictated by the factors, in respect of the deemed direct payment. The off-payroll working rules can only apply where a UK liability to tax and/or NICs arises in the same manner as it applies to regular employees. In other words, if the worker would not be subject to tax due to those factors if they were a direct employee, they will not be subject to tax under the off-payroll working rules. A client does not need to consider whether Chapter 10 / Part 2 rules apply where there is no liability to tax and NICs in the UK.

Where the intermediary is a partnership or unincorporated association, the deemed direct payment is not treated as income of the partnership or association. Under the rules the payment is treated as personal income of the worker, and tax and NICs will have already been deducted.

Where a medium or large-sized non-public sector client is based wholly overseas, so there is no UK connection as it is not UK resident and does not have a UK permanent establishment, then the rules at Chapter 10, Part 2 ITEPA 2003 do not apply (see ESM10006). The worker’s intermediary should consider whether Chapter 8, Part 2 ITEPA 2003 applies for these engagements.

Regulation 18 Social Security Contributions (Intermediaries) Regulations 2000

This Regulation applies where deemed direct earnings are treated as having been paid in any tax year, under Regulation 14 of The Social Security (Intermediaries) Regulations 2000.

For the purposes of Parts 1 to 5 Social Security Contributions and Benefits Act:

  • the amount of any deemed direct earnings (DDE) calculated under Regulation 17 shall be treated as remuneration derived from an employed earner’s employment,
  • the worker shall be treated, in relation to the DDE, as employed in employed earners employment by the person treated as making the payment of DDE,
  • the services were performed, or are to be performed, by the worker in the course of performing the duties of that employment, and
  • the person treated as making the payment of DDE shall be treated as the secondary contributor in relation to the DDE.

The DDE are treated as paid by reference to the date payment is made by the deemed employer rather than the date the work was done or the invoice date. The payment date will therefore determine the earnings period.