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TAXguide 07/21: Off-payroll working: payroll and practical issues

Technical release

Published: 23 Mar 2021 Update History

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Questions posed by ICAEW Tax Faculty exploring the impact of changes from 6 April 2021 to the off-payroll working regime and what they mean in practice, in particular for payroll, with answers based on HMRC's guidance.

This TAXguide (which replaces TAXguide 08/20) comprises questions originally put to HMRC in December 2019 exploring the impact of changes from 6 April 2021 to the off-payroll working regime on practical matters, such as payroll processes, expenses and the status determination statement.

Pending a direct response from HMRC, ICAEW's Tax Faculty has inserted extracts from HMRC guidance. The guide is based on our current understanding of the prospective measures and may be subject to change. 

The guide is split into two sections. The first covers payments and status determination statements across the transition, and the second section looks at ongoing compliance across a range of scenarios, including:

  • Employment status 
  • NIC period 
  • Coding notices for employers
  • Allowable expenses
  • Correcting mistakes in payroll
  • Corporation tax computation for the personal service company
  • Contractor's self assessment return

The transition


1. We had asked HMRC to consider issuing a statement that the new off-payrolling rules do not apply where contracts / work has ceased prior to the commencement date for the new rules. Will HMRC do this? If not, please explain how the new legislation allows withholding of PAYE when there is no SDS that can be issued for the period of the contract.


ESM10001A confirms that the new rules apply only where the work is performed and the payment is made on or after 6 April 2021.

Status determination statement (SDS)

2. Please confirm that a valid SDS can be issued before 6.4.21, ie, please confirm that a determination of employment status which applies to a period after 5.4.21 and fulfils the requirements for an SDS, eg, states the reasons for the conclusion and reasonable care is taken, will be accepted by HMRC as a valid SDS if it was given to the contractor and agency before 6.4.21.


Yes. ESM10013 says:

Status determinations made prior to 6 April 2021 can be a valid SDS for engagements carrying on after 6 April 2021, providing they meet the legislative requirements.

ESM10015 also covers what happens if a disagreement is raised on one of those determinations prior to implementation on 6 April, see Q5.

3. If a contract started pre-6.4.21, do public sector clients need to issue SDSs effective from 6.4.21, to ensure inter alia that the obligation for withholding continues to be with fee payers?

4. If the answer to the previous question is yes, is this the case even if the client was compliant with the new rules before 6.4.21, eg, gave a notification of employment status to both the worker and any party with whom the client contracted which contained reasons and reasonable care was taken?


Yes. In the previous version of this TAXguide we said:

“HMRC has issued a factsheet to the public sector that explains that they have to issue SDSs. The factsheet suggests that you have to issue an SDS whether in or outside of IR35. This does not appear to match the legislation but appears to be HMRC’s view of best practice.
“ICAEW comment: This may have GDPR issues particularly when issuing to an agency and containing details of the contractor being in business on their own account. “.

HMRC’s guidance at ESM10001 which relates to public authorities as defined by section 61L prior to 6 April 2021 says:

Commencement: For public authorities that were within the scope of Chapter 10, Part 2 ITEPA 2003 prior to 6 April 2021, the new rules will apply to payments made on or after 6 April 2021 regardless of when work was carried out (see those listed in a) to f) in ESM10005).

HMRC has confirmed to us that notifications of status determination issued before 6 April 2021 for contracts that span 5-6 April 2021 that comply with the law as amended in FA 2020 will be treated as valid SDSs.

5. If an SDS is issued before the start date of the new rules, ie 6.4.21, and the contractor makes representations to the client that they disagree under new s61T(1), does the 45 day period in new s61T(2) by which the employer must confirm the original or issue a new SDS always run from 6.4.21 if the contractor’s representations were received before 6.4.21?


Yes. ESM10015 contains the following guidance:

SDS issued before 6 April 2021:

If a SDS is issued prior to 6 April 2021, a worker or deemed employer can make representations before 6 April 2021 if they wish. If a client receives representations against an SDS prior to 6 April 2021, the legislation treats the client as receiving those representations on 6 April 2021. The effect of this is that the 45-day time limit the client has to respond to representations will begin on 6 April 2021 if the client receives representations before that date.

Ongoing compliance

Employment status

6. Please confirm that someone working through a PSC cannot also be a limb (b) worker and therefore does not have employment rights (eg, paid holidays and be within auto-enrolment).


Deemed employers are not obliged to auto enrol or offer pension schemes to deemed employees

Deemed employers should not deduct student or post graduate loans repayments. Contractors will make repayments through SA.

Deemed employers are not liable for statutory payments. The right to receive statutory payments for contractors who are deemed employees arises via their actual employments with their personal service companies.

The new rules determine employment status for tax, they do not decide employment status for rights.
See HMRC’s guidance in ESM10019. The guidance does not mention limb (b) workers as limb (b) relates to employment rights and not to tax.

7. Are there circumstances in which a contractor working through a PSC can also be a limb (b) worker for the same contract?


Please see answer to previous question.

Status determination statement (SDS)

8. Please clarify whether an SDS needs to be issued by non-small clients in all cases, ie, regardless of whether or not the contractor’s employment status as determined by client is that of deemed employee. We believe that it will be best practice for clients to do so to minimise the possibility of becoming liable to account for PAYE because of new 61N(5) inserted by para 12(3) unless there are GDPR implications when issuing to an agency.


An SDS should be issued by non-small clients in all cases in order to avoid the possible consequences of not doing so if the contractor is subsequently found to be a deemed employee. HMRC guidance ESM10012 says that:

Once the client has determined whether the off-payroll working rules apply to an engagement, it should communicate that decision in the form of a Status Determination Statement (‘SDS’) - (see ESM10013 for what constitutes a valid SDS) to the worker and any third party it contracts with. There is an incentive for the client to pass the SDS to the worker and any third party it contracts with because failure to pass on the SDS will result in the client being responsible for the deduction of tax and NICs, and paying these, along with any apprenticeship levy, to HMRC if due.

The incentive, legislative vires for which is in s61N(5) ITEPA 2003, is illustrated by Examples 3 and 4 in ESM10012.

Notification where client is small

9. The draft Finance Bill legislation does not oblige ‘small’ clients to tell contractors that they are small. We acknowledge that the government wishes to minimise the compliance burden on small clients but the absence of such notification will create uncertainty for contractors who will not know whether the obligation to determine employment status, and if appropriate account for PAYE, lies with them or with another party. Given that this impacts on the contractor’s ability to know how to comply with their tax obligations, and is likely to have a knock-on effect on compliance, we recommend that the contractor should have the right to be told by the client whether it is small.


The government in its review of the implementation of the off-payrolling rules published on 27.2.20 (which we contributed to) confirmed that it would:
…place a legal obligation on clients to respond to a request for information about their size from the agency or worker, and update the legislation to address concerns raised over the rules as they apply to off-shore companies.

Finance Act 2020 inserted a new s60H ITEPA 2003 which imposes a duty on a client to confirm its size in response to a request by a contractor or the person with whom the client has contracted. See HMRC’s ESM10011A for more details, including on the 45 day time limit imposed on the client, and ESM10011B for a suggested template for confirming size that clients can adapt.

Client-led disagreement process

10. In order to give a degree of certainty to clients, we recommend that that there needs to be a deadline by which contractors can raise disagreements with their clients under new s61T. We suggest a deadline of 45 days from when the SDS is issued or whenever circumstances change to make a valid SDS no longer accurate. This should not preclude a contractor from completing their SA and their PSC’s tax returns on a basis different from the SDS.


Finance Act 2020 inserted a replacement s61T ITEPA 2003 which, as part of the obligation on a client to have a disagreements process, imposes a duty on the client to respond within 45 days of receiving notice of a disagreement from a contractor or deemed employer. See HMRC’s ESM10015 for more details, including that:

Representations can be made at any time. However, the client is only required to respond to representations made before the final chain payment is made in relation to that engagement. The client is not obliged to respond to representations made outside of this timeframe as there are no further chain payments on which the client could operate PAYE.


Starter checklist

11. Should deemed employees be asked to complete and return a starter checklist, like actual employees?


Yes they should. ESM10019 provides the following instructions:

  • workers should be added to payroll like any other starter would be. They should be issued a starter checklist so they can provide the deemed employer with the information it needs to run payroll. The student loan portion of starter checklist is not required to be completed as the deemed employer is not responsible for collecting student loans from a deemed employee.
  • the declaration the worker chooses on the starter checklist will determine their tax code. Usually this will be declaration C as the worker will already have a primary employment with their intermediary. This would mean that tax code BR is allocated by the deemed employer. 0T week 1 / month 1 would apply if the worker does not return the starter checklist. HMRC can then issue another tax code if it is required.
  • workers will mostly be employed by their own intermediary and so wouldn’t provide deemed employers with a P45. In the unlikely event the worker does provide a valid P45, this should be used.
  • devolved powers that affect tax codes would apply as normal, for example Scottish rates of income tax. For HMRC to determine if a Welsh or Scottish tax regime identifier is appropriate, the worker should put their home address and not their business address.
  • when running payroll, the RTI flag (sometimes referred to as the off-payroll worker marker) should be set to show the individual is an off-payroll worker.

ESM10019 also includes other helpful advice including on providing pay advices showing deductions and forms P45 and P60, paying apprenticeship levy and the treatment of benefits-in-kind.

12. Can HMRC amend the starter checklist to include a question regarding deemed employees and make it clear that the student and postgraduate loan questions do not apply to deemed employees?


We (and other employer representatives) have drawn this lacuna (and others) on the starter checklist to the attention of HMRC but we are not aware currently of any proposal to tailor it for deemed employees. 

Code numbers for starters

13. We should welcome confirmation that deemed employees within the off-payrolling rules who make no declaration on the starter checklist should be treated in the same way as actual employees and so deemed employers should initially apply code 0T(M1/W1) under option C undeclared. Or if not, why not?


As noted in the answer to Q11, as regards code numbers, deemed employee starters are treated in exactly the same way as actual employee starters, so if a deemed employee does not return a completed declaration to the deemed employer, the deemed employer should apply code number 0T week 1 / month 1.

Coding notices for employers

14. Please confirm that as currently in the public sector, HMRC will continue to send deemed employers coding notices forms P6 and P9 for deemed employees, and will not be differentiating between off-payroll workers and normal employees.


As regards notices of coding, deemed employee starters are treated in exactly the same way as actual employees. Please see answer to Q11 for more detail.

NIC period

15. The law provides that, in payroll, tax must be accounted for when the payment is made whereas NIC should be accounted for based on the period in respect of which the payment is made. For example, where an invoice covers two months, two sets of NIC thresholds should be applied but only one tax threshold.

Please confirm whether the above statement is correct, or, if not, how fee payers should deal with this in payroll.


The foregoing statement as regards NIC is oversimplistic. Just as for actual employees, the NIC earnings period to be applied depends on a number of factors including length of pay periods, regularity of payments, whether a payment is mistimed, etc. HMRC’s guidance to software developers on NIC stated:

NICs should be calculated based upon the full deemed direct earnings payment. See ESM10028. Normal NICs rates and thresholds apply.

See also ESM10019 which says:

For both tax and NICs the legislation treats the payment to the worker as made at the same time as the payment made by the deemed employer. It is the time at which the payment is actually made, not the invoice date, which determines the date the earnings are treated as made. It will be this date used within the payroll. Usual rules around NICs periods apply regarding regular and irregular payments. For example, if payments are made each month, the period is monthly even if in one period two invoices are paid. The NICs period is when the money is made available, so this will also be based on when the payment is made. For more detailed guidance on earnings periods for NICs, please see NIM08000

NIM08000: Earnings periods (updated 17.3.21) provides further explanations including examples.

16. For example, how will this work in respect of a payment made:

a) after 5 April 2021 in respect of the month of March 2021?

b) on 31 July in respect of an invoice covering 1 May to 31 July 2021


a) ESM10001A confirms that the new rules apply only where the work is performed other than for a public authority and the payment is made on or after 6 April 2021.

b) As noted in the answer to the previous question, more information is needed to calculate the NIC on this payment; see NIM08000: Earnings periods, which provides explanations including examples.

Off-payroll worker marker (OPWM)

17. Will the OPWM need to be ticked in every FPS? If set up in error can it be removed in next FPS? And if not set up in time, can it be included in next month’s FPS?


As noted in ESM10019, the OPWM will need to be ticked to show that the contractor is a deemed employee. Regarding ticking the OPWM every time, we assume that once set it will continue until unticked, but this will depend on the payroll software.

In respect of the OPWM being set in error, HMRC’s guidance to software developers stated that:

Corrections should be made through normal payroll correction procedures and an updated FPS sent to HMRC, so the correct information is held. Once corrections have been made the necessary amounts can be reimbursed to the worker.

18. We have been told by HMRC’s Operational Excellence team that the OPWM once attached to an employment cannot be removed in HMRC’s NPS, and that the only solution is for the deemed employer to resign the employee where the OPW marker has been set in error. Please confirm whether this is correct.


HMRC has subsequently confirmed that OPW markers set in error can be now be removed from NPS. See next question for how to reverse in payroll.

19. How can a deemed employer which has incorrectly treated a contractor as a deemed employee:

a) first, reverse the entries and,

b) secondly, recover the overpaid tax and NIC?


(a) The procedure is explained in ESM10015 and ESM10019. It is the same as for an actual employee, so rectify in the payroll as follows:

  • for the current tax year, in the next full payment submission (FPS) set the year to date values to zero and insert a leaving date that is the same as the start date, and
  • for (a) previous tax year(s), as above but in (a) corrective YTD FPS.

When making a correction, note that, as explained in ESM10015 and ESM10019:

Simply deleting a worker’s record in payroll would not correct the position as corrective information must be submitted to HMRC through RTI in order to change HMRC’s records.

(b) The above amendments should generate a refund in the usual way. In practice, PAYE repayments are best obtained by reducing the next payment of PAYE due.

20. And how will HMRC reconcile its records, which may wrongly include a deemed employment in NPS, with the contractor’s SA tax return when submitted, which will include no employment page for the deemed employment set up in error?


Provided the adjustments described in the answer to the previous question have been processed by HMRC, NPS should show nil in respect of the deemed employment so should reconcile with the SA tax return containing no employment page for the deemed employment. 


21. Does a deemed employee have the right to receive a payslip (absent a provision in the contract to this effect)? We understand that employment rights legislation, which obliges employers to provide payslips to employees, does not apply to deemed employments so a deemed employee has no right to receive a payslip. However, we consider that best practice demands a payslip be issued to help contractors see what they have been paid and what deductions have been made, even though deemed employees being able to access online payroll systems to download electronic payslips could potentially create security issues.


HMRC guidance to software developers states:

There is no requirement for a payslip to be issued. In practice under the 2017 public sector reform payslips or remittance notices are provided by the deemed employer containing payment and deduction information.

HMRC guidance ESM10019 says:

Deemed employees may be given a payslip showing the amounts of the deductions. Alternatively, these can be shown in a different way such as including them on a remittance notice.

Given the legal position summarised above, we recommend that the procedures outlined in HMRC’s guidance, ie, provide a payslip or a remittance advice showing the fee payer’s name and HMRC reference and gross payment and itemising the deductions to reconcile to net amount paid, should be adopted as best practice. Similarly provide end of year form P60. This will make it easier for PSCs to compile their accounts and run payroll and where applicable calculate statutory payments, and contractors to complete their SA tax returns.

Statutory payments for contractors who are deemed employees

22. Please clarify how a contactor all of whose earnings are from deemed employments can become entitled to statutory payments (SP). As a matter of policy is it intended that deemed employees should be treated the same as actual employees for this purpose? We believe that they should be but that the law will need to be changed to achieve this.


The guidance to software developers explained that:

To be eligible to claim statutory payments the worker must be paid a salary through their intermediary as set out in ESM10030.

The worker’s intermediary will need to report it on an FPS using box 58A if the worker wishes to claim statutory payments. (Note, the worker’s intermediary does not need to set the RTI flag. The deemed employer will have already set the RTI flag on its payroll).’ (ICAEW note: ‘RTI flag’ means off-payroll worker marker.)

In brief terms, when calculating average weekly earnings, or, currently, owing to covid-19, normal weekly earnings, for statutory payment purposes, use

  • the payment dates and
  • amounts

of salary received by the contractor from their PSC on which NIC has been accounted for.

This will comprise:

  • salary paid by the contactor’s personal service company (PSC) in the normal way, ie salary paid to contractor by PSC on which tax and NIC has been paid via the PSC’s payroll (so declared in PSC’s RTI full payment submission (FPS) as having been subjected to tax and NIC in the PSC payroll)


  • tax- and NIC-free salary representing onward paid OPW deemed employment income, ie salary paid to the contractor by PSC on which neither tax nor NIC has been accounted for in the PSC’s payroll (so declared in PSC’s RTI FPS as a tax- and NIC-free payment (in Box 58A)) but which represents onward paid deemed employment income that has been subjected to tax and NIC in the payroll of the fee payer/deemed employer received by the PSC on or before the date on which it was onward paid to the contractor. We recommend that the PSC keeps an ongoing tally so that amounts of tax- and NIC-free onward salary payments representing OPW fees can be related back to deemed employment income.

The tax and NIC-free amounts onward paid have to be grossed up by reference to the tax and NIC accounted for on the deemed employment income. HMRC’s guidance at ESM10033A says that HMRC permits any just and reasonable method to be adopted to ascertain gross NIC-able earnings for SP purposes, so, for example, either add back to the net amount received the tax and employee NIC shown on the payslip or remittance advice received from the fee payer, or in the absence of such a document, ask the fee payer how much tax and employee NIC was deducted in arriving at the net amount and add that back to arrive at gross for SP, or calculate the gross by basing it on the amount of remuneration agreed under the contract reduced by agency fees/expenses.

We would note that the tax- and NIC-free payments box on the PSC’s full payments submission (Box 58A) can be used to report other payments as well onward paid deemed employment income so could lead to mismatches in HMRC’s records. Also using contracted amounts or amounts billed to calculate the gross NI-able salary raises the question of timing, i.e, how to match fees cited in contracts and billed and deemed employment income received from fee payers with sums onward paid as salary by the PSC.

For further details, please see ESM10033A and ESM10033B.


Allowable expenses

23. The public sector rules have provision for adjusting the deemed payment to allow for the cost of materials, and expenses that would have been deductible if there had been direct employment (s61Q ITEPA - see below).

24. If the contractor (via the PSC/agency) charges expenses to the end client, who pays them (or the contractor arranges for them to be paid direct by the end client), then logic would suggest that they should be excluded from PAYE. However, the legislation says, at Step 3, to deduct ‘so much of that amount as represents expenses met by the intermediary’ (emphasis added).

25. Please confirm that in this situation the expenses are deductible from taxable pay by the deemed employer because they have been met by the intermediary or the engager.


Expenses that would have been deductible against earnings if there had been actual employment are deductible in the deemed payroll calculation: see HMRC’s guidance at ESM10028, which highlights that OPW does not change any rules on expenses, and for an example calculation see ESM10029.

Non-deductible expenses

26. Please confirm what returns should be made to HMRC by the end client and fee payers when a contractor’s PSC is, via the fee-payer, paid expenses which would not be deductible if paid to an actual employee, for example commuting to a normal place of work.


HMRC’s guidance at ESM10019 says:

  • benefits in kind are treated in the same way under the off-payroll working rules as they would with direct employments. Benefits in kind can be reported on a form P11D or eligible benefits can be processed through payroll. Class 1A NICs should be calculated and paid to HMRC by being included in form P11D(b).

Non-deductible expenses can be processed through the deemed employment payroll as a deduction from net pay, see ESM10028 and ESM10029, but could equally be paid direct from clients’ finance departments at the same time as any VAT on the PSC’s invoice.

27. For an actual employee, the cost of a non-deductible train ticket paid for direct by the employee’s employer would be entered on form P11D in Box M with Class 1A NIC due, and the cost of a non-deductible train ticket paid for by the employee and reimbursed by the employer would be entered on form P11D in Box N (expenses) and liable to Class 1 NIC. As a contractor who is a deemed employee is not an employee, will form P11D be in point for deemed employer/ees, and, if so, under what statutory vires? If not, will HMRC expect deemed employers to account for tax and NIC, and if so, how?


Please see answer to previous question.

Correcting mistakes in payroll

Change to SDS

28. If following an appeal an SDS that said PAYE withholding was due is replaced with an SDS that says no withholding is due, what is the procedure for reversing the situation and reclaiming the tax and both the employer and employee NIC paid? Please explain the procedure when the SDS was issued and re-issued in:

a) the same tax year, and

b) different tax years.


The procedure is explained in the answer to Q19 and in ESM10015 and ESM10019. It the same as for an actual employee, so rectify in the payroll as follows:

(a) for the current tax year, in the next full payment submission (FPS) set the year to date values to zero and insert a leaving date that is the same as the start date, and

(b) for (a) previous tax year(s), as above but in (a) corrective YTD FPS(s).

When making a correction, note that, as explained in ESM10015 and ESM10019:

Simply deleting a worker’s record in payroll would not correct the position as corrective information must be submitted to HMRC through RTI in order to change HMRC’s records.

PAYE not accounted for

29. What happens if an SDS is received by the fee payer too late to implement in payroll as the payment has already been made gross to PSC? Should the fee payer make an adjustment in the following pay period? What if the final payment for the contract has already been made?


Responsibility for the PAYE liability rests where the SDS was when the payment was made to the deemed employee. The fee payer should therefore not make an adjustment in the following pay period.

Even if paid gross, the deemed employee can claim credit for the PAYE tax and employee NIC that should have been deducted (provided they were not a party to fraudulent non- or under-deduction).

30. Please confirm whether regulation 80 of the PAYE Regulations (Income Tax (PAYE) Regulations 2003) applies to a deemed employer / fee payer in the same way as to an employer, and if so, that the deemed employee can claim credit for the income tax determined to be payable under PAYE?


Yes, as confirmed in ESM10020, the position for deemed employers is the same as for actual employers so reg 80 et al will apply. HMRC’s guidance on reg 80 determinations is at PAYE54000. See also HMRC’s guidance on the transfer of debt provisions in ESM10031.

Even if paid gross, the deemed employee can claim credit for the PAYE tax and employee NIC that should have been deducted (provided they were not a party to fraudulent non- or under-deduction).

Getting it wrong – who bears the cost?

31. Where a client has issued to the worker an SDS saying that the worker is not a deemed employee and which complies with the requirements of new s61NA(1)(b) and (2) (reasons provided and reasonable care taken), who bears the cost of:

a) employer NIC,

b) employee NIC,

c) employee income tax, and

d) apprenticeship levy,

if the SDS is proved later on to be wrong?


The deemed employer will be liable in the first instance. If the deemed employer has failed, then HMRC will probably invoke the transfer of debt provisions.

ESM10014 says (but note the caveat at the beginning):

If a client is not already the deemed employer, and has taken reasonable care and fulfilled its other duties (such as issuing the SDS), the responsibility for deducting tax and NICs and paying these to HMRC will not rest with it. This is the case even if it turns out that the client got the decision wrong.

32. Does the answer differ depending on whether the client contracted directly with the contractor’s PSC or did so via an agency?


No, the answer is the same as in Q31.

33. Our understanding is that the liability will pass to the client, even where the client has done all in its power to comply, including using CEST to determine the status. This is unjust when the client has done all that it reasonably could have to comply, and in such cases the liability should fall on the worker or their PSC. If as a matter of policy the liability falls to the client, it is inconsistent with what happens when a PSC has to make a deemed employment calculation in respect of services supplied to ‘small’ private sector clients in which case the PSC accounts to HMRC for the employer NIC.


HMRC will pursue the deemed employer first. If necessary the recovery provisions will be invoked. The liability will be that of the client if everyone else has failed.
ESM10031 and ESM10032 and other pages of HMRC’s guidance touch on when the client becomes liable. The client will become liable in situations including recovery of debt (but only if the debt cannot be recovered from another party in the chain first) or it fails in one of its obligations. The client however does have the protection of reasonable care as highlighted in the answers to Q31 and Q32 above.

Unaccounted for PAYE – who is responsible?

34. Who is responsible for tax and NIC – including employer NIC and apprenticeship levy – if the deemed employer / fee-payer ceases trading:

a) having withheld PAYE from an invoice but not remitted it to HMRC?

b) having made payment gross to PSC having ignored an SDS saying that the contractor is a deemed employee?

We consider that this the liability for tax and employee NIC should not transfer to the client if they have undertaken due diligence.


HMRC will take similar steps to recover unpaid /underpaid PAYE from a deemed employer as from an actual employer. If the fee payer has failed, then as explained in HMRC’s guidance ESM10031:

Where HMRC cannot recover (for example, because the company has dissolved) or has attempted to recover a deemed employer PAYE debt and is satisfied that there is no realistic prospect of recovering the tax, NICs and apprenticeship levy liabilities due from the deemed employer (see ESM10017) within a reasonable period of time, HMRC may decide to recover the debt from a relevant person.

Relevant persons are:

  • the first agency in the chain (the agency the client contracts with and the second highest person in the contractual chain – referred to as ‘agency 1’), and
  • the client (the highest person in the contractual chain).

Further clarification can be found in ESM10031

Tax and NIC not deducted by an employer can be recovered from an employee if HMRC can show that the employee received the payment knowing that the employer had wilfully failed to deduct the tax and NIC (reg 72 PAYE Regs 2003 and reg 86 SSCR 2001).

The personal service company

Corporation tax (CT) computation

35. The accounts of a PSC are normally drawn up under the accruals basis. This means that fee invoices are shown in the accounts in the period in which rendered and are taxed that financial year. If an amount subject to the off-payrolling rules has been invoiced but is not paid and therefore is not subjected to PAYE until the following year, please explain:

a) in which year should the invoice amount be shown in the accounts, and

b) we suggest by way of an example, how the timing difference should be handled in the corporation tax computation of the PSC.


The PSC should account in its financial statements on the accruals basis for the fee note, ie when rendered, at which time a debtor would be set up in anticipation of receiving the matching deemed employment income, and reversed when the cash representing deemed employment income is received.

For tax, the fee note, the deemed employment income and associated PAYE deductions and the onward payment by the PSC to the contractor of either a salary or dividend are disregarded for all tax purposes in the PSC. Instead the contractor is subjected to income tax and Class 1 NIC on the deemed employment income when it is paid to the PSC by the fee payer, as if it had been paid to the contractor as actual salary.

When preparing the corporation tax (CT) computations of the PSC, treat the fee note as not taxable. When the deemed employment income is received by the PSC, treat it as not subject to CT and the tax and NIC withheld as not allowable. When the onward payment is made to the contractor, again treat the payment as not CT deductible. If the onward payment is by way of salary, report it in the PSC’s payroll RTI full payment submission as a payment to employee not subject to tax or Class 1 NIC (Box 58A of the full payment submission). If the onward payment is by way of dividend, ensure that Companies Act requirements are followed, just like for any dividend paid in the normal way.

HMRC’s guidance in ESM10035 provides further explanation about PSC accounting and CT computations.

36. Please confirm that the legislation in s141A Corporation Taxes Act 2009 gives a CT deduction for the gross amount of the chain payment received, ie, the amount invoiced, by the PSC whether or not it is onward paid to the contractor, not just the fees net of PAYE.


Yes it does, the legislation refers to the amount used at Step 1 as the starting point for calculating the amount of the deemed direct payment. See the explanation and examples in HMRC’s guidance ESM10035.

Contractor’s SA return

37. HMRC has previously told us that the contractor’s SA return should show an entry for amounts relating to off-payroll working fee income onward paid to them as tax and NIC-free salary by their PSC. If this is indeed the correct approach, please explain:

a) how such amounts will be distinguished on the SA return and in HMRC’s records from actual salary paid to the individual (eg where the PSC has undertaken work which is outside the IR35/off payrolling rules), and

b) how HMRC will prevent double taxation of the off-payroll working employment income shown on the two employment pages.


ESM10030 states that:

The worker will only show taxable pay on their self-assessment return on the employment pages under the deemed employment with the deemed employer. They do not have to also record on their SA return the non-taxable remuneration (or non-taxable dividends) from their PSC onward paid in respect of deemed employment income.

About the author

Steve Wade is Associate Partner of EY People Advisory Services and Chairman of ICAEW Employment Taxes & National Insurance Contributions Committee. He has over 30 years experience of advising multinational companies and their employees on the employment and personal tax implications of international assignments.

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