HMRC updates its guidance on calculating deemed payments where there is off-payroll working (IR35) in the public sector

HMRC has updated its guidance on paying a worker who provides their services through an intermediary and is subject to the off-payroll working rules.

The update to the guidance adds an explanation on how to calculate the deemed direct payment, which is the amount paid to the worker that should be treated as earnings for the purposes of the off-payroll rules.

To calculate the deemed direct payment the fee-payer must:

  • work out the value of the payment to the worker’s intermediary, having deducted any VAT due;
  • deduct the direct costs of materials that have or will be used in providing their services; and
  • deduct expenses met by the intermediary that would have been deductible from taxable earnings if the worker was employed.

The resulting amount is the deemed direct payment. If it is nil or negative there is no deemed direct payment.

The fee-payer then needs to deduct tax and NIC, as appropriate, from the deemed direct payment, and also pay employer Class 1 NIC due in respect of these engagements.

The pay and deductions need to be reported to HMRC under RTI using a full payment submission (FPS), like for normal workers who are on payroll.

However, unlike a real worker, the following payroll fields do not apply to a worker who is engaged through their own company, namely

  • student loan repayments (the worker has to account for these themselves in their own tax returns or company payrolls – the fee-payer should ignore any notifications received in relation to student loan repayments for these workers);
  • statutory payments (entitlement to which comes through the worker’s primary employment with their own company); and
  • workplace pension payments (as the worker is not subject to auto-enrolment into the fee-payer’s workplace pension).
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