Contract lawyer (UK) Roger Sinclair Egos Ltd IR35

Income Tax (Earnings and Pensions) Act 2003
2003 Chapter 1 - continued
PART 2, EMPLOYMENT INCOME: CHARGE TO TAX - continued



	CHAPTER 8
	APPLICATION OF PROVISIONS TO WORKERS UNDER ARRANGEMENTS MADE BY INTERMEDIARIES (see note 1)
	Application of this Chapter
48 (see note 2)	Scope of this Chapter
	(1) This Chapter has effect with respect to the provision of services through an intermediary.
	(2) Nothing in this Chapter-
	(a) affects the operation of Chapter 7 of this Part, or
	(b) applies to payments subject to deduction of tax under section 555 of ICTA (payments to non-resident entertainers and sportsmen).
49 (see note 3)	Engagements to which this Chapter applies
	(1) This Chapter applies where-
	(a) an individual ("the worker") personally performs, or is under an obligation personally to perform, services for the purposes of a business carried on by another person ("the client"),
	(b) the services are provided not under a contract directly between the client and the worker but under arrangements involving a third party ("the intermediary"), and
	(c) the circumstances are such that, if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client.
	(2) In subsection (1)(a) "business" includes any activity carried on-
	(a) by a government or public or local authority (in the United Kingdom or elsewhere), or
	(b) by a body corporate, unincorporated body or partnership.
	(3) The reference in subsection (1)(b) to a "third party" includes a partnership or unincorporated body of which the worker is a member.
	(4) The circumstances referred to in subsection (1)(c) include the terms on which the services are provided, having regard to the terms of the contracts forming part of the arrangements under which the services are provided.
	(5) In this Chapter "engagement to which this Chapter applies" means any such provision of services as is mentioned in subsection (1).
50 (see note 4)	Worker treated as receiving earnings from employment
	(1) If, in the case of an engagement to which this Chapter applies, in any tax year-
	(a) the conditions specified in section 51, 52 or 53 are met in relation to the intermediary, and
	(b) the worker, or an associate of the worker-
	(i) receives from the intermediary, directly or indirectly, a payment or benefit that is not employment income, or
	(ii) has rights which entitle, or which in any circumstances would entitle, the worker or associate to receive from the intermediary, directly or indirectly, any such payment or benefit,
	the intermediary is treated as making to the worker, and the worker is treated as receiving, in that year a payment which is to be treated as earnings from an employment ("the deemed employment payment").
	(2) A single payment is treated as made in respect of all engagements in relation to which the intermediary is treated as making a payment to the worker in the tax year.
	(3) The deemed employment payment is treated as made at the end of the tax year, unless section 57 applies (earlier date of deemed payment in certain cases).
	(4) In this Chapter "the relevant engagements", in relation to a deemed employment payment, means the engagements mentioned in subsection (2).
51 (see note 5)	Conditions of liability where intermediary is a company
	(1) Where the intermediary is a company the conditions are that the intermediary is not an associated company of the client that falls within subsection (2) and either-
	(a) the worker has a material interest in the intermediary, or
	(b) the payment or benefit mentioned in section 50(1)(b)-
	(i) is received or receivable by the worker directly from the intermediary, and
	(ii) can reasonably be taken to represent remuneration for services provided by the worker to the client.
(see note 6)	(2) An associated company of the client falls within this subsection if it is such a company by reason of the intermediary and the client being under the control-
	(a) of the worker, or
	(b) of the worker and other persons.
	(3) A worker is treated as having a material interest in a company if-
	(a) the worker, alone or with one or more associates of the worker, or
	(b) an associate of the worker, with or without other such associates,
	has a material interest in the company.
	(4) For this purpose a material interest means-
	(a) beneficial ownership of, or the ability to control, directly or through the medium of other companies or by any other indirect means, more than 5% of the ordinary share capital of the company; or
	(b) possession of, or entitlement to acquire, rights entitling the holder to receive more than 5% of any distributions that may be made by the company; or
	(c) where the company is a close company, possession of, or entitlement to acquire, rights that would in the event of the winding up of the company, or in any other circumstances, entitle the holder to receive more than 5% of the assets that would then be available for distribution among the participators.
	(5) In subsection (4)(c) "participator" has the meaning given by section 417(1) of ICTA.
52 (see note 7)	Conditions of liability where intermediary is a partnership
	(1) Where the intermediary is a partnership the conditions are as follows.
	(2) In relation to any payment or benefit received or receivable by the worker as a member of the partnership the conditions are-
	(a) that the worker, alone or with one or more relatives, is entitled to 60% or more of the profits of the partnership; or
	(b) that most of the profits of the partnership concerned derive from the provision of services under engagements to which this Chapter applies-
	(i) to a single client, or
	(ii) to a single client together with associates of that client; or
	(c) that under the profit sharing arrangements the income of any of the partners is based on the amount of income generated by that partner by the provision of services under engagements to which this Chapter applies.
	In paragraph (a) "relative" means husband or wife, parent or child or remoter relation in the direct line, or brother or sister.
	(3) In relation to any payment or benefit received or receivable by the worker otherwise than as a member of the partnership, the conditions are that the payment or benefit-
	(a) is received or receivable by the worker directly from the intermediary, and
	(b) can reasonably be taken to represent remuneration for services provided by the worker to the client.
53 (see note 8)	Conditions of liability where intermediary is an individual
	Where the intermediary is an individual the conditions are that the payment or benefit-
	(a) is received or receivable by the worker directly from the intermediary, and
	(b) can reasonably be taken to represent remuneration for services provided by the worker to the client.
	The deemed employment payment
54 (see note 9)	Calculation of deemed employment payment
	(1) The amount of the deemed employment payment for a tax year ("the year") is the amount resulting from the following steps-
	Step 1
	Find (applying section 55) the total amount of all payments and benefits received by the intermediary in the year in respect of the relevant engagements, and reduce that amount by 5%.
	Step 2
	Add (applying that section) the amount of any payments and benefits received by the worker in the year in respect of the relevant engagements, otherwise than from the intermediary, that-
	(a) are not chargeable to income tax as employment income, and
	(b) would be so chargeable if the worker were employed by the client.
	Step 3
	Deduct (applying Chapters 1 to 5 of Part 5) the amount of any expenses met in the year by the intermediary that would have been deductible from the taxable earnings from the employment if-
	(a) the worker had been employed by the client, and
	(b) the expenses had been met by the worker out of those earnings.
	If the result at this or any later point is nil or a negative amount, there is no deemed employment payment.
	Step 4
	Deduct the amount of any capital allowances in respect of expenditure incurred by the intermediary that could have been deducted from employment income under section 262 of CAA 2001 (employments and offices) if the worker had been employed by the client and had incurred the expenditure.
	Step 5
	Deduct any contributions made in the year for the benefit of the worker by the intermediary to a scheme approved under Chapter 1 or 4 of Part 14 of ICTA that if made by an employer for the benefit of an employee would not be chargeable to income tax as income of the employee.
	This does not apply to excess contributions made and later repaid.
	Step 6
	Deduct the amount of any employer's national insurance contributions paid by the intermediary for the year in respect of the worker.
	Step 7
	Deduct the amount of any payments and benefits received in the year by the worker from the intermediary-
	(a) in respect of which the worker is chargeable to income tax as employment income, and
	(b) which do not represent items in respect of which a deduction was made under step 3.
	Step 8
	Assume that the result of step 7 represents an amount together with employer's national insurance contributions on it, and deduct what (on that assumption) would be the amount of those contributions.
	The result is the deemed employment payment.
	(2) If section 559 of ICTA applies (sub-contractors in the construction industry: payments to be made under deduction), the intermediary is treated for the purposes of step 1 of subsection (1) as receiving the amount that would have been received had no deduction been made under that section.
	(3) In step 3 of subsection (1), the reference to expenses met by the intermediary includes-
	(a) expenses met by the worker and reimbursed by the intermediary, and
	(b) where the intermediary is a partnership and the worker is a member of the partnership, expenses met by the worker for and on behalf of the partnership.
	(4) In step 3 of subsection (1), the expenses deductible include the amount of any mileage allowance relief for the year which the worker would have been entitled to in respect of the use of a vehicle falling within subsection (5) if-
	(a) the worker had been employed by the client, and
	(b) the vehicle had not been a company vehicle (within the meaning of Chapter 2 of Part 4).
	(5) A vehicle falls within this subsection if-
	(a) it is provided by the intermediary for the worker, or
	(b) where the intermediary is a partnership and the worker is a member of the partnership, it is provided by the worker for the purposes of the business of the partnership.
(see note 10)	(6) Where, on the assumptions mentioned in paragraphs (a) and (b) of step 3 of subsection (1), the deductibility of the expenses is determined under sections 337 to 342 (travel expenses), the duties performed under the relevant engagements are treated as duties of a continuous employment with the intermediary.
	(7) In step 7 of subsection (1), the amounts deductible include any payments received in the year from the intermediary that-
	(a) are exempt from income tax by virtue of section 229 or 233 (mileage allowance payments and passenger payments), and
	(b) do not represent items in respect of which a deduction was made under step 3.
	(8) For the purposes of subsection (1) any necessary apportionment is to be made on a just and reasonable basis of amounts received by the intermediary that are referable-
	(a) to the services of more than one worker, or
	(b) partly to the services of the worker and partly to other matters.
55 (see note 11)	Application of rules relating to earnings from employment
	(1) The following provisions apply in relation to the calculation of the deemed employment payment.
	(2) A "payment or benefit" means anything that, if received by an employee for performing the duties of an employment, would be earnings from the employment.
	(3) The amount of a payment or benefit is taken to be-
	(a) in the case of a payment or cash benefit, the amount received, and
	(b) in the case of a non-cash benefit, the cash equivalent of the benefit.
	(4) The cash equivalent of a non-cash benefit is taken to be-
	(a) the amount that would be earnings if the benefit were earnings from an employment, or
	(b) in the case of living accommodation, whichever is the greater of that amount and the cash equivalent determined in accordance with section 398(2).
(see note 12)	(5) A payment or benefit is treated as received-
	(a) in the case of a payment or cash benefit, when payment is made of or on account of the payment or benefit;
	(b) in the case of a non-cash benefit that is calculated by reference to a period within the tax year, at the end of that period;
	(c) in the case of a non-cash benefit that is not so calculated, when it would have been treated as received for the purposes of Chapter 4 or 5 of this Part (see section 19 or 32) if-
	(i) the worker had been an employee, and
	(ii) the benefit had been provided by reason of the employment.
56 (see note 13)	Application of Income Tax Acts in relation to deemed employment
	(1) The Income Tax Acts (in particular, the PAYE provisions) apply in relation to the deemed employment payment as follows.
	(2) They apply as if-
	(a) the worker were employed by the intermediary, and
	(b) the relevant engagements were undertaken by the worker in the course of performing the duties of that employment.
	(3) The deemed employment payment is treated in particular-
	(a) as taxable earnings from the employment for the purpose of securing that any deductions under Chapters 2 to 6 of Part 5 do not exceed the deemed employment payment; and
	(b) as taxable earnings from the employment for the purposes of section 232.
	(4) The worker is not chargeable to tax in respect of the deemed employment payment if, or to the extent that, by reason of any combination of the factors mentioned in subsection (5), the worker would not be chargeable to tax if-
	(a) the client employed the worker,
	(b) the worker performed the services in the course of that employment, and
	(c) the deemed employment payment were a payment by the client of earnings from that employment.
	(5) The factors are-
	(a) the worker being resident, ordinarily resident or domiciled outside the United Kingdom,
	(b) the client being resident or ordinarily resident outside the United Kingdom, and
	(c) the services in question being provided outside the United Kingdom.
	(6) Where the intermediary is a partnership or unincorporated association, the deemed employment payment is treated as received by the worker in the worker's personal capacity and not as income of the partnership or association.
	(7) Where-
	(a) the worker is resident in the United Kingdom,
	(b) the services in question are provided in the United Kingdom, and
	(c) the client or employer carries on business in the United Kingdom,
	the intermediary is treated as having a place of business in the United Kingdom, whether or not it in fact does so.
	(8) The deemed employment payment is treated as relevant earnings of the worker for the purposes of section 644 of ICTA (relevant earnings for purposes of permissible pension contributions).
	Supplementary provisions
57 (see note 14)	Earlier date of deemed employment payment in certain cases
	(1) If in any tax year-
	(a) a deemed employment payment is treated as made, and
	(b) before the date on which the payment would be treated as made under section 50(2) any relevant event (as defined below) occurs in relation to the intermediary,
	the deemed employment payment for that year is treated as having been made immediately before that event or, if there is more than one, immediately before the first of them.
	(2) Where the intermediary is a company the following are relevant events-
	(a) the company ceasing to trade;
	(b) where the worker is a member of the company, the worker ceasing to be such a member;
	(c) where the worker holds an office with the company, the worker ceasing to hold such an office;
	(d) where the worker is employed by the company, the worker ceasing to be so employed.
	(3) Where the intermediary is a partnership the following are relevant events-
	(a) the dissolution of the partnership or the partnership ceasing to trade or a partner ceasing to act as such;
	(b) where the worker is employed by the partnership, the worker ceasing to be so employed.
	(4) Where the intermediary is an individual and the worker is employed by the intermediary, it is a relevant event if the worker ceases to be so employed.
	(5) The fact that the deemed employment payment is treated as made before the end of the tax year does not affect what receipts and other matters are taken into account in calculating its amount.
58 (see note 15)	Relief in case of distributions by intermediary
	(1) A claim for relief may be made under this section where the intermediary-
	(a) is a company,
	(b) is treated as making a deemed employment payment in any tax year, and
	(c) either in that tax year (whether before or after that payment is treated as made), or in a subsequent tax year, makes a distribution (a "relevant distribution").
	(2) A claim for relief under this section must be made-
	(a) by the intermediary by notice to the Inland Revenue, and
	(b) within 5 years after the 31st January following the tax year in which the distribution is made.
	(3) If on a claim being made the Inland Revenue are satisfied that relief should be given in order to avoid a double charge to tax, they must direct the giving of such relief by way of amending any assessment, by discharge or repayment of tax, or otherwise, as appears to them appropriate.
	(4) Relief under this section is given by setting the amount of the deemed employment payment against the relevant distribution so as to reduce the distribution.
	(5) In the case of more than one relevant distribution, the Inland Revenue must exercise the power conferred by this section so as to secure that so far as practicable relief is given by setting the amount of a deemed employment payment-
	(a) against relevant distributions of the same tax year before those of other years,
	(b) against relevant distributions received by the worker before those received by another person, and
	(c) against relevant distributions of earlier years before those of later years.
	(6) Where the amount of a relevant distribution is reduced under this section, the amount of any associated tax credit is reduced accordingly.
59 (see note 16)	Provisions applicable to multiple intermediaries
	(1) The provisions of this section apply where in the case of an engagement to which this Chapter applies the arrangements involve more than one relevant intermediary.
	(2) All relevant intermediaries in relation to the engagement are jointly and severally liable, subject to subsection (3), to account for any amount required under the PAYE provisions to be deducted from a deemed employment payment treated as made by any of them-
	(a) in respect of that engagement, or
	(b) in respect of that engagement together with other engagements.
	(3) An intermediary is not so liable if it has not received any payment or benefit in respect of that engagement or any such other engagement as is mentioned in subsection (2)(b).
	(4) Subsection (5) applies where a payment or benefit has been made or provided, directly or indirectly, from one relevant intermediary to another in respect of the engagement.
	(5) In that case, the amount taken into account in relation to any intermediary in step 1 or step 2 of section 54(1) is reduced to such extent as is necessary to avoid double-counting having regard to the amount so taken into account in relation to any other intermediary.
	(6) Except as provided by subsections (2) to (5), the provisions of this Chapter apply separately in relation to each relevant intermediary.
	(7) In this section "relevant intermediary" means an intermediary in relation to which the conditions specified in section 51, 52 or 53 are met.
60 (see note 17)	Meaning of "associate"
	(1) In this Chapter "associate"-
	(a) in relation to an individual, has the meaning given by section 417(3) and (4) of ICTA, subject to the following provisions of this section;
	(b) in relation to a company, means a person connected with the company; and
	(c) in relation to a partnership, means any associate of a member of the partnership.
	(2) Where an individual has an interest in shares or obligations of the company as a beneficiary of an employee benefit trust, the trustees are not regarded as associates of the individual by reason only of that interest except in the following circumstances.
	(3) The exception is where-
	(a) the individual, either alone or with any one or more associates of the individual, or
	(b) any associate of the individual, with or without other such associates,
	has at any time on or after 14th March 1989 been the beneficial owner of, or able (directly or through the medium of other companies or by any other indirect means) to control more than 5% of the ordinary share capital of the company.
	(4) In subsection (3) "associate" does not include the trustees of an employee benefit trust as a result only of the individual's having an interest in shares or obligations of the trust.
	(5) Sections 549 to 554 (attribution of interests in companies to beneficiaries of employee benefit trusts) apply for the purposes of subsection (3) as they apply for the purposes of the provisions listed in section 549(2).
	(6) In this section "employee benefit trust" has the meaning given by sections 550 and 551.
61 (see note 18)	Interpretation
	(1) In this Chapter-
	"associate" has the meaning given by section 60;
	"associated company" has the meaning given by section 416 of ICTA;
	"business" means any trade, profession or vocation and includes a Schedule A business;
	"company" means a body corporate or unincorporated association, and does not include a partnership;
	"employer's national insurance contributions" means secondary Class 1 or Class 1A national insurance contributions;
	"engagement to which this Chapter applies" has the meaning given by section 49(5);
	"national insurance contributions" means contributions under Part 1 of SSCBA 1992 or Part 1 of SSCB(NI)A 1992;
	"PAYE provisions" means the provisions of Part 11 or PAYE regulations;
	"the relevant engagements" has the meaning given by section 50(4).
	(2) References in this Chapter to payments or benefits received or receivable from a partnership or unincorporated association include payments or benefits to which a person is or may be entitled in the person's capacity as a member of the partnership or association.
	(3) For the purposes of this Chapter-
	(a) anything done by or in relation to an associate of an intermediary is treated as done by or in relation to the intermediary, and
	(b) a payment or other benefit provided to a member of an individual's family or household is treated as provided to the individual.
	(4) For the purposes of this Chapter a man and a woman living together as husband and wife are treated as if they were married to each other.

Prepared 12 March 2003

Note 1: Chapter 8: Application of provisions to workers under arrangements made by intermediaries

Overview

189. The provisions in this Chapter are commonly known as the "service company provisions".

190. The material in this Chapter derives from Schedule 12 to FA 2000 and follows much the same order as that Schedule. References in the notes on this Chapter to paragraphs are all references to paragraphs of Schedule 12 to FA 2000 unless otherwise stated.

191. This Chapter does not include anything in respect of paragraphs 17 or 18, which concern the computation of profits of the intermediary and are to be dealt with in the rewrite of the trading income provisions.

192. This Chapter also excludes the material from paragraph 23, which is a transitional provision.

Note 2: Section 48: Scope of this Chapter

193. Subsection (1) of this section provides for the Chapter to have effect where the services of a worker are provided through an intermediary.

194. Subsection (2) sets out that Chapter 7 of this Part, treatment of workers supplied by agencies, and section 555 of ICTA, payments to non-resident entertainers or sportsmen, both have priority over this Chapter. It derives from paragraphs 6 and 24.

Note 3: Section 49: Engagements to which this Chapter applies

195. Subsection (1) sets out when the provisions of the Chapter apply. It derives from paragraph 1(1). There are three elements to be satisfied in order for the Chapter to apply:

· an individual ("the worker") personally performs, or is under an obligation to perform, services for the purposes of a business carried on by another person ("the client")

· the services are provided not under a contract directly between the client and the worker but under arrangements involving a third party ("the intermediary"), and

· the circumstances are such that, if the services were provided under a contract directly between the worker and the client, the worker would be regarded for income tax purposes as an employee of the client.

196. Subsection (2) expands on the interpretation of "business" given in section 61 for the purposes of subsection (1)(a). That interpretation only extends to trades, professions, vocations and Schedule A businesses. This would not normally include the activities of, say, a Government Department delivering public services, so subsection (2) is needed to bring in the other instances where individuals provide services through intermediaries. It derives from paragraph 1(2).

197. Subsection (3) expands on the meaning of "third party" used in subsection (1)(b). If the intermediary is a partnership, the worker would be a member of that partnership - subsection (3) is needed to make sure that such a partnership (or other unincorporated association) counts as a third party for the purposes of subsection (1)(b). This material derives from the paragraph 1(1)(b).

198. Subsection (4) ensures that the wide phrase "the circumstances" used in subsection (1)(c) can include the terms on which the services are provided and the contractual arrangements under which they are provided throughout the whole chain of relationships between worker and client, rather than focusing only on the contract to which the worker is a party. This provision is drawn from paragraph 1(4).

199. This Chapter does not include the material in paragraph 1(5). That sub-paragraph said:

The fact that the worker holds an office with the client does not affect the application of this Schedule.

200. Even without such a statement, the fact that a worker holds an office with the client has no relevance to the operation of these provisions. See Note 12 in Annex 2.

201. Subsection (5) brings forward the explanation of the label "engagement to which this Chapter applies". In Schedule 12 to FA 2000 the equivalent term is not explained until paragraph 21(1), although it is used several times in the early paragraphs of that Schedule.

Note 4: Section 50: Worker treated as receiving earnings from employment

202. Subsection (1) describes what happens when all the relevant conditions (as set out in sections 51, 52 and 53) are met and the provisions of the Chapter apply. Where there is, in any tax year, a payment (or right to receive such payment) for services in circumstances as set out in section 49, and that payment is not chargeable to tax as employment income, then the intermediary is treated as making a deemed payment to the worker. That deemed payment is chargeable to income tax as earnings. (Later sections in this Chapter explain how to calculate the deemed payment).

203. The most notable change in this subsection from its source in paragraph 2(1) of Schedule 12 to FA 2000 is the new name for what was "the deemed Schedule E payment", which has been shortened in common usage of that legislation to "the deemed payment". To chime in with the language of Chapter 2 of this Part, this is now "the deemed employment payment".

204. Subsection (2) sets out that a single deemed employment payment is treated as being made in respect of all engagements in relation to which the intermediary is treated as making a payment to the worker during the year. This derives from paragraph 2(3).

205. Subsection (3) sets out when the single payment mentioned in subsection (2) should be treated as being made. This derives from paragraph 2(2).

206. Subsection (4) introduces the label "relevant engagements", which means any engagements in relation to which the intermediary is treated as making a payment to the worker during the year. This derives from paragraph 2(3).

Note 5: Section 51: Conditions of liability where intermediary is a company

207. As suggested by the heading, this section is only of interest if the intermediary is a company. It derives from paragraph 3.

208. Subsection (1) sets out one negative condition and two alternative positive conditions. The negative condition is that the intermediary should not be an associated company of the client. If the intermediary is associated with the client then this Chapter will not apply.

209. Subsection (2) sets out a special test for whether the company is associated with the client for the purposes of this paragraph. It derives from paragraph 3(2).

210. It incorporates a minor change to the law. The normal meaning of "associated company" is given in section 416 of ICTA. That definition says that two companies are associated if one has control of the other, or if they are both controlled by the same person or persons. It is imported for the purposes of this Chapter by section 61. But paragraph 3(2) only envisages common control under a maximum of two people - the worker and another person. This subsection widens the definition of "associated company" for the purposes of section 51 to include companies that are under the common control of the worker together with more than one other person. See Change 12 in Annex 1.

211. One of the positive conditions mentioned in subsection (1) is that the worker has a material interest in the company. This catches the most obvious cases where a company is being used as an intermediary, where the worker has some say in the operation of the company. Subsection (4) sets out the definition of "material interest" for this purpose. That definition includes a reference to "a participator", a term which is defined in subsection (5).

Note 6: Change 12: Intermediaries: widening of the category of associated companies to which paragraph 3(2) of Schedule 12 to FA 2000 applies: section 51(2).

This involves the widening of the category of associated companies to which paragraph 3(2) of Schedule 12 to FA 2000 applies to include companies that are under the common control of the worker and more than one other person.

The meaning of "associated company" for the purposes of Chapter 8 of Part 2 of the Act is given by section 416 of ICTA (see section 61(1) of the Act). Two companies are associated if one has control of the other, or if they are both controlled by the same person or persons. But paragraph 3(2) of Schedule 12 to FA 2000 provides for common control under a maximum of two persons, the worker and another person. Section 51(2) of the Act, which replaces paragraph 3(2), widens the category of associated companies to which it applies to include companies that are under the common control of the worker and more than one other person.

This change is in taxpayers' favour in principle and may in practice benefit some although the numbers and amounts are thought to be negligible.

Note 7: Section 52: Conditions of liability where intermediary is a partnership

212. As suggested by the heading, this section is only of interest if the intermediary is a partnership. It derives from paragraph 4.

213. Subsection (2) sets out the situations where liability may arise because the worker has a say in the operation of the partnership, whether that is because:

· the worker (alone or with relatives) is entitled to more than 60% of the profits of the partnership;

· most of the profits of the partnership come from one client (or that client's associates) in respect of services provided by the worker to which this Chapter applies; or

· the worker is a member of the partnership whose share of partnership profits is based on the amount of income generated by his/her provision of services to which this Chapter applies.

214. The alternative test set out in subsection (3) is designed to catch the cases where the worker is not paid as a member of the intermediary partnership, but rather as an individual. This condition looks at what is actually going on between the worker, the intermediary and the client. It is satisfied if the worker receives (or is entitled to receive) direct from the intermediary something that can reasonably be taken to be remuneration for services provided to the client.

Note 8: Section 53: Conditions of liability where intermediary is an individual

215. This section is only of interest where the intermediary is an individual. It is drawn from paragraph 4. The condition looks at what is actually going on between the worker, the intermediary and the client. It is satisfied if the worker receives (or is entitled to receive) direct from the intermediary something that can reasonably be taken to be remuneration for services provided to the client.

Note 9: Section 54: Calculation of deemed employment payment

216. Subsection (1) sets out a method statement to show how to calculate the deemed employment payment. It derives from paragraph 7.

217. Steps 1 and 2 contain a cross-reference to section 55, so that readers know where to find out what amount should be taken into account in respect of any benefits.

218. After Step 2, all the remaining steps deduct various amounts. Step 3 contains a statement to the effect that if the result of that, or any later step, is nil or a negative amount, then there is no deemed employment payment.

219. Step 3 also contains a cross-reference to the deductions provisions in Chapters 1 to 5 of Part 5 so that the reader can see where to look to find out what kind of expenses may be deducted.

220. Step 8 of the method statement explains the operations involved in deducting the notional national insurance contributions.

221. The method statement concludes with a statement that the result represents the deemed employment payment.

222. Subsection (2) explains what to include in Step 1 of the calculation of the deemed payment if the intermediary has received amounts under deduction of tax because of the operation of section 559 of ICTA (sub-contractors in the construction industry). It is drawn from paragraph 8.

223. Subsection (3) provides that amounts deducted at Step 3 of the method statement may include certain reimbursed expenses. This derives from section 38(2) of FA 2002.

224. Subsection (4) and (5) provide that mileage allowance relief may be included in amounts deducted at Step 3 of the method statement. This derives from paragraph 7B as introduced by section 38(2) of FA 2002.

225. Subsection (6) is new. It applies for the purposes of working out the amount to be deducted at Step 3 of the method statement in respect of travel expenses. Entitlement to travel expenses depends on whether or not a workplace is "temporary" and where the worker is based over the course of the employment. Subsection (6) allows such travel expenses to be deducted at Step 3 as would have been available during the combined period of all the relevant engagements as if that combined period was a continuous employment with the intermediary. This new rule is a minor change to the law. See Change 13 in Annex 1.

226. Subsection (7) allows for mileage allowance payments or passenger payments to be deducted at Step 7 of the method statement. This derives from paragraph 7B as introduced by section 38(2) of FA 2002.

227. It is quite likely that the intermediary will receive payments from the client to cover the services of more than one worker or to cover the services of a worker and other things (such as materials, reimbursed fees to third parties etc). Subsection (8) sets out that in such a case any apportionment required to arrive at the amount attributable to the services of a single worker should be on a just and reasonable basis. It derives from paragraph 9.

Note 10: Change 13: Intermediaries: treating all relevant engagements as the duties of a continuous employment: section 54(6)

This involves treating all relevant engagements as the duties of a continuous employment with the intermediary for the purpose of working out the travel expenses to be deducted in determining the amount of the deemed employment payment.

The basic assumption in Step 3 in paragraph 7(1) of Schedule 12 to FA 2000 (see section 54(1) of the Act) - that one should look at whether the expenses would be deductible if the worker were employed by the client - does not provide enough information to say what travel expenses should be deducted. This is because entitlement to travel expenses depends on whether or not a workplace is temporary and where the worker is based over the course of the employment.

Section 54(6) of the Act fills the gap by allowing such travel expenses to be deducted under Step 3 as would have been deductible during the combined period of all the relevant engagements if that combined period were a continuous employment with the intermediary.

This change is in principle in taxpayers' favour but is expected to have no practical effect as it is in line with current practice.

Note 11: Section 55: Application of rules relating to earnings from employment

228. This section explains how to arrive at the amounts to be used in the various steps of the method statement outlined in section 54(1). It derives from paragraph 10. Broadly it specifies that the normal rules for computing employment income should apply when working out the amounts to go into the method statement.

229. One place where paragraph 10 departs slightly from the normal rule for employment income is in sub-paragraph (5), which deals with the time that a payment or benefit should be treated as received. This reads:

(5) A payment or benefit is treated as received-

(a) in the case of a payment or cash benefit, when payment is made of or account of the payment or benefit;

in the case of a non-cash benefit, when it is used or enjoyed.

230. Subsection (5) of this section provides a more detailed explanation of when a non-cash benefit should be treated as received. This is a minor change to the law. See Change 14 in Annex 1.

Note 12: Change 14: Intermediaries: normal timing rules to apply for determining when a non-cash benefit is to be treated as received: section 55(5)

This involves applying the normal timing rules for determining when a non-cash benefit is to be treated as received.

Paragraph 10(5)(b) of Schedule 12 to FA 2000 provides that a non-cash benefit is to be treated as received when it is used or enjoyed. But a non-cash benefit might be used or enjoyed over a long period of time or might even (in the case of a car benefit) be calculated by reference to such a period. To cater for such cases, section 55(5) of the Act provides that a non-cash benefit is treated as received—

· if it is calculated by reference to a period within the tax year, at the end of that period,

if it is not so calculated, when it would have been treated as earnings if the worker had been an employee and the benefit had been provided by reason of the employment.

Note 13: Section 56: Application of Income Tax Acts in relation to deemed employment

231. This section ensures that the deemed employment payment is treated in exactly the same manner as if it were an actual payment of salary made by the intermediary, as employer, to the worker as employee. It derives from paragraph 11.

Note 14: Section 57: Earlier date of deemed employment payment in certain cases

232. As set out in section 50(3) the basic timing rule for the deemed payment is that it is treated as being made at the end of the tax year in question. This section sets out what earlier date should be taken for payment of the deemed payment if there is a break in the worker-intermediary relationship during the tax year in question. It derives from paragraph 12, as amended by section 38(3) of FA 2002.

233. Subsection (1) sets the scene and says that where there is such a break (relevant event), then the deemed payment is treated as being made immediately before it, or before the first of them if there are more than one.

234. Subsection (2) lists the kinds of break in the worker-intermediary relationship that count as relevant events if the intermediary is a company. Subsections (3) and (4) list the kinds of break in the worker-intermediary relationship that count as relevant events where the intermediary is a partnership and where the intermediary is an individual.

235. Subsection (5) emphasises that this section only affects the time at which the deemed payment is treated as being made. It does not affect the calculation of the deemed payment, which is still based on amounts received in the tax year.

Note 15: Section 58: Relief in case of distributions by intermediary

236. Where the intermediary is a company, it may pay distributions to the worker if the worker is a shareholder in the company. Since April 1999, UK companies have not had to pay ACT on distributions made. But the recipient of any distributions is taxable on them under Schedule F. So there is a possibility of double taxation in that the worker might have to pay tax under Schedule E on the deemed payment as well as on the actual amount of any distributions received. This section allows an intermediary that is a company to make a claim for relief to remove the possibility of double taxation. It derives from paragraph 13.

237. Subsection (2) describes how a claim to relief under this section should be made. It includes a statement of the time limit for such a claim. There is no specified time limit for making the claim in Schedule 12. This means the default time limit for claims (in section 43 of TMA 1970) applies, so that the claim must be made not more than five years following the 31 January following the tax year during which the distribution is made. That time limit is reproduced here to save users having to refer to another Act.

238. Subsection (3) describes the method of delivery of the relief claimed. It allows the Inland Revenue to direct that the relief be given by whatever means appears appropriate.

239. Subsection (4) makes it clear that in a case where there is a distribution and a deemed employment payment, it is the distribution that is reduced, by setting the employment income payment against it.

Note 16: Section 59: Provisions applicable to multiple intermediaries

240. There may be a chain of intermediaries between the worker and the client.

241. Subsections (2) and (3) contain provisions derived from paragraph 16 concerning the intermediaries' responsibility to operate PAYE on deemed payments made to the worker. Subsection (2) makes all the relevant intermediaries involved in the same relevant engagement jointly and severally liable for amounts due as a result of the operation of PAYE on the deemed payment in respect of the engagement common to all the intermediaries, plus (if applicable) any other relevant engagements. Subsection (3) provides a get-out for any intermediaries who have not received any payments or benefits in respect of the common relevant engagement or any other relevant engagement.

242. Subsections (4) and (5) prevent any double counting of amounts when calculating the deemed payments of the intermediaries where there is more than one intermediary. It applies where there has been some kind of payment (or benefit provided) from one relevant intermediary to another in respect of a relevant engagement. In such a case, a reduction is made in the amount to be taken into account at Steps 1 and 2 of the deemed payment calculation. This material derives from paragraph 15.

243. Subsection (6) says that, subject to subsections (2) to (5), the Chapter applies to each intermediary separately. Subsection (7) explains the label "relevant intermediary", used in this section. These two subsections derive from paragraph 14.

Note 17: Section 60: Meaning of "associate"

244. This section deals with the meaning of "associate". This term is used in sections 50(1)(b), 51(3)(a) and (b) and 52(2)(b)(ii). It derives from paragraph 19.

245. The definition of an employee benefit trust now appears in Chapter 11 of Part 7.

Note 18: Section 61: Interpretation

246. This interpretative section derives from paragraph 21.

247. Subsection (1) points out where the various terms used in the Chapter are defined.

248. Subsection (2) ensures that any payments or benefits received or receivable from a partnership or unincorporated association include any that a person is or may be entitled to receive in his capacity as a member of that partnership or association.

249. Subsection (3) treats anything done by or in relation to an associate of an intermediary as if it were done by or in relation to the intermediary. It also treats anything provided to an individual's family or household as if it were provided to the individual.

250. Subsection (4) treats (for the purposes of this Chapter) a man and a woman who live together as husband and wife as if they were married to each other. This extends into the definition of "associate" (defined in section 60(1) as having the same meaning as in section 417(3) and (4) of ICTA).