This article is based on parts of the HMRC Employment Status Manual ESM10019.
How does a Deemed Employer operate PAYE?
When the deemed employer operates PAYE, it should do this through payroll.
They can add them to an existing payroll or set up a new payroll or PAYE scheme.
New Deemed Employee – anything different?
The off-payroll worker is added to the payroll in exactly the same way as anyone else.
They are issued with the standard starter checklist to provide the information required for payroll.
The student loan question 9 and 10 are not relevant as the deemed employer is not responsible for collecting student loans from deemed employees.
Which declaration and tax code?
The declaration is chosen by the deemed employee and this determines the tax code to apply:
- A = 1257L cumulative
- B = 1257L Week 1 / Month 1
- C = BR cumulative
If they either refuse or do not complete and return the new starter checklist, then
- C = 0T Week 1 / Month 1
The HMRC may then issue a different tax code to be applied to future payments.
Deemed employees are usually employed by their own intermediary and so generally would not provide a P45. If they do provide a P45 then you should use that P45 tax code along with any devolved tax code prefix: S for Scotland and C for Wales.
What address should the deemed employees use?
So that HMRC can determine if Welsh or Scottish tax rates should apply, the deemed employee should provide their home address if different to their business address.
Reporting off-payroll workers to HMRC
On the Real Time Information (RTI) Full Payment Submission (FPS) has an ‘off-payroll worker’ marker which should be set so that it is reported by your payroll software.
Payslips and a P60?
Deemed employees can be given a payslip showing the amounts paid and the deductions of tax and National Insurance. However, this can also be given as part of an alternate remittance notice.
Deemed employees can also be given a P60 at the end of the tax year.
What about leaving when the contract ends?
Deemed employees are taken off payroll in the same way as employees when the contract ends. A leave date needs to be reported to HMRC on the FPS submission and you can issue a P45.
What about benefits?
Treatment of benefits is the same for off-payroll workers as it is for employees. Where provided, they can be reported on form P11D or formerly patrolled where the employer has registered.
Class 1A needs to be accounted and paid over to HMRC.
Who pays the secondary National Insurance Contributions?
In addition to making deductions of tax and Primary NICs from the deemed direct payment, deemed employers must also pay Secondary NICs.
The deemed employer cannot deduct Secondary NICs from the amounts treated as employment income of the worker, Secondary NICs are additional to the deemed direct payment.
And the apprenticeship levy?
As the payment is subject to Class 1 National Insurance, there are secondary NIable earnings and so also subject to the apprenticeship levy.
What about the Employment Allowance?
Class 1 NICs for deemed employees cannot be reclaimed as part of the Employment Allowance and the secondary NICs relating to off-payroll workers doesn’t apply towards the Employment Allowance limit.
What doesn’t apply to deemed employment?
The off-payroll working rules determine employment status for tax, they do not decide employment status for rights. As deemed employees are not actual employees, the liabilities extend to tax and National Insurance liabilities only.
The following do not apply:
- Pensions auto-enrolment
- Student Loan and Postgraduate Loan deductions
- Attachments and Arrestments of earnings
- Holiday pay
- Sick pay
- Parental leave rights and payments
- Construction Industry Scheme
What timing is applied for tax and NICs calculations
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.
So it is the time at which the payment is actually made, that is used by payroll, not the invoice date. The Usual rules around NICs periods apply regarding regular and irregular payments.
If payments are made each month, the period is monthly even if two invoices are paid. The NICs period is when the money is made available, so will also be based on when the payment is made.
If work is done in one month but not paid until the next then it is the later month which defines the payment date.
Mistakes and errors?
If mistakes are made, such as the RTI off-payroll worker flag being unchecked incorrectly, this can be corrected on the next within the next FPS or by sending a correction. This FPS needs to include the correct year to date figures. For example, where a worker was deemed to be inside the rules, so deductions were made, but that conclusion changes, corrections can be made through the deemed employer’s payroll in the next FPS and the worker reimbursed. This can be done by adjusting the worker’s year to date values to zero, setting the worker’s leave date to the same as the start date already used and submitting a corrective FPS or submitting in the next FPS.
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.
More information
The above information is based on:
PAYadvice.UK 28/3/2021 updated 3/4/2021
Good post. This is a common issue that many employers face.