ESM3035 – Basic principles: what happens when there is a relevant engagement - example

Mrs B is an engineer who provides services to a client through her service company, B Services Ltd. Under the terms of the contractual arrangements, B Services Ltd will be paid £20,000 if the contract is fulfilled satisfactorily. The contract is a relevant engagement under the legislation.

The amount paid by the client is unaffected by the legislation. The client pays B Services Ltd the full amount due under the terms of the contract, i.e. £20,000.

This has the following consequences:

• the amount of £20,000 is be taken into account in working out the amount of the deemed payment which B Services Ltd is treated as making to Mrs B
• Mrs B is treated as receiving a deemed payment based upon the amount of £20,000
• this deemed payment is taxable under Schedule E/as employment income and subject to Class 1 NICs
• the deemed payment is normally treated as paid on 5 April, that is, the last day of the tax year in question, and
• B Service Ltd’s taxable profits for the accounting period in which the deemed payment is treated as paid are reduced by the amount of the deemed payment and the employer’s Class 1 NICs paid on it.