Deemed Employment
The treatment of limited company contract income as employment income when a contract is caught by IR35.
Deemed employment is the concept at the heart of IR35. When HMRC determines that a contractor operating through a limited company is effectively working as an employee of the end client, their income is 'deemed' to be employment income — subject to income tax and employee NI under PAYE, rather than the more tax-efficient salary-and-dividend model.
Under the off-payroll working rules (Chapter 10 ITEPA 2003), the deemed employment determination is made by the end client (for medium/large private sector and all public sector engagements). For small private sector clients, the contractor's limited company makes the determination.
A deemed employment payment does not give the contractor any employment rights — they are deemed an employee only for tax purposes, not for employment law purposes.
Contractors who work through an umbrella company are already on PAYE employment — IR35 and deemed employment are not relevant to them.