What was the purpose of section 61H of the Income Tax (Earnings and Pensions) Act 2003?

Section 61H provided relief from double taxation where a managed service company (MSC) that is a body corporate was treated as making a deemed employment payment and also made a distribution such as a dividend. Without this relief, the same underlying income could be taxed twice — once as deemed employment income and again as a distribution.

How was a claim for relief made under section 61H?

The managed service company itself had to make the claim by giving notice to an officer of HMRC. The time limit was five years after 31 January following the tax year in which the distribution was made. For example, a distribution made in 2008–09 had a claim deadline of 31 January 2015.

How was relief applied where there were multiple distributions under section 61H?

HMRC followed a specific order of set-off. First, the deemed employment payment was set against distributions of the same tax year before other years. Second, distributions received by the worker took priority over those received by other persons. Third, distributions from earlier tax years were relieved before those of later years.

Is section 61H of ITEPA 2003 still in force?

No. Section 61H was omitted from the legislation with effect from 15 September 2016 by the Finance Act 2016. It therefore has no application to periods after that date, although it may remain relevant for earlier tax years where claims were made within the permitted time limits.

Income Tax (Earnings and Pensions) Act 2003 section 61H

Relief in case of distributions by managed service company

Section 61H provided a mechanism for claiming relief where a managed service company (MSC) that is a body corporate has been subject to a deemed employment payment and also makes a distribution, so that the same income is not taxed twice. Note: this section was omitted with effect from 15 September 2016.

Where an MSC (being a body corporate) is treated as making a deemed employment payment and also makes a distribution in the same or a subsequent tax year, a claim for relief can be made to avoid double taxation
The claim must be made by the MSC to HMRC within five years after 31 January following the tax year in which the distribution is made
Relief works by setting the deemed employment payment amount against the relevant distribution, thereby reducing the distribution for tax purposes
Where there are multiple distributions, relief is applied first to distributions of the same tax year, then to those received by the worker before others, and then to earlier years before later years

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