What are a recruitment agency's duties as fee-payer under the off-payroll (IR35) rules?
Under the off-payroll working rules the client decides whether a contractor is inside or outside IR35 and issues a status determination statement with reasons. The agency does not decide status. Its duties are to pass the statement down the chain and, where it is the fee-payer and the deemed employer for an inside engagement, to deduct Income Tax and employee National Insurance, pay employer National Insurance and any Apprenticeship Levy on top, and report through payroll. Small private sector clients are outside the client-led rules.
Written by the Vayora team. Updated 28 October 2026.
The off-payroll working rules, in Chapter 10 of Part 2 of the Income Tax (Earnings and Pensions) Act 2003, apply when a worker provides services through their own intermediary, usually a limited company. They moved the decision on status from the contractor's company to the client for public sector clients in 2017 and for medium and large private sector clients from 6 April 2021. For most agency work that means the agency is not the decision-maker. It is a link in a chain that carries the decision and, sometimes, the tax.
HMRC's guidance is blunt on one point: all agencies, regardless of size, have some responsibilities where the rules apply. The size tests apply to clients only. A two-person agency supplying a contractor to a large client has the same duties as a large agency.
The duties fall into three jobs. Pass the statement on. If your agency sits lowest in the chain above the contractor's company, work out the tax correctly where the engagement is inside. And keep the records that prove you did both. This page takes each in turn, covers the small-client exemption and what changed in April, and says plainly what to do when a status is disputed.
Who decides status, and what is an agency's role?
The client decides. HMRC's Employment Status Manual says agencies do not decide a worker's status, and that where a client subcontracts the decision or the production of the statement, it stays responsible for the accuracy of the determination. Where the client is a small private sector business, the rules about size mean the contractor's own intermediary decides status and whether the rules apply.
The agency's role depends on where it sits. The manual says agencies must check who they contract with, so they know the labour supply chain and their place in it. Everything else follows from that: whether you receive the statement, whether you pass it on, and whether you become the deemed employer.
What does the client's status determination statement do for the agency?
The client must give a status determination statement, with its conclusion and reasons, to the worker and to the person it contracts with. Without reasons, the tax responsibility sits with the client. Each agency in the chain must pass the statement to the next party until it reaches the party immediately above the contractor's company. If an agency receives it and does not pass it on, the agency becomes the deemed employer and takes on the tax itself.
If you have not received a statement, GOV.UK says to pay without deducting Income Tax or National Insurance, and to ask the agency or client above you why none arrived. A small private sector client does not have to assess the rules, so it may not issue one; as the agency it contracts with, you can ask it to confirm its size. Keep the request and the answer.
Our glossary entry on the status determination statement covers what makes one valid, including why a job advert saying inside or outside is not one.
Who is the fee-payer and who is the deemed employer?
HMRC defines the fee-payer as the party immediately above the worker's intermediary. The deemed employer is the qualifying person at the lowest point in the labour supply chain who holds the statement. The two are often the same, but not always. If no party in the chain qualifies, the client remains the deemed employer. See the fee-payer glossary entry for the plain-English version.
The table below sets the common situations side by side. It is a summary of the GOV.UK and Employment Status Manual pages, not a determination of your own chain.
| Scenario | Who determines | Who is fee-payer | What the agency does |
|---|---|---|---|
| Medium or large client, agency contracts directly with the contractor's company, outside IR35 | The client, in its statement | The agency | Keep the statement, pay the company without deductions, keep a dated record of receipt |
| The same chain, determined inside IR35 | The client, in its statement | The agency, usually also the deemed employer | Treat the payment as a deemed direct payment, deduct tax and employee National Insurance, pay employer National Insurance on top, report through payroll |
| Two agencies in the chain | The client | The lower agency, the party above the contractor's company | The upper agency passes the statement down and keeps proof; if it does not, it becomes the deemed employer |
| Small private sector client | The contractor's own company | Not applicable under the client-led rules | Pay as normal, ask the client to confirm its size if no statement arrives, record the answer |
| Medium or large client sends no statement | Should be the client | The agency is not a qualifying person without a statement | Pay without deductions, ask why none arrived, keep the request |
| Genuinely contracted-out service | The supplier, not the client | Depends on the supplier's chain | Check the contract really buys a service and has not been relabelled to avoid the rules |
What does the fee-payer do for an inside engagement?
The deemed employer works out a deemed direct payment. GOV.UK sets the steps: take the value of the payment to the worker's intermediary after any VAT, deduct the direct cost of materials used in providing the services, then deduct expenses the intermediary met that would have been deductible if the worker were an employee. If the result is nil or negative, there is no deemed direct payment.
The deemed employer then deducts Income Tax and employee National Insurance from that figure and pays them to HMRC. It pays employer National Insurance, and the Apprenticeship Levy where it applies, and the guidance is explicit that employer National Insurance cannot be deducted from the payment to the intermediary. Employment Allowance cannot be used against these payments. The payment is reported through Real Time Information using the off-payroll worker indicator.
The practical result is a rate conversation. The client's rate now has to carry employer costs that did not exist when the engagement was outside, so an inside determination often reopens both the charge rate and the pay rate. The contract margin calculator helps you see what is left before you agree anything. For the umbrella route, see PSC versus umbrella; GOV.UK has also introduced new PAYE rules for labour supply chains that include umbrella companies from 6 April 2026, so check that guidance if you use one.
Did the small-company thresholds change in April 2026?
No change in April 2026 appears in the sources. What HMRC's Employment Status Manual shows is a change from 6 April 2025. For financial years beginning on or after that date, two of the three Companies Act thresholds rose: turnover more than £15 million and balance sheet total more than £7.5 million, with the 50-employee limit unchanged. A company is medium or large for the rules only if it meets two of the three tests for two consecutive financial years.
Because size looks back at filed accounts, the manual says the earliest tax year in which a client can move out of the rules because of the change is 2027/28. Until a client confirms it is small, an agency should assume the client decides. One trap: the GOV.UK page for clients still printed the old £10.2 million and £5.1 million figures when checked on 28 October 2026, so do not take a threshold from a single page without checking its date.
A client that stops being medium or large has to withdraw its statement for the year in which it moves out. If you supply a client that tells you it has fallen out of the rules, keep that notice with the earlier statements.
What happens when the status is disputed?
The client must run a disagreement process. The worker and the deemed employer can raise it, in speech or in writing, and as many times as they like until the last payment for the engagement is made. The client has 45 calendar days from receiving the representations to respond, either confirming the statement with reasons or withdrawing it and issuing a new one with the date it applies from.
While the dispute runs, the original determination still applies and the deemed employer stays responsible for deductions. If the client does not meet the minimum requirements, responsibility for the tax and National Insurance on further payments moves to the client. An agency that is not the deemed employer has no right to use the process, though it can back the contractor in raising it. Copy every dispute you see into the engagement file, because HMRC expects you to keep records of disagreements.
What should the agency keep in its own records?
The statutory minimum on the fee-payer page is a record of the payments made and of the Income Tax and National Insurance deducted, plus copies of records about disagreements. Beyond that, sensible practice is a dated record that you received the statement, when and to whom you forwarded it, and your own check of who the client is and where you sit in the chain. This is practice rather than a statutory list.
- The client's statement with its reasons, and the date you received it.
- Proof of when you passed it on and to whom, if there is an agency below you.
- Any request you made for a missing statement or for the client's size, and the reply.
- Payment and deduction records for every inside engagement.
- Every disagreement notice, response and withdrawal, with the date it takes effect.
Where Vayora fits
Vayora is software, not legal advice or a payroll. A role can carry an IR35 status label (inside, outside, exempt or to be confirmed) and a flag for whether an umbrella is required. A contractor's record holds their IR35 preference and their trading vehicle: limited company, umbrella, sole trader or PAYE inside IR35. You can filter on all of these when you search for contractors.
That is where it stops. Vayora does not assess status, does not keep a status determination statement as its own record, and has no deemed employment payment, PAYE, National Insurance or Real Time Information logic in its invoicing or pay runs. Self-bills and pay runs pay a limited company contractor's company the signed rate, so if your agency is the fee-payer for an inside engagement the deductions run in your payroll software. You can attach the statement to the contractor's record as a file and keep your forwarding evidence next to it. Read how the contract finance side works, or start a free trial.
Common questions
- Does an agency decide whether a contract is inside or outside IR35?
- No. Under the client-led off-payroll rules the client decides and issues a status determination statement with reasons. HMRC's Employment Status Manual says agencies do not decide a worker's status. The agency's job is to pass the statement down the chain, and to account for tax if it is the deemed employer on an inside engagement.
- What if the client never sends a status determination statement?
- GOV.UK says that if you have not received one you pay without deducting Income Tax or National Insurance, and you can ask the agency or client above you why none arrived. A small private sector client may not issue one, and you can ask it to confirm its size. Keep your request and the reply on file.
- Who pays employer National Insurance on an inside engagement?
- The deemed employer pays it, usually the agency acting as fee-payer, on top of the payment to the contractor's company. HMRC's guidance says it cannot be deducted from that payment, and Employment Allowance cannot be used against it. The Apprenticeship Levy also applies where it is due. That is why an inside decision often reopens rates.
- How long does a client have to answer a status disagreement?
- The client has 45 calendar days, counted from the day it receives the representations, to confirm its statement with reasons or withdraw it and issue a new one. If the client does not meet the minimum requirements, responsibility for tax and National Insurance on further payments moves to the client. The process stays open until the last payment for the engagement.
- Do the off-payroll rules apply to small private sector clients?
- Not the client-led rules. A small private sector client does not have to assess status, and the contractor's own company decides instead. Client size is judged by the Companies Act tests over two consecutive financial years, and HMRC says the 2025 change to the thresholds has no practical effect before the 2027/28 tax year at the earliest.
Sources
- Deemed employer responsibilities under the off-payroll working rules (GOV.UK)
- Off-payroll working rules for agencies (GOV.UK)
- ESM10006A, size-threshold changes from 6 April 2025 (HMRC Employment Status Manual)
- ESM10015, client-led status disagreement process (HMRC Employment Status Manual)
- ESM10018, responsibilities of agencies and other parties in the chain (HMRC Employment Status Manual)
Checked 28 October 2026