Under the UK’s off-payroll working rules, fee-payer liability under IR35 means the entity that pays a contractor’s intermediary carries the tax obligations of an employer: it must deduct income tax and employee National Insurance from the fee before paying the intermediary, account for employer National Insurance on top, and can be pursued by HMRC for up to 100% of any unpaid tax if it gets this wrong.1GOV.UK. HMRC Internal Manual – Compliance Handbook – CH82120 Liability does not sit permanently with one party, though. It can move up the chain to the end client or an intermediary agency if any of them fails to discharge its own duties.
Who the Fee-Payer Is
The fee-payer is the party in the contractual chain sitting immediately above the worker’s intermediary, usually a personal service company.2GOV.UK. Employment Status Manual – ESM10002 Section 61N of the Income Tax (Earnings and Pensions) Act 2003 defines the chain as running from the end client at the top to the intermediary at the bottom, with each link making a “chain payment” for the worker’s services.3legislation.gov.uk. Income Tax (Earnings and Pensions) Act 2003 Section 61N
Where the end client contracts directly with the PSC, the client is the fee-payer. Where a recruitment agency sits between them and pays the PSC, the agency holds the role. If several agencies are stacked in the chain, the one that actually pays the PSC is the fee-payer. Only one entity in the chain holds this designation at any given time, which prevents double taxation of the same fee.
What the Fee-Payer Has to Do on Each Payment
Before the first payment, the fee-payer needs the worker’s full name, National Insurance number, and either a P45 or a completed starter checklist.4GOV.UK. Starter Checklist if You’re Starting a New Job The worker is registered on payroll as an off-payroll contractor rather than a regular employee, which stops the system generating holiday pay or auto-enrolment pension contributions that do not apply.
Each pay run works to the same cycle: calculate the deemed payment, deduct income tax and employee NIC, pay the net figure to the intermediary, and submit a Full Payment Submission through Real Time Information on or before the pay date.5GOV.UK. Rates and Allowances – National Insurance Contributions
Working Out the Deemed Payment
The deemed payment is the figure that PAYE actually runs on. Section 61Q of ITEPA 2003 sets out the steps.6legislation.gov.uk. Income Tax (Earnings and Pensions) Act 2003 Section 61Q In plain terms:
- Take the gross chain payment to the intermediary and strip out any VAT.
- Deduct the direct cost of any materials the intermediary supplied for the work.
- Optionally deduct expenses the intermediary incurred that would have been tax-deductible had the worker been a direct employee paying them from salary.
- If the running total is zero or below, there is no deemed payment and no PAYE due.
Rates for 2026-27
Income tax comes off according to the worker’s tax code. Employee (Class 1 primary) National Insurance for 2026-27 is 8% on earnings between the Primary Threshold of £242 per week (£12,570 per year) and the Upper Earnings Limit of £967 per week (£50,270 per year), then 2% above the Upper Earnings Limit.5GOV.UK. Rates and Allowances – National Insurance Contributions These come out of the worker’s fee.
Employer (Class 1 secondary) contributions are 15% on earnings above the Secondary Threshold of £96 per week (£5,000 per year).7GOV.UK. Rates and Thresholds for Employers 2026 to 2027 This is an extra cost on top of the contracted fee, not a deduction from it. It’s easy to miss when pricing an engagement because it never appears on the worker’s payslip.
Organisations with an annual pay bill above £3 million also pay the Apprenticeship Levy at 0.5%.8GOV.UK. Pay Apprenticeship Levy Off-payroll worker payments count toward that pay bill, so bringing contractors inside IR35 can push a borderline employer over the threshold.
How Liability Moves Up the Chain
Liability under IR35 does not automatically rest with the fee-payer. It starts at the top of the chain with the end client and only moves down if each party properly discharges its duties. The client must issue a valid Status Determination Statement. Each intermediary agency must pass that statement to the next link. The fee-payer at the bottom must operate PAYE. A break anywhere in this sequence leaves the failing party holding the bill.
If the fee-payer fails to deduct tax, HMRC pursues the fee-payer first. If the fee-payer never received the SDS because someone higher up dropped it, HMRC traces the chain back until it finds who broke it. Whoever broke it inherits the liability, including employer National Insurance that would not normally come out of the worker’s pay.
What Makes a Status Determination Statement Valid
The SDS must do three things: state whether the engagement falls inside or outside IR35, give reasons based on employment status indicators, and demonstrate that the client took reasonable care in reaching the decision.9GOV.UK. Help to Comply With the Reformed Off-Payroll Working Rules (IR35) – Status Determination Statements Fail any of those and the statement is not valid, which means the client itself becomes the deemed employer for all tax, National Insurance, and Apprenticeship Levy.
HMRC has not fixed a rigid definition of reasonable care, but in practice it means engaging with the facts of each working arrangement rather than issuing blanket determinations. Using HMRC’s Check Employment Status for Tax tool and keeping the results is one recognised way of showing the question was properly considered, though it is not the only one.
The SDS must also be passed to the next party in the chain. Until the client hands it down, the client remains the deemed employer. An agency that receives an SDS but fails to pass it on becomes the deemed employer itself.9GOV.UK. Help to Comply With the Reformed Off-Payroll Working Rules (IR35) – Status Determination Statements
The 45-Day Disagreement Clock
A worker or their intermediary can challenge an inside-IR35 determination through a client-led disagreement process. The disagreement must give specific reasons tied to employment status indicators; a bare objection can be rejected. Once a valid disagreement arrives, the client has 45 calendar days to consider it and respond, and the worker’s tax treatment stays unchanged during that period.10GOV.UK. Help to Comply With the Reformed Off-Payroll Working Rules (IR35) – Client-Led Disagreement Process
Miss the 45 days and the client becomes the deemed employer for PAYE purposes until it does respond. The response has to either confirm the original decision with reasons or withdraw the old SDS and issue a new one to every party in the chain.
Penalties, and the Reasonable-Care Safe Harbour
HMRC’s inaccuracy penalties apply to off-payroll failures on the same scale as other tax obligations: up to 30% of the unpaid tax for careless errors, up to 70% for deliberate inaccuracies, and up to 100% where the inaccuracy is deliberate and concealed.1GOV.UK. HMRC Internal Manual – Compliance Handbook – CH82120 These are maximums, and early disclosure and cooperation can reduce them. Deliberate non-compliance involving criminal activity can lead to prosecution.
HMRC has stated it will not charge penalties where the fee-payer took reasonable care to apply the rules correctly but still made a genuine mistake.11GOV.UK. HMRC Issue Briefing – Supporting Organisations to Comply With Changes to the Off-Payroll Working Rules (IR35) That makes documentation decisive. A fee-payer that can show it engaged with the facts, used the available tools, and kept records of its reasoning is in a far stronger position than one that made blanket calls or ignored the issue.
When These Rules Don’t Apply the Way You’d Expect
Two situations change who carries the risk. Where the end client qualifies as a “small” company under the Companies Act 2006, IR35 status stays with the worker’s own PSC, and no fee-payer obligation arises further down the chain. For accounting periods beginning on or after 1 April 2025, a company is small if it meets at least two of these for two consecutive financial years: turnover no more than £15 million, balance sheet total no more than £7.5 million, and no more than 50 employees on average. A company is always small in its first financial year. In groups and joint ventures, the test applies to the aggregate figures across connected entities, and if the group breaches the thresholds every entity loses the exemption.
The rules also assume a UK-based end client. A client based wholly overseas with no UK permanent establishment falls outside Chapter 10 of ITEPA 2003 and has no obligation to issue an SDS; the worker’s PSC assesses its own status under the original intermediaries legislation. The fee-payer role cannot rest with a non-UK-resident entity either. If a UK client contracts through an overseas agency that then pays a UK contractor’s PSC, the overseas agency is skipped and the UK client becomes the fee-payer.
Umbrella Company Supply Chains From April 2026
From 6 April 2026, new PAYE rules apply where umbrella companies employ workers in a supply chain. The agency, or the end client where there is no agency, becomes responsible for ensuring PAYE is operated correctly by the umbrella, and HMRC can recover any underpayment directly from the agency or client rather than only from the umbrella.12GOV.UK. PAYE Rules for Labour Supply Chains That Include Umbrella Companies From 6 April 2026
The change targets umbrella arrangements that reduce apparent deductions by disguising earnings as loans or other non-taxable payments. Under the new framework, agencies and end clients face joint-and-several liability for unpaid tax where an umbrella in their chain fails to operate PAYE properly. Any organisation using umbrellas should be checking that PAYE is being run correctly, because HMRC will look upward through the chain when it finds a shortfall at the bottom.