IR35 for recruitment agencies: who decides status, what the fee-payer owes, and the umbrella rule since 6 April 2026

A recruitment agency does not decide whether a contractor is inside IR35, but it is usually the party that pays when the answer is inside. Under the off-payroll working rules the client makes the decision, and the business that pays the contractor's limited company, which HMRC calls the fee-payer, runs the payroll and pays the employer's National Insurance. Since 6 April 2026 a second rule sits beside it: the agency is jointly liable for the PAYE of an umbrella company in its supply chain.

Who decides status

HMRC's guidance treats a private company as medium or large if it meets two or more of three conditions: annual turnover above £10.2 million, a balance sheet total above £5.1 million, more than 50 employees. The Companies Act figures behind the first two rose to £15 million and £7.5 million from 6 April 2025, but HMRC's manual says the earliest tax year the higher figures can affect a client is 2027/28. Until then the older figures are the test.

Ask every private client in writing which side of the line it is on. A small client moves the decision, and the tax risk, back to the contractor's company.

A client that decides must give its SDS, with reasons, to the worker and to the party it contracts with, which is the agency. HMRC tells clients to take reasonable care, and says that if they do not, the worker's income tax and National Insurance become the client's responsibility. That protects the agency only if it can show what it was given and when.

What the agency does as fee-payer

HMRC defines the fee-payer as "the party immediately above the worker's intermediary". In most chains that is the agency.

1. Before the assignment starts, ask the client for the SDS and file it with the date it arrived.
2. If a second agency sits between you and the contractor, pass the SDS down the chain the same day. HMRC's guidance says that an agency which receives an SDS and does not pass it on becomes the deemed employer, responsible for the tax, the employee and employer National Insurance and the Apprenticeship Levy.
3. If the SDS says inside, treat the fee as pay. Deduct income tax and employee National Insurance and pay them to HMRC through your payroll.
4. Pay employer National Insurance on top, and the Apprenticeship Levy if it applies to you. HMRC states that this "cannot be deducted from the payment to the worker's intermediary".
5. If the SDS says outside, pay the invoice gross and keep the SDS on the contractor's file.
6. If the contractor disagrees, the dispute goes to the client, which has 45 days to respond. A client that misses the 45 days takes on the tax and National Insurance itself.

The cost, worked

A contractor's company bills £400 a day for 20 days. That is £8,000 for the month before VAT, with no expenses. The agency charges the client £8,800, so its margin is £800.

The SDS says inside. Employer National Insurance for 2026 to 2027 is 15% of pay above a secondary threshold of £417 a month.

The placement loses £337.45 a month unless the charge rate was agreed with the employer's cost already in it. Quote inside roles from the SDS, and put the client's duty to supply the SDS before the start date into the terms of business.

The umbrella rule since 6 April 2026

Paying a contractor through an umbrella company takes the payroll off the agency's books. It no longer takes the risk away. A new Chapter 11 of the Income Tax (Earnings and Pensions) Act 2003 makes the agency jointly and severally liable for PAYE on umbrella payments made on or after 6 April 2026.

HMRC's manual and policy paper set out how it works:

• Which agency. Where a chain has more than one, it is "the agency in the supply chain who has a contract with the client to supply the worker".
• What is covered. The worker's income tax, student loan repayments, and both employee and employer Class 1 National Insurance.
• Who HMRC asks first. The policy paper of 21 July 2025 says the rule lets HMRC "pursue an agency in the first instance" for payroll taxes the umbrella has not paid.
• When the client is liable instead. Where the worker is placed through an agency based outside the UK, or where there is no agency in the chain.

We found no due-diligence defence in the HMRC pages we read, so we cannot say that good checks cancel the debt. HMRC's guidance for employment businesses asks for checks on umbrellas that are "regular, reasonable and proportionate". It names VAT registration, Companies House records and workers' payslips, and warns that in most circumstances "claiming that you were not aware of non-compliance is not a defence".

This tax rule is separate from the plan to bring umbrella companies inside the Conduct Regulations in 2027, which the Employment Rights Act dates guide covers.

What goes on the file

For each contractor paid through their own company:

• the client's dated statement of its size
• the SDS, the date it arrived and the date it was passed on
• the payroll record, if the decision was inside

For each umbrella company:

• the VAT and Companies House checks, with dates
• a sample of real payslips at a set interval, read against the rate you paid

A new agency should decide before its first contract placement whether it will pay contractors' companies at all; the start-up checklist lists what a temp desk adds.

Overlyft can set up an AI assistant that keeps the compliance documents an agency chooses to hold against each record, and flags a file with one missing. Who is put forward to a client stays the consultant's decision. This page is general information, not tax or legal advice.