IR35 and individuals supplied by agencies

23 March 2021

Individuals supplied by agencies could be within scope of the off-payroll workers change to law (IR35).

The change to the law for off-payroll workers will affect all ‘medium and large’ private sector organisations (and public authorities, for whom the rules already applied in similar form) that engage individuals through an intermediary. See Olivia Toulson’s article Off payroll working: April 2021 changes on this change to the law, which is due to take effect from 6 April 2021.

In situations where instead of contracting directly for an individual’s labour or services, an organisation contracts via an intermediary, then the new rules could apply. This is a really complex and technical area of the law and we have provided an example diagram below of the contractual relationship that this article addresses. This article does not replace the need for organisations and individuals to take legal advice. Instead, it is written to act as a warning that each individual situation needs to be reviewed and considered carefully to see whether the new rules apply and if so in what way.

If you are an end-client (the person who receives the benefit of the labour and ultimately bears the cost of the labour) who:

  • engages with a contractor and receives their services indirectly, for example, by contracting with an employment business/agency or a personal services company
  • the individual who is supplied by that employment business/agency or personal service company is not employed and the fees payable in respect of the engagement are not pay rolled by that employment business/agency
  • the individual provides their services to the employment business/agency or the end–client through a personal services company (or any entity in which the individual providing the labour or the end-client receiving it has a material interest)

then the new rules are likely to apply from 6 April 2021. 

Under the new rules, firstly the end-client who receives the individual/contractor’s services starts off with the responsibility to determine their status as employed or self-employed for tax purposes, and to pass on their status determination to the individual and/or any employment business or agency such end-client has contracted with. Unless and until the end-client has done this status determination and passed on the status determination statement, the end-client is liable for PAYE due. 

Once the end-client has complied with its obligations regarding status determination, if there are employment businesses or agencies with whom the end-client has contracted, for the purposes of the new rules a ‘chain of payments’ is formed. This chain of payments starts with the end-client and progresses down to the personal service company (or company in which the worker or client has a material interest). Each entity in that chain must pass on the status determination statement, and with this they also pass the responsibility of who is held liable for any PAYE. Ultimately, if each entity in the chain passes on the status determination and complies with the relevant applicable legal requirements, then it is whichever entity in the chain that actually pays the personal service company that is the ‘fee-payer’ who is liable for any PAYE. Note that the key change here is that it will no longer be the personal services company that bears the liability for PAYE. 

It will, in a simple client-agency-personal service company-individual structure, often be the agency who will be responsible (once the client has done their status determination and passed it on) as the agency will often be the ‘fee payer’ that has a responsibility to pay those fees to the employment business/agency via payroll. 

Note, however, that the PAYE liability under these rules should arise only where an individual worker personally performs services for a client that is either a medium or large business or a public authority, under arrangements involving a third party where the circumstances are such that if the services were provided under a direct contract between the client and the worker, the worker would be regarded for tax purposes as employed (a ‘deemed employment relationship’). 

It may be simpler for organisations that contract with employment businesses or agencies that supply workers involving a worker’s personal service company, as illustrated in the diagram below, to instead require the employment business/agency to payroll the worker’s fees that are ultimately paid to the personal services company. 


If an organisation chooses to take this approach, the employment business/agency may in turn decide to alter the way in which it contracts with the individual’s personal services company.

The economic effects of the change to the law may require a re-negotiation of the contractual terms in which the parties in the diagram above contract with each other.

Birketts has been recently advising organisations from all sectors on how best to manage this issue.

Due to the nature of the contractual relationships that can often occur in the diagram above, it can be difficult to manage the risk and responsibilities associated with this change to the law. Where a formal contract exists between an organisation and an employment business/agency or intermediary, a formal deed of variation to the existing contract will create contractual certainty. However, sometimes a more flexible approach may be needed where the supply of labour is more informal or based on the employment business/agency’s or intermediary’s terms of business. In these circumstances a stand-alone side agreement can be put in place.

We have also been advising employment businesses/agencies on how best to vary their contracts with the individuals who provide their labour through a personal service company. Whilst it is always important to keep contractual terms under review, this issue has resulted in a need for organisations and employment businesses/agencies to revisit the contractual mechanics of how they operate prior to the changes which are due to come in to force on 6 April 2021.

If you are an organisation that contracts with an employment business/agency to provide labour or you are an employment business/agency then it would be wise to seek advice on this issue. Birketts has a team of expert and experienced lawyers to advise on this specific issue and their details are below. Alternatively, please contact your regular Birketts’ contact who will put you in touch.

The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at March 2021.


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