IR35 compliance: building the off-payroll process UK hirers need

The off-payroll rules were introduced in 2000 and placed on a more enforceable footing by moving responsibility from the contractor’s company to the hiring organisation, first in the public sector in 2017 and then to medium and large clients in the private and voluntary sectors in 2021. HMRC’s written evidence to Parliament says internal analysis showed at least 50,000 people moved onto PAYE in the public sector after the 2017 reform, generating an additional £250 million in 2017/18 and £275 million in 2018/19. The public sector experience was the template for 2021.

HMRC’s later evaluation of the private sector reform reports its own estimate of the effect. It says around 120,000 workers are likely to have been affected by the April 2021 reform, that an additional £4.2 billion has been generated in tax revenues in the period October 2019 to March 2023, and that the average annual tax increase per affected worker is £10,000 including employer taxes. These are government estimates, not audited receipts, and the methodology involves judgements about what would have happened anyway. Even so, they show how the Exchequer regards the policy: as effective and worth defending.

For a Head of Legal, the practical meaning is that compliance is not a niche concern that will fade. The reform shifted work from HMRC’s investigation of individual contractors to the client organisation’s determination process, which scales better for the tax authority and shifts cost and risk to hirers. HMRC’s written evidence also confirms that it has invested in guidance, webinars and one-to-one calls with the largest businesses. Large hirers are therefore likely to be treated as informed, and assessed on that basis.

What to do: brief the board and audit committee with a one-page summary of the regime and your current exposure, expressed as the number of engagements within scope and the percentage with a documented determination. Treat the answer as a baseline metric. If you cannot state the denominator, start by building the inventory of off-payroll engagements, because every other control depends on it.

Behind the numbers sits a behavioural shift that legal teams should recognise. HMRC’s evaluation estimates that a small share of the workforce was affected, but that share accounts for a large amount of tax because the average annual increase per affected worker is £10,000. Individual outcomes therefore matter to the Exchequer, and to the contractor’s net pay, which is why disputes tend to be contested. A hirer that treats each determination as a routine administrative step may underestimate how much rides on it for the individual and for HMRC.

GOV.UK guidance says clients are medium or large if they meet two or more conditions: annual turnover above £10.2 million, a balance sheet total above £5.1 million, or more than 50 employees. Public sector clients are always in scope. If the parent of a group is medium or large, its subsidiaries also have to apply the rules. A client below the thresholds is small, which means responsibility for determining status stays with the contractor’s own company rather than the client.

The thresholds have since risen. Stevens & Bolton reports that the small-company limits are now turnover of no more than £15m, balance sheet total of no more than £7.5m and no more than 50 employees, for financial years beginning on or after 6 April 2025, and that the government estimates around 14,000 companies will transition to small companies. Not all of them use off-payroll workers. The employee test is unchanged, so a company with fewer than 50 employees but turnover between £10.2 million and £15m will now fall on the other side of the line.

Timing needs care. Because the size test looks at the previous financial year, advisers differ on when the change takes practical effect: Stevens & Bolton says some businesses will not see the impact until at least 6 April 2026, while Greenberg Traurig states that the higher thresholds will apply in practice from April 2027 at the earliest. We do not resolve that difference here. It is a reason to verify the position against HMRC’s current guidance and your own year-end dates before changing any approach.

What to do: re-run the size test each year, for every legal entity and for the group as a whole, and record the result with the date. Do not relax determinations solely because a threshold has moved; a company that has relied on a determination process may find that the contractor’s intermediary, the agency or the end client has a different view of who is responsible. Tell your agencies in writing what your size status is and when it changes.

Groups deserve particular attention. Because a medium or large parent brings its subsidiaries into scope, the entity that signs a contract is not necessarily the entity whose size matters most. Corporate restructurings, acquisitions and disposals can change a group’s status in a single transaction, and a newly acquired subsidiary may arrive with its own off-payroll engagements and no determinations. Legal and corporate development teams should agree a standard integration step: an off-payroll inventory and size-test review within the first quarter after any change of control.

GOV.UK guidance is direct: a client must take reasonable care when making a determination. The determination has to be communicated in a status determination statement (SDS) that gives reasons, and passed to the contractor and to the next party in the chain. HMRC’s guidance says that until you pass down the statement, you will remain the deemed employer and responsible for PAYE, and that if the statement does not meet the required criteria it will not be valid, leaving responsibility for deducting tax and National Insurance with the client organisation.

The legal effect is therefore practical rather than technical. A determination that is made but not documented, not reasoned, or not communicated before payment fails to move the liability that the rules intend to move. In a chain with an agency, the client’s compliant statement allows the agency to treat the engagement correctly; without it, the client remains on the hook. Many disputes in practice begin with a missing or late statement rather than a wrong conclusion about status.

Reasonable care is the standard against which the work will be judged. It implies that the person making the determination has relevant information about the working arrangements, applies a consistent method, records the reasoning and revisits the decision when the engagement changes. A blanket determination applied to a whole role family without looking at individual circumstances is the type of shortcut that is difficult to defend, whichever direction the result goes. The documentation should show that the engagement was considered on its facts.

What to do: define an SDS template with required fields, owner, date, decision, reasons and evidence, and make issuing it a pre-condition for the first payment. Build a control that blocks purchase orders or onboarding where no statement exists. Keep a register of statements and the date each was passed to the contractor and agency, because the register is the evidence you will rely on if HMRC asks.

A well-run determination is also a commercial document. It sets out why the client regards the engagement as inside or outside, and it signals to the contractor how the client views the relationship. Where the conclusion is inside, the contractor’s fee will normally be adjusted, so clear and early communication affects negotiation and retention of scarce skills. Where the conclusion is outside, the client should be comfortable that its day-to-day management practice will not undermine the statement. Alignment between legal conclusion and operational behaviour is the real test.

The off-payroll rules include a client-led status disagreement process. GOV.UK guidance says a client must provide a response within 45 days of receiving notification, and HMRC’s Employment Status Manual states that the legislation requires clients to deal with disagreements within 45 calendar days beginning with the day the representations are received. There is no cap on how many times a worker or deemed employer can raise a dispute. A disagreement can be raised until the last payment is made for the worker’s services.

The consequence of missing the deadline is significant. HMRC guidance states that failure to respond within 45 days results in the worker’s Income Tax and National Insurance contributions falling to the client side of the chain, so that the client or fee-payer takes on the tax liability for payments made. A process that depends on a single email inbox or a quarterly legal review is not built for this. A dispute that arrives during a holiday period and sits unopened can generate a liability that no one decided to accept.

The process also affects relationships. Contractors who feel that a determination was made without reasons are more likely to challenge it, and every challenge consumes legal and managerial time. Clear reasons at the first stage reduce the number of disagreements, and a fast, courteous second-stage response reduces escalation. Where the new determination changes the outcome, the client must state when the new SDS applies from, and the deemed employer must correct its reporting in its next period or through a corrective filing.

What to do: treat the 45-day clock as a formal service-level agreement. Create a single intake route, log the date of receipt, assign a reviewer with authority to change the determination, and report open cases weekly. Require agencies to forward representations to you on the day they receive them. Test the process with a dry run each quarter, so that the first live challenge is not also the first time the process has been used.

Evidence retention is the other half of timeliness. A response sent within 45 days is only helpful if the reasoning behind it can be reconstructed later. Keep the original representation, the facts re-examined, the person who decided, the outcome and the date the new statement takes effect. If a determination changes, the corrective reporting position also needs to be documented. These records are the file you will hand to HMRC, to auditors or to an agency that asks why its payroll position changed.

HMRC’s own 2021 impact assessment, in its written evidence to Parliament, estimated that about 180,000 personal service companies would be affected, that up to 60,000 medium and large-sized client organisations outside the public sector would be impacted, and that approximately 20,000 employment agencies would be involved. It also expected £3.8 billion of additional revenue over 2020/21 to 2025/26. Agencies are therefore a large and visible group, and they sit at the centre of the liability chain.

GOV.UK guidance explains that, where the client contracts with one or more agencies, who the deemed employer is will depend on the position in the chain, whereas if the client contracts directly with the worker’s intermediary, the client is always the deemed employer. The deemed employer is responsible for deducting Income Tax and employee National Insurance contributions and paying the employer contributions. For a staffing firm, that means the commercial terms with clients, and with downstream providers, must say clearly who performs these functions and what happens when information is late or wrong.

Recovery and set-off are further considerations. GOV.UK has published a policy on calculating PAYE liability where the rules have been incorrectly operated, which applies to liabilities assessed on or after 6 April 2024 and relates to deemed direct payments made from 6 April 2017. The related HMRC consultation concerned set-offs, which deal with how tax already paid through a worker’s intermediary is taken into account. The detail matters to anyone modelling downside exposure and should be read in full with counsel rather than summarised from commentary.

What to do: for agencies, review every master services agreement and supply contract for clauses on SDS timing, information accuracy, indemnities, set-off and fee-payer responsibilities. For clients, align your terms so that an agency cannot become the deemed employer through a failure that you caused. For both, agree a data-sharing protocol that specifies how determinations, disagreements and corrections are transmitted, in what format and within what time.

Smaller agencies face a particular squeeze. They often depend on clients’ information to operate PAYE correctly, yet carry the penalty if the information is late or wrong. Where an agency has many clients, each with its own process and timing, the aggregate administrative load can be heavy. Industry bodies and larger agencies have a role in encouraging clients to adopt a common data format for statements and disagreements, which reduces errors and makes outsourced payroll processing feasible. Clients benefit too, because cleaner data reduces the number of queries returned.

The off-payroll rules do not change the underlying employment status test; they change who has to apply it. The Court of Appeal’s 2022 decisions in HMRC v Atholl House Productions and Kickabout Productions v HMRC, both in HMRC’s favour, stated that mutuality of obligation and the right of control must be present for a contract of employment, and that contractual terms are the starting point. As summarised by Irwin Mitchell, the court also said it was desirable to have one clear approach to determine employment status.

For hirers the lesson is that how the engagement works in practice will be examined alongside the paper. A contractor with a substitution clause who never substitutes, or a statement of work that disclaims control while a manager directs the day, creates a gap between document and reality. HMRC can see that gap through email, systems access and organisation charts. A well-reasoned determination records what is actually done, not only what the contract allows.

The case law also supports a sceptical view of heavy reliance on a single tool. HMRC’s Check Employment Status for Tax service is useful, but a result generated from inaccurate inputs does not meet the reasonable care standard. Equally, a determination that rests on an advisory firm’s generic opinion without considering the particular engagement is vulnerable. Evidence of the actual arrangement, gathered from the hiring manager and the contractor, is the foundation for a defensible conclusion.

What to do: require a short, structured engagement questionnaire from the hiring manager at the start, covering control, substitution, equipment, financial risk and integration. Re-confirm the answers at renewal and at any change in scope. Sample a proportion of engagements each quarter and compare the paper with working practice, including a conversation with the manager, and treat discrepancies as findings to be corrected.

Sampling should include conversations, not only paperwork. A thirty-minute discussion with the hiring manager about how the contractor is directed, whether they could send a substitute and who provides equipment often reveals more than a document review. Findings should be shared with managers constructively, because the objective is to align practice with the determination, not to criticise. Where practice has drifted towards employment-like control, the choices are to change the practice, change the determination or end the engagement, and each should be a deliberate decision recorded by the accountable executive.

Pulling the requirements together, the model has six parts. An inventory of off-payroll engagements. A size-test record. A determination method with documented reasoning. An SDS issue and pass-down control that gates payment. A disagreement process that meets the 45-day limit. And assurance, comprising sampling, metrics and board reporting. Each has an owner, usually a named person in legal, procurement or finance, and a service level. Without ownership the parts decay into templates nobody opens.

The labour market context raises the stakes. The Office for National Statistics reports that payrolled employees fell by 138,000, or 0.5%, between April 2025 and April 2026, and that workforce jobs data show a decrease of 127,000, or 2.9%, in the self-employment jobs component over the year. A softer market gives hirers more leverage over rates and terms, and the temptation to fill roles with contractors on tight timelines can lead to determinations made in a hurry. The process has to hold when business pressure is highest.

Metrics make the model manageable. We suggest tracking the percentage of engagements with a valid SDS before first payment, the median time to determination, the number of disagreements received and answered inside 45 days, the share of determinations changed on review, and the number of sampled engagements where practice differed from paper. These are lead indicators; a rise in changed determinations, for example, signals that first-stage reasoning is weak, long before a tax assessment arrives.

What to do: appoint an accountable executive and a working group that meets monthly, with legal, tax, procurement, HR and a business representative. Agree the metrics, set targets, and report quarterly to the audit committee. Commission an independent review of a sample of engagements every year. Publish a plain-English guide for hiring managers, because the quality of the determination depends on the quality of the information they supply.

Technology can help but does not replace judgement. Workflow tools can route questionnaires, enforce mandatory fields, issue and time-stamp statements, track the 45-day clock and produce management information. They are most useful when the underlying process is already clear. We would avoid buying a platform before the roles, decision rights and metrics are agreed, because the tool will then encode confusion. Start with a spreadsheet and a clear owner if necessary, prove the process, and then automate the parts that are repeatedly slow or error-prone.

Karter McKinley’s Strategy & Transformation work helps legal, procurement and finance leaders turn off-payroll compliance into a documented operating process: inventory design, determination workflow, agency contract alignment, service-level and metric design, and implementation support. We work alongside your tax and employment counsel, who remain responsible for legal advice on individual determinations. This paper is general information, not legal advice.