IR35 Status Determination When a UK Agency Places a Contractor

Recruitment agencies that place contractors into UK engagements sit inside the off-payroll working chain, even though they do not decide the contractor's tax status. The off-payroll working rules, commonly called IR35, govern how a worker who supplies services through their own company is taxed, and they place specific duties on the client and on whoever pays the worker's company. In a typical placement the client decides the status and the agency that contracts with the client makes the payments, so the two duties fall on different parties. Two carve-outs change that allocation entirely, and getting the allocation wrong exposes the wrong party to the tax. This guide sets out who issues the Status Determination Statement in the placement chain, who operates payroll on an inside-the-rules engagement, the two carve-outs that move the responsibility, and what an agency must operate day to day.

What the off-payroll working rules cover

The off-payroll working rules apply where a worker supplies services through an intermediary but would be an employee for tax if engaged directly, the same contractor-versus-employee distinction that drives misclassification risk in other jurisdictions. The intermediary is usually the worker's own limited company, commonly a personal service company, often abbreviated to PSC. The rules exist to tax that engagement broadly as employment where the working relationship looks like employment, regardless of the company structure sitting between the worker and the client. They sit in Chapter 10, Part 2 of the Income Tax (Earnings and Pensions) Act 2003, and they have applied to private-sector and third-sector engagements since 6 April 2021. A repeal announced in 2023 was scrapped before it took effect, so the rules described here remain in force.

Who decides the status and issues the SDS

Where the off-payroll working rules apply, the client is responsible for determining the worker's employment status for tax. The client is the organisation the worker ultimately provides services to, which in an agency placement is the end client rather than the agency. Having reached a decision, the client must produce a Status Determination Statement, commonly called an SDS, that states the outcome and the reasons for it. The SDS is the document that fixes whether an engagement is inside or outside the rules, and the client must pass it both to the worker and to the next party in the contractual chain. Until a client issues a valid SDS, the responsibility for the tax can rest with the client rather than passing down the chain.

Who operates PAYE as the fee-payer

The fee-payer operates PAYE on an engagement that the client has determined to be inside the rules. The fee-payer is the party that pays the worker's intermediary, which in an agency placement is normally the agency holding the contract with the client. Where the engagement is inside the rules, the fee-payer must deduct income tax and employee National Insurance from the payment to the worker's company and account for employer National Insurance, treating the relevant payment broadly as employment income. The duty to operate PAYE follows the contractual money, so identifying the fee-payer means identifying who actually pays the worker's company, not who decided the status.

The small-company carve-out

Where the client is a small company outside the public sector, the responsibility for determining status stays with the worker's own intermediary. In that situation the client does not issue an SDS, and the obligation to assess whether the engagement falls inside the original intermediaries legislation rests with the PSC rather than passing up to the client or across to the agency. The carve-out is defined by company size, measured against the Companies Act small-company thresholds, which were updated in April 2025. A client that exceeds the size limits is treated as medium or large and carries the SDS duty, so the threshold test decides which regime applies.

The small-company thresholds are set by reference to annual turnover, balance-sheet total, and average number of employees, and a company is small if it meets at least two of the three. Under the Companies Act 2006 thresholds in force from 6 April 2025, those limits are an annual turnover of not more than 15 million pounds, a balance-sheet total of not more than 7.5 million pounds, and not more than 50 employees. The practical effect on off-payroll status is delayed, because a client's size is tested over two consecutive financial years, so the April 2025 uplift first changes status determinations from around April 2027. The size test also applies across a connected group rather than the hiring entity alone, so a small subsidiary within a larger group can still be treated as medium or large.

The wholly-overseas-client carve-out

Where the client is wholly overseas with no UK fixed establishment, the off-payroll working rules do not apply. A client falls into this carve-out when it has no presence in the United Kingdom that amounts to a fixed establishment, such as a branch or office, a position that often arises when a UK agency places contractors with clients in the Gulf. In that situation there is no UK client obligation to determine status or issue an SDS, and the engagement is assessed by the worker's own intermediary under the original intermediaries legislation instead. The carve-out turns on the client's UK footprint, so an overseas client that does hold a UK fixed establishment is brought back inside the rules and carries the SDS duty.

Who decides and who pays in each scenario

The allocation of the SDS duty and the fee-payer role depends on the client's size and location. The table below sets out the three main scenarios an agency encounters when placing a contractor who works through a personal service company.

Scenario	Who determines status / issues the SDS	Who is the fee-payer
Large UK client, agency in the chain, worker on a PSC	The client determines status and issues the SDS	The agency that pays the worker's company, if the engagement is inside the rules
Small private-sector client	The worker's own intermediary (PSC) determines status; no client SDS	The PSC accounts for tax under the original intermediaries legislation
Wholly-overseas client, no UK fixed establishment	Off-payroll rules do not apply; the PSC assesses status itself	No UK fee-payer duty under the off-payroll rules

Worked example

A UK agency places a contractor who works through a personal service company with a large UK end client. Because the end client is medium or large and based in the United Kingdom, the off-payroll working rules apply, so the client determines the contractor's status and issues a Status Determination Statement to both the contractor and the agency. The client decides the engagement is inside the rules, which makes the agency the fee-payer, so the agency deducts income tax and employee National Insurance from the payment to the contractor's company, accounts for employer National Insurance, and reports through PAYE.

The allocation changes if the facts change. If the same contractor is placed with a client that is wholly overseas and holds no UK fixed establishment, the off-payroll rules do not apply, no client SDS is issued, and the contractor's company assesses its own position under the original intermediaries legislation. If instead the client is a small private-sector company, the responsibility for determining status stays with the contractor's company rather than passing to the client or the agency, so again no client SDS is issued and the agency does not operate PAYE on the basis of a client determination. The same placement therefore produces three different outcomes depending only on the size and location of the client.

What an agency operates day to day

An agency in the off-payroll chain runs a set of routine controls even though it does not determine status. The first is confirming, for every placement, which party carries the SDS duty, which depends on whether the client is medium or large, small, or wholly overseas without a UK fixed establishment. The second is obtaining and retaining the SDS where the client must issue one, and passing it down the chain if the agency is not the final payer. The third is operating PAYE correctly when the agency is the fee-payer on an inside-the-rules engagement, including the income tax, employee National Insurance, and employer National Insurance treatment. The fourth is keeping records that evidence which regime applied to each engagement, so the basis for paying the worker's company gross or net can be shown if queried.

Hiring contractors compliantly without carrying the chain

Companies that want to engage UK contractors without operating the off-payroll chain themselves can use an employer of record or a compliant employment route. Under an employment route the worker is employed directly and paid through PAYE, which removes the status-determination question because the engagement is employment rather than an off-payroll supply through a PSC, a contrast with regimes such as the EU presumption of employment for platform workers that instead shift the default towards employee status. This shifts the income tax, National Insurance, and employment-rights obligations onto the employing entity and gives the worker employee status, in place of the client determining status, issuing an SDS, and a fee-payer operating PAYE on a deemed basis. The mechanics of employing a worker through a third party are set out on the Employer of Record service page.

About Aspirock

Aspirock is an Employer of Record and payroll provider operating across 70+ countries, with six global offices and over 22 years of experience supporting more than 5,000 workers. Every client works with a named account team that owns the deployment end to end, so contracts, payroll, visas, and compliance filings in each market are handled by people accountable for the outcome. For employer-of-record and payroll support, see the Employer of Record service page.

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