Engaging with contractors through an intermediary

This article is the fifth in our monthly tax series in which TLT’s team of tax specialists look at specific tax issues arising in the financial services sector.

In our work in the financial services sector, we often help our clients understand, and comply with, their employment taxes responsibilities when engaging with contractors.  In this month’s article, we answer some frequently asked questions on the tax rules (commonly referred to as the Off-Payroll Working rules) which apply when a business engages with contractors through an intermediary.

What are the Off-Payroll Working rules?

The Off-Payroll Working rules, introduced in 2021, capture arrangements where a medium or large-sized business (or public sector organisation) engages individuals via their own intermediary (most commonly a limited company that such individuals own (PSC)) either directly or indirectly. 

Where such arrangements are in place then the rules require the engaging business to determine the status of the individual contractor (ie whether, absent the intermediary, the individual would be treated as an employee of the business or a self-employed contractor) before the engagement begins and provide a status determination statement (SDS) confirming the outcome of that analysis. 

PAYE income tax, employee and employer national insurance liabilities will arise for the business where the individual is treated as an employee and they contract directly with the intermediary and can arise in other circumstances if other parties in the contractual chain fail to comply with their obligations or the business has failed to comply with specific aspects of the legislation, such as the requirement to produce a SDS.

How does a business know when the Off-Payroll Working rules apply?

Ostensibly the rules apply where the business engages contractors via their own intermediaries, however, identifying such arrangements in practice can range from straightforward to more complex, particularly where there are quite long contractual chains.  First, it is essential to have the right processes in place to: (a) identify and classify contractor arrangements; and (b) determine how those contractors will perform the services.  Second, training should be ongoing to ensure that everyone involved in the engagement of contractors understands the scope of the rules. 

As for whether the individuals will be considered deemed employees there are a wide range of tools available to assist in making that determination.  One of these is HMRC’s “Check Employment Status for Tax” (CEST) tool, which has the benefit of an HMRC commitment to stand by the outcome of the tool, provided that the questions were answered accurately.  However, we are aware that its one size fits all approach can lead to difficulties of interpretation and may not necessarily be helpful in all cases, particularly when engaging experts. 

Do the Off-Payroll Working rules apply to “outsourced” arrangements?

The application of the Off-Payroll Working rules can often be overlooked where a business has an arrangement that is commonly labelled an “outsourced” or “contracted out” arrangement. In reality, these types of arrangement may involve the business, as the client, receiving the services of the individual and the provider engaging that individual via their PSC. This can result in the business being responsible for determining the employment status of the individual and, potentially, for accounting for employment taxes in relation to the engagement.

Sometimes these “contracted out” arrangements may be dealt with by different parts of the organisation, such as procurement rather than HR, and processes may be different to those which apply to the engagement of individual contractors.

We have seen recent issues with incorrect classification of arrangements as contracted out services, where actually the Off-Payroll Working rules applied. These issues can be managed by appropriate contractual provision, at the very least a robust tax indemnity, but also potentially a general restriction on engaging workers via PSCs, or restrictions with consent.

Are there alternatives to engaging contractors via intermediaries?

Since the implementation of the Off-Payroll Working rules we are aware that many organisations have implemented a complete ban on the use of contractors engaged via intermediaries to provide services in order to limit tax risk.  However, in order to maintain an element of flexibility and access to diverse skills, organisations (being the “end client”) have increased the use of umbrella companies.  In this scenario these umbrella companies act as the workers’ employer and account for income tax and national insurance on any income paid to them through PAYE.  The rationale for the use of these arrangements by the end client is that, provided that the individuals had no interest in the umbrella company, these arrangements represented a nil or low tax risk issue for the end client under the Off-Payroll Working rules.  

Are there tax risks for an end user business associated with umbrella company arrangements?

Yes there can be. Umbrella company compliance has been a watching brief for the government in recent years, with a keen eye on compliance failures, specifically including the underpayment of, or complete failure to pay, employment taxes by umbrella companies.  This was marked by a consultation by the previous government in 2023 on options to reduce non-compliance in the umbrella company market. 

At the Autumn Budget 2024 the new labour government announced that it would create legislation to change who has responsibility to account for PAYE where a non-compliant umbrella company is used in a labour supply chain to engage a worker. 

Following consultation, it was announced on 21 July 2025 that with effect from 6 April 2026 legislation will be updated to make employment agencies or end clients jointly and severally liable for any amount required to be accounted for under the PAYE rules where an umbrella company forms part of a labour supply chain.  There will be equivalent legislation for national insurance purposes.  An end client will be liable if contracting directly with an umbrella company. 

While no doubt most umbrella companies will have gone through some sort of procurement process, this doubles down on the requirement to ensure that an end client business follows rigorous due diligence procedures in assessing any umbrella company with whom it wishes to engage directly.  An umbrella company will no longer be the easy solution to managing a flexible worker population. 

TLT comment 

Ensuring compliance with the Off-Payroll Working rules is crucial for businesses when engaging contractors through PSCs or classifying arrangements as “outsourced”. Forthcoming legislation targeting non-compliant umbrella companies means end clients may soon be liable for PAYE where such structures are used as an alternative. Given these developments, businesses should implement robust due diligence across their supply chain and regularly review engagement models, including contractual terms, to minimise unexpected liabilities.

How can we help?

Our Incentives and Employment Tax team operates out of our offices in Bristol, London and Manchester and works with a range of clients including FTSE, AIM and global companies, PE backed companies and start-up companies. 

We have an in-depth knowledge of employee tax and can help you ensure your business complies with its payroll obligations in the context of ongoing employments and termination of employment.  We can also advise you on how to protect your business, and comply with the relevant legislation, when engaging with individuals supplying their services through an intermediary or umbrella company.

If you are interested in discussing any of the topics covered in this article, get in touch with our Incentives and Employment Tax specialists below. 

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2025. Specific advice should be sought for specific cases. For more information see our terms & conditions.