Deemed employer responsibilities under off-payroll working rules
Check if you’re the deemed employer and what your responsibilities are if the off-payroll working rules (IR35) apply.
The off-payroll working rules make sure that a worker (sometimes known as a contractor) pays broadly the same Income Tax and National Insurance as an employee would.
The rules apply if the worker who provides services to a client through their own intermediary would have been an employee if they were providing their services directly to that client.
Who determines if the rules apply
The person responsible for administering the rules, including determining whether the worker is employed for tax purposes, depends on whether the client is in the public or private sector and whether the client is a small business.
In most cases, the client will be responsible for determining the employment status of the worker. However, if a worker provides services to a small client outside the public sector, the worker’s intermediary is responsible for deciding the worker’s employment status and if the rules apply. Different rules also apply if the client is based wholly overseas. Read more about off-payroll working for clients.
The off-payroll working rules apply on a contract-by-contract basis. A worker may have some contracts which fall within the off-payroll working rules and some which do not.
If the client determines that the contractor should be treated as ‘employed’ for tax purposes, the client should produce a status determination statement (SDS) setting out its assessment, and the reasons for this. While there is no specific legal format for an SDS, best practice would be to set this out in writing, such as an email, letter, or providing it online.
If there is a labour supply chain, the client should pass the SDS to the agency or other organisation they contract with, who should pass it down the labour supply chain until it reaches the party immediately above the worker’s intermediary. The party immediately above the worker’s intermediary is known as the fee-payer. The client should also pass the SDS to the worker.
The labour supply chain is the chain of separate contracts between each party, from the client to the worker’s intermediary. A contract for the purpose of the off-payroll working rules is a written, verbal, or implied agreement between parties.
Check if you’re the deemed employer
Under the off-payroll working rules, the deemed employer is the qualifying person at the lowest point in the labour supply chain in possession of the status determination statement (SDS). You are not the deemed employer until you have received the SDS, unless you are the client.
The deemed employer will often be the fee-payer (the party immediately above the worker’s intermediary) but a person or organisation will only qualify as the deemed employer if certain conditions are met.
To qualify as a deemed employer, you must:
- be resident in the UK, or have a place of business in the UK
- pay an intermediary that is controlled by the worker or associate of the worker
- not be controlled, or a material interest be held, by either a worker, alone or with one or more associates of a worker, or an associate of a worker, with or without other associates
If no party in the labour supply chain meets the qualifying conditions to be a deemed employer, the client remains the deemed employer.
The deemed employer is responsible for:
- deducting Income Tax (PAYE) and employee National Insurance contributions, and paying these to HMRC
- paying National Insurance contributions and Apprenticeship Levy, if applicable, to HMRC. This cannot be deducted from the payment to the worker’s intermediary and should be paid on top of the payment to the worker’s intermediary
The responsibility for deducting Income Tax and employee National Insurance contributions, and paying employer National Insurance contributions, is the client’s until they share the SDS with the worker and the person or organisation they contract with.
If you receive an SDS but do not pass it on, you will be the deemed employer and will be responsible for deducting Income Tax and employee National Insurance contributions and paying these to HMRC. You will also be responsible for the employer National Insurance contributions and Apprenticeship Levy.
You will remain the deemed employer until the determination is passed on.
If you are the deemed employer, and you disagree with the client’s status determination, you can challenge it if you think it’s wrong.
Your responsibilities as the deemed employer
If you are the deemed employer you must:
- calculate the deemed direct payment to account for employment taxes and National Insurance contributions associated with the contract
- deduct those taxes and employee National Insurance contributions from the payment to a worker’s intermediary
- pay employer National Insurance contributions
- report to HMRC through Real Time Information the Income Tax and National Insurance contributions deducted
- use the ‘off-payroll worker subject to the rules’ indicator in PAYE Real Time Information (the name of this indicator may be different in your software)
- apply the Apprenticeship Levy and make any payments
Employment allowance cannot be used against payments to deemed employees.
Read ESM10019 in the Employment Status Manual for further guidance on operating PAYE.
How to calculate deemed direct payments
The deemed direct payment is the amount paid by the deemed employer to the worker’s intermediary that should be treated as earnings for the purposes of the off-payroll rules.
- Work out the value of the payment to the worker’s intermediary, having deducted any VAT that applies.
- Deduct the direct costs of materials that have, or will be, used in providing their services.
- Deduct expenses met by the intermediary that would have been deductible from taxable earnings if the worker was employed.
- The resulting amount is the deemed direct payment. If it is nil or negative there is no deemed direct payment.
You then need to deduct Income Tax and employee National Insurance contributions as appropriate from the deemed direct payment. You also need to pay employer National Insurance contributions. Employer National Insurance contributions cannot be deducted from the deemed direct payment.
You’ll need to report the pay and deductions you make to HMRC using a Full Payment Submission, as you do for workers on your payroll. You should indicate that this person is an off-payroll worker by using the ‘off-payroll worker subject to the rules’ indicator in PAYE Real Time Information (the name of this indicator may be shown differently in your software).
You do not have to add these workers to your existing payroll, but you can do this if you wish. If the payments are not reported under your existing PAYE scheme, then you’ll have to open a new one.
You should keep records of any payments as well as amounts of Income Tax and National Insurance contributions deducted.
Find out how to calculate the deemed employment payment.
How much Income Tax and National Insurance contributions must be paid
You should give the worker a new starter checklist. This will decide the worker’s tax code. The Income Tax code will often be code ‘BR’, as the worker will have a primary employment with their own intermediary.
You must use the normal National Insurance rates and thresholds on the value of the deemed payment.
To work out how much Income Tax and National Insurance contributions need to be paid on the deemed employment payment, you can use either:
- your payroll software
- Basic PAYE Tools
How to correct errors
Use your PAYE software if you need to correct an error you’ve made on a previous PAYE or Real Time Information submission, as you would with any other mistake.
What you are not responsible for
You are not responsible for deducting student or postgraduate loan repayments for workers engaged through their own companies. The worker will account for student or postgraduate loan obligations in their own tax return.
As the worker is not one of your employees they are not entitled to:
- statutory payments
- be automatically enrolled into a pension
The worker’s entitlement to statutory payments comes through their employment with their intermediary. They can also contribute to a pension as an employee of their intermediary.
Workers providing services through intermediaries are also not entitled to employment rights from you, such as holiday pay.
If you disagree with a status determination
If you are the deemed employer, but not the client, you can challenge a status determination if you think it’s wrong. The worker can also challenge the determination.
The client who made the determination will need to have processes in place for dealing with disagreements about determinations they make.
If you disagree, you must explain the reasons why you think the client’s determination was wrong. You can provide any evidence you feel supports the reasons for your disagreement.
You will need to write to the client to give reasons why you disagree.
This should include details of:
- the employment status determination they disagree with
- their reasons for disagreeing
Keep copies of any records about disagreements.
The client will need to:
- consider any further information that you provide to them and reconsider the employment status determination
- decide whether to maintain the determination because they feel it is correct and give reasons why, or withdraw the determination because they feel it was wrong
- respond to you within 45 days of receiving your disagreement
- confirm which date the determination is valid from
You can raise a disagreement to the client until the last payment is made for the worker’s services.
The client will continue to apply the rules in line with their original determination until they respond.
Last updated 7 March 2023 + show all updates
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Details of the off-payroll working rules prior to April 2021 have been removed.
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The guidance has been updated to reflect that the off-payroll working rules changed from 6 April 2021.
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Information about a delay due to the coronavirus (COVID-19) pandemic removed.
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Guidance updated in the section 'What you are not responsible for' to include postgraduate loan repayments.
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This page has been updated to reflect the delay to the changes to the off-payroll working rules until 6 April 2021.
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Information about when the rules apply, how to check if you're the fee-payer, your responsibilities if you are the fee-payer and what to do if you disagree with a status determination has been updated after the review of the off-payroll working rules from April 2020.
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First published.