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Fee-payer risk

Standing Out From The Crowd

Understanding the fee-payer risk

There are a number of parties in the contractual chain. At a minimum there is the contractor and the end client. But often, there is a consultancy, umbrella or recruitment agency that also sit within the chain. The fee-payer is typically the organisation that pays the PSC.

The end client is responsible for determining the IR35 status and must be able to evidence reasonable care. However, the party identified as the fee-payer shoulders all the risk when it comes to making the appropriate deductions.

Know your obligations

Unless the fee-payer is wholly overseas or controlled by the contractor, the fee-payer is also the deemed employer. This means they are the party responsible for making sure the correct tax treatment applies to each payment made to the PSC.

If the off-payroll rules apply and the engagement is inside IR35, the deemed employer must calculate and deduct Income Tax and employee National Insurance contributions from the payment it makes. Otherwise the payment can be made gross, without any deductions.

The deemed employer must also pay employer National Insurance contributions and Apprenticeship Levy where applicable.

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What is your exposure to HMRC?


We’re the recruitment agency dealing with contractors and understand we are the fee-payer. What is our exposure if HMRC decide that an engagement is caught and should be Inside IR35?

Assuming you receive an outside IR35 SDS and have paid the contractor gross, if HMRC subsequently challenges this then, as the fee-payer, you are the party who is primarily liable for the unpaid tax and NI which should have been deducted. Therefore, it is your agency that will need to defend the IR35 position in the event of an HMRC enquiry.

This may seem unfair given that it is the client who made the decision. But this is how the legislation is worded. The client may become liable however if it did not take reasonable care making the decision regarding IR35, but in most cases the liability will rest solely with the fee-payer.

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