When agencies sit between contractors and clients, who determines IR35 status?

Most contractors don't work directly with end clients. There's usually a recruitment agency in the middle, sometimes two or three. This creates a chain: you invoice the agency, the agency invoices the client, and somewhere along that chain someone needs to determine your IR35 status and someone needs to be liable if they get it wrong.

For contractors, this arrangement creates confusion. Who assesses your status? Who's responsible if the assessment is wrong? What happens if the agency and client disagree? Can the agency force you inside IR35 even if your working practices suggest you're outside?

For agencies, IR35 creates risk. Get the determination wrong and they might be liable for unpaid tax. Get it right but the client disagrees, and they lose business. Some agencies have responded by blanket-banning limited company contractors entirely.

Understanding how IR35 works when agencies are involved matters for everyone in the contracting chain. The liability can shift depending on who sits where, what decisions they make, and how the commercial arrangements are structured.



How the Typical Agency Chain Works

Start with the basic structure. You're a contractor operating through your limited company. An end client needs someone with your skills. A recruitment agency finds you and brokers the arrangement.

The contract chain usually looks like this: the end client has a contract with the agency, the agency has a contract with you, you have a contract with your limited company, and your limited company provides services through you to the agency.

Money flows backwards along the chain. You invoice your limited company. Your limited company invoices the agency. The agency invoices the end client. The end client pays the agency. The agency pays your limited company. Your limited company pays you.

Each link in this chain is a separate legal relationship. The terms of your contract with the agency might be completely different from the terms of the agency's contract with the end client.

This creates complexity for IR35 because your status depends on the relationship between you and the end client, but you might never have a direct contract with the end client.

The Fee Payer Responsibility

Under the off-payroll working rules introduced in April 2021, the "fee-payer" is responsible for operating IR35. The fee-payer is defined as the party paying the contractor's limited company, even if they're not the end client.

In most agency arrangements, the agency is the fee-payer. Your limited company invoices the agency, so the agency pays the fees.

This means the agency is responsible for:

• Receiving the Status Determination Statement from the end client
• Operating PAYE if you're determined inside IR35
• Paying employer's National Insurance
• Issuing payslips
• Handling all the tax obligations

The agency can't pass this responsibility back to you. If you're inside IR35, they must operate PAYE on payments to your limited company. They can't just pay you gross and leave you to sort out the tax.

When there are multiple agencies

Sometimes you have agency chains. A prime agency has the client contract, they subcontract to a second agency, who contracts with you. In this scenario, the agency directly paying your limited company is the fee-payer with all the responsibilities.

The prime agency isn't off the hook entirely. If they fail to pass the Status Determination Statement down the chain, or if they pass on an SDS they know to be incorrect, they can become liable instead.

Who Actually Determines IR35 Status

The end client is responsible for determining your IR35 status if they're medium or large. They must issue a Status Determination Statement assessing if you're inside or outside IR35.

The agency doesn't make this determination. They receive it from the client and act on it. If the client says you're inside, the agency must operate PAYE. If the client says you're outside, the agency can pay you gross.

This separation of responsibility is crucial. The agency isn't making the judgment about your working practices. The client is. The agency's job is to implement what the client has determined.

Small client exemption

If the end client is small (meets two of three tests: turnover under £10.2 million, balance sheet under £5.1 million, fewer than 50 employees), they're exempt from making determinations. In this scenario, you assess your own status, just like the pre-2021 rules.

The agency should confirm the client's size before accepting they're exempt. If the agency wrongly assumes the client is small when they're not, the agency becomes liable for any unpaid tax.

When clients don't provide an SDS

If a medium or large client fails to provide an SDS, the agency must assume you're inside IR35 and operate PAYE. The client's failure to provide an SDS doesn't mean you can operate outside by default.

This puts agencies in a difficult position. If the client won't provide an SDS, the agency either needs to refuse the placement or force the contractor inside IR35 to protect themselves.

Agency Liability vs Client Liability

The liability for getting IR35 wrong sits with different parties depending on the circumstances.

When the client provides an accurate SDS

The client is liable if their determination is wrong. If they said you were outside IR35 but HMRC later determines you were inside, the client owes the unpaid tax. The agency and contractor are protected.

When the client provides an SDS but the agency knows it's wrong

If the agency receives an SDS but has reasonable grounds to believe it's incorrect, and they don't challenge it, liability can transfer to the agency. This "reasonable care" test means agencies can't just blindly follow client determinations they know are false.

When the client doesn't provide an SDS

The agency becomes liable. They're the fee-payer and they haven't received a determination, so they're responsible for operating PAYE and any resulting tax if they don't.

When the contractor provides false information

If you deliberately mislead the client or agency about your working arrangements, causing an incorrect determination, you can become personally liable. Liability can transfer to the party who caused the error through fraud or negligence.

Agency Workers vs Contractors Through Agencies

There's important legal distinction between being an agency worker and being a contractor who happens to work through an agency.

Agency workers are covered by employment agency legislation. They have employment rights, holiday pay, and protections. For tax purposes, they're often employed by the agency itself or an umbrella company.

Contractors through agencies are self-employed businesses providing services. They don't have employment rights from the agency relationship. They're not agency workers in the legal sense.

Some agencies deliberately blur this distinction. They'll talk about "our contractors" and treat them like agency workers while maintaining they're self-employed for tax purposes. This creates risk for everyone.

IR35 applies to contractors through agencies, not agency workers who are already employed. If you're genuinely an agency worker receiving employment rights, IR35 is irrelevant because you're already paying tax as an employee.

What Agencies Should Be Doing

Competent agencies operating in the post-2021 world should have clear processes for handling IR35.

Before placement

Confirm the end client's size to determine if the off-payroll rules apply. Request an SDS from medium and large clients before you start work. Review the SDS for obvious errors or missing information. Clarify any ambiguities with the client.

Explain to you what the determination means and how it affects your pay. If you're inside IR35, break down the PAYE deductions so you understand your take-home. If you're outside, confirm this is based on a client SDS and show you the determination.

During the engagement

Monitor any changes to working practices that might affect status. If your role significantly changes, the SDS might need reviewing. Process payroll correctly if you're inside IR35. Issue proper payslips, make correct deductions, pay HMRC on time.

Maintain proper records of SDS documents, correspondence with clients, and evidence of reasonable care in checking determinations.

If you challenge the determination

Facilitate your right to disagree with the client's SDS. Pass your challenge to the client through the proper process. Operate based on the client's response to your challenge. Keep records of the dispute and resolution.

What Many Agencies Actually Do

The gap between what agencies should do and what many actually do is substantial.

Blanket policies

Many agencies have decided all contractors go through umbrellas. They won't engage limited companies at all. This eliminates their IR35 risk entirely but forces contractors inside IR35 regardless of actual working practices.

Some agencies claim this is because "all our roles are inside IR35." Often it's because they don't want the administrative burden or potential liability of handling limited company contractors.

Inadequate SDS processes

Some agencies don't request SDS documents from clients. They make their own determinations or guess based on similar roles. This is wrong and exposes the agency to liability.

Others receive SDS documents but don't share them with contractors. You're told "the client says you're inside" but never see the actual determination or reasoning. This denies you the right to challenge.

Passing liability to contractors

Some agencies include contract clauses attempting to make contractors liable for IR35 determinations. These clauses are generally unenforceable because IR35 legislation specifies where liability sits. Contracts can't override statutory liability rules.

Agencies might require indemnities from contractors. While you can agree to indemnify an agency, this doesn't shift the primary liability away from the fee-payer. It just means they can sue you if HMRC comes after them.

Poor communication

Many contractors don't understand who determined their status or on what basis. The agency might tell you "you're inside IR35" without explaining this is based on a client SDS, or what the SDS actually says, or that you have rights to challenge it.This information vacuum makes it impossible for contractors to properly assess if determinations are correct.

Red Flags in Agency Arrangements

Certain agency behaviors suggest they're not properly handling IR35 responsibilities.

They refuse to show you the SDS

You're entitled to see the Status Determination Statement. If the agency won't provide it, they're either not following the proper process or they're hiding something.

They claim to have assessed you themselves

For medium and large end clients, the agency shouldn't be making the determination. If they claim they've assessed you, they've either misunderstood the rules or the end client is failing their obligations.

They insist all roles are inside IR35

While it's possible all their roles genuinely are inside, blanket policies often indicate the agency doesn't want to deal with proper IR35 processes. Every role should be individually assessed based on actual working practices.

They try to make you liable

Contract clauses that attempt to shift IR35 liability from the agency to you are unenforceable. The agency is the fee-payer and the legislation specifies their responsibilities.

They change your status mid-contract without explanation

If you start outside IR35 and they suddenly say you're inside, there should be a reason. Either working practices changed, or there's been a review, or something triggered a reassessment. Arbitrary changes suggest poor process.

They won't facilitate challenges

If you disagree with an inside determination and want to challenge it, the agency must facilitate this. If they refuse or say it's not possible, they're denying your statutory rights.

Your Rights When Working Through Agencies

You have specific rights under the off-payroll working rules even though you're working through an agency.

Right to see the SDS

You're entitled to receive or see the Status Determination Statement. The agency must provide this on request.

Right to make representations

If you disagree with the determination, you can make representations to the end client. The agency must pass these representations to the client within 45 days.

Right to a response

The end client must respond to your representations within 45 days and issue a new SDS if they change their determination. If they don't respond within 45 days, they become liable for any IR35 tax due, removing protection from the agency and contractor.

Right to proper PAYE treatment if inside

If you're determined inside IR35, the agency must operate PAYE correctly. This means proper tax codes, correct deductions, payslips, P60s, and all normal employment tax processes.

You don't have the right to be determined outside IR35 if your working practices suggest you're inside. But you do have rights to proper process and documentation.

When You Should Challenge Through Agencies

Challenging an inside IR35 determination through an agency is more difficult than challenging directly with a client. You're adding layers of communication and potential delay.

Challenge when

• The determination is clearly wrong based on your actual working practices. You have strong evidence of control, substitution rights, or lack of mutuality that wasn't properly considered.
• The SDS is incomplete or doesn't properly assess the key tests. Many client determinations are rushed or use tick-box approaches that miss crucial details.
• Your working practices are substantially different from what the client assumes. Sometimes clients make determinations based on typical roles rather than your specific circumstances.

Don't bother challenging when

• You're genuinely inside IR35 but don't like the tax outcome. Challenges should be based on facts, not financial preference.
• The determination is marginal and could go either way. Borderline cases rarely succeed in challenges because clients err on the side of caution.
• You haven't actually started work yet and don't know what the working practices will be. Challenge once you've seen the reality of the role if it differs from expectations.

How Agency Chains Complicate IR35

Multiple agencies in the chain creates additional complexity.

Prime and subcontract agencies

The prime agency has the relationship with the end client and receives the SDS. They must pass this to their subcontract agency. The subcontract agency must pass it to you.

Each link in the chain has responsibility to pass the SDS down accurately and act on it properly. If any link breaks, liability can shift.

Conflicting information

Sometimes the prime agency and subcontract agency give you different information about your status. This usually indicates poor communication or one of them misunderstanding the situation.

The SDS from the end client is what matters. If agencies are giving conflicting information, demand to see the actual SDS from the end client.

Fee structures

In agency chains, each agency takes a margin. This can make inside IR35 positions particularly unattractive because you're losing tax efficiency and paying multiple agency margins.

Understanding the full fee structure helps you assess if a position is financially worthwhile.

Umbrella Companies as Agency Solution

Many agencies now require contractors to use umbrella companies instead of engaging limited companies directly. This is their solution to IR35 risk.

From the agency's perspective, this is clean. The umbrella employs you, operates PAYE, handles all tax obligations. The agency pays the umbrella as a business, and IR35 doesn't apply because you're already employed.

From your perspective, you're inside IR35 by default regardless of your actual working practices. You lose the tax efficiency of genuine outside IR35 arrangements, and you pay the umbrella's margin on top.

When umbrellas make sense

If you're genuinely inside IR35 anyway, using an umbrella the agency recommends can simplify your admin. You avoid running payroll through your own limited company, and the umbrella handles everything.

If you're moving between multiple short-term contracts that are all inside IR35, umbrella consistency across engagements can be easier than constantly adjusting your own company's tax treatment.

When they don't

If you have other outside IR35 contracts and want to maintain your limited company, being forced through an umbrella for one inside role creates unnecessary complexity.

If you could legitimately operate outside IR35 but the agency's blanket umbrella policy forces you inside, you're losing thousands in tax unnecessarily.

Questions to Ask Agencies Before Accepting Roles

Before committing to a contract through an agency, clarify the IR35 situation completely.

Ask directly

Has the end client provided a Status Determination Statement? Can I see it? If they're a small company and exempt, how have you verified their size?

If I'm determined inside IR35, who made that determination and what was it based on? Can I see the assessment and the reasoning?

If I disagree with an inside determination, what's the process for challenging it? How long does that process take?

What happens to my pay if I'm inside IR35? Show me the actual deductions and take-home calculation. How does this compare to working outside IR35 on the same rate?

Do you require umbrella companies for any contractors, or can I work through my limited company if I'm outside IR35?

Assess the answers

Good agencies will have clear answers to all these questions. They'll show you documentation. They'll explain the process. They'll be transparent about determinations and calculations.

Poor agencies will be vague, claim they can't share certain information, or pressure you to accept terms without proper explanation.

The quality of agency answers to IR35 questions tells you a lot about the quality of the agency.

The Future of Agency IR35 Practices

Agency practices around IR35 continue evolving as case law develops and HMRC enforcement increases.

Some agencies are improving processes, investing in proper IR35 assessment capabilities, and working with clients to ensure determinations are robust. These agencies see IR35 compliance as a competitive advantage.

Others are retreating from limited company contractors entirely, making umbrella companies mandatory for all placements. This minimizes their risk but reduces contractor choice.

The trend seems to be towards more agency involvement in assessments. While the end client remains legally responsible for determinations, agencies are providing guidance, templates, and review services to help clients make better decisions. This reduces the risk of agencies receiving inaccurate SDS documents.

For contractors, this means being more selective about which agencies you work with. Agencies with robust IR35 processes, transparent communication, and willingness to engage with complex situations are worth building relationships with. Agencies with blanket policies and poor communication are worth avoiding if you have the choice.

Making Agency IR35 Work

When agencies sit between you and end clients, IR35 gets more complicated. But it's manageable if everyone understands their responsibilities.

The end client determines status. The agency operates tax based on that determination. You have rights to see determinations and challenge them. Liability sits with the fee-payer unless someone else caused the error through negligence or fraud.

Insist on transparency. Get everything in writing. Understand who determined your status and on what basis. Know your rights and don't accept agencies denying them.

If an agency won't provide proper information or facilitate proper process, that's a serious red flag about the placement. The agency's job is to implement IR35 correctly, not to hide information or shift risk onto you.

Work with agencies that understand IR35 properly, communicate clearly, and respect your rights as a contractor. Avoid agencies that treat IR35 as something to work around rather than comply with properly.

Your IR35 status depends on your working practices with the end client. The agency is just the mechanism for implementing the resulting tax treatment. Keep that distinction clear, and you'll navigate agency relationships successfully even in the post 2021 IR35 world.