Since 6 April 2026, where an umbrella company in your supply chain does not account for its PAYE, HMRC may be able to recover it from you. There is no exemption for small businesses, and whether you are caught turns on facts about your agency rather than about you. And the increase in the small company thresholds you have read about does not take you out of the off-payroll rules yet: for most companies it will change nothing until 2028.
You need six months of work done and you do not want a permanent hire. You find someone, and they ask to be paid through an umbrella company. The umbrella runs the payroll and you approve an invoice each month. Nobody in your business has met the umbrella, and nobody has asked what it does with the money.
Then HMRC writes to you about the PAYE the umbrella did not pay. That letter has been possible since 6 April 2026, and the size of your business makes no difference to it. Put an agency into the chain and the answer changes, though not always in your favour: it turns on whether that agency is UK resident and whether it is connected with the umbrella, which are facts about somebody else’s business that you have probably never checked.
Contractor status is a subject where the law moved twice inside eighteen months and the received wisdom has caught up with neither change. One of the two is being under-reported and it has real teeth; the other is being over-reported, and businesses are acting on it about two years early. Underneath both sits the question we are asked most often, which is whether a well-drafted consultancy agreement is enough. It is not, and it never was. Status turns on the true terms of the relationship, and what the parties actually do is the best evidence of those, so a contract describing a relationship nobody is living is worse than no contract at all.
| Where the line runs. We draft and review the consultancy and contractor agreements, we run the status documentation and the record-keeping, we deal with the indemnities and set-off between the parties, we advise on the employment-rights side of status and on TUPE where a contractor base transfers, and we run the status workstream on a sale. The tax analysis, the deemed employment payment, any HMRC enquiry or settlement and any CEST position are not ours: they sit with our tax colleagues. Payroll operation sits with our accountancy colleagues. We are a non-contentious practice, so an HMRC status enquiry and any tribunal claim are referred out. Where appropriate, we work alongside our tax, accountancy and financial-planning colleagues across Fusion Consulting Group. |
1. The change that has already happened: umbrella companies
Finance Act 2026 inserted a new Chapter 11 into Part 2 of the Income Tax (Earnings and Pensions) Act 2003, with effect for payments made on or after 6 April 2026. Where a worker provides services to you and is employed by an umbrella company, each “relevant party” is jointly and severally liable, along with the umbrella, for the PAYE the umbrella should have accounted for on that pay. National Insurance follows through a parallel set of regulations in force the same day.
Who the relevant party is depends on the shape of your supply chain:
- No agency in the chain. Where the umbrella contracts directly with you, you are a relevant party. A business that has quietly been engaging two or three contractors through an umbrella, with nobody in between, is now a primary debtor for that umbrella’s PAYE.
- An agency in the chain. The agency that holds the contract with you is the relevant party, and you are not. Where there is more than one agency, only the one contracting with you is caught; the ones further down are not.
- The two exceptions that put you back in. You are a relevant party anyway if that agency is connected with the umbrella company, or if it is not UK resident. Tied agency and umbrella groups are not unusual, so this is not a remote possibility.
Three features of the regime deserve saying plainly, because each one cuts against what most people assume.
| There is no small company exemption. None at all. The operative conditions turn on the worker, the umbrella and the shape of the contractual chain, not on the size of the client or of the agency, and there is no equivalent of the small client relief that takes a small business out of the off-payroll rules. Size does not decide whether you are caught; the shape of your chain does. But a five-person owner-managed company engaging one contractor directly through an umbrella is caught, and carries the same liability as a FTSE 100 client. There is no statutory order of recovery, and HMRC’s published position is not the one you would hope for. The liability is ordinary joint and several liability. Nothing requires HMRC to pursue the umbrella first, or to exhaust it before turning to you. Its manual says that where the tax and National Insurance go unpaid it will pursue recovery from the relevant parties, meaning the agency or the client, and that there may be circumstances where it is appropriate to pursue the umbrella instead. There is no published sequence or safe harbour of the kind Chapter 10 provides. Whether you are exposed turns on facts about the agency you may not know. The two questions that decide it are whether the agency contracting with you is UK resident, and whether it is connected with the umbrella. The umbrella’s own residence is not the test. That is a contract and due diligence problem before it is a tax problem, and it is squarely ours. Ask in writing, then put warranties to that effect in the terms of business, with an obligation to notify a change and an indemnity behind it. |
One trap worth knowing about in advance. Where an HMRC officer tells you that you may be jointly and severally liable, the disclosure can name the umbrella and set out its liability. Onward disclosure of that information without HMRC’s consent may constitute a criminal offence. Whether it does depends on what the information is, on whether consent was given and on the exceptions that apply, but a finance director forwarding the letter to the agency, the umbrella or an adviser is exactly the fact pattern the restriction is aimed at. Obtain HMRC’s consent, or specific advice, before circulating it.
2. The change that has not: why £15 million does not help you yet
The Companies Act small company thresholds rose to turnover of £15 million, a balance sheet total of £7.5 million and 50 employees, for financial years beginning on or after 6 April 2025. The off-payroll rules borrow that definition, so the natural conclusion is that a good many businesses have already moved out of scope. They have not.
The reason is a timing rule that gets very little attention. A company’s size for off-payroll purposes is taken from its last financial year that is “relevant to” the tax year, and a financial year is only relevant once the period for filing the accounts for that year has ended before the tax year begins. For a private company that filing period is nine months from the year end. The first financial year that can be tested on the new figures is therefore the first one beginning on or after 6 April 2025, and its answer does not arrive until nine months after it closes.
Working that through by accounting reference date:
| Your year end falls | First financial year tested on the new figures ends | First tax year the new thresholds can help |
| 5 April to 5 July | April to July 2026 | 2027/28 |
| 6 July to 4 April | July 2026 to April 2027 | 2028/29 |
HMRC’s own guidance says the earliest tax year affected is 2027/28, which is right as an earliest. Both of its worked examples use a 30 June year end, which sits inside that narrow early window. For the two commonest year ends in owner-managed businesses, 31 December and 31 March, the answer is 2028/29. If you have read that the change took effect in April 2025 or April 2026 and have acted on it, the position needs revisiting.
There is a second brake on top of the timing. A change in size only takes effect if the company meets, or ceases to meet, the conditions in two consecutive financial years, so one year on the right side of the line does not move you. A transitional provision in the 2024 regulations softens that by rewriting the earlier year on the new figures, which is why the uplift can bite as soon as the timing allows rather than two years later still.
| And there is a trap for the businesses that do drop below. Falling out of the off-payroll rules is not automatic. Where you have already issued status determination statements and you cease to be medium or large, you must give a statement withdrawing them, to the worker or the deemed employer, before the tax year begins. Miss that and you are treated as medium or large for the whole of that tax year and you become the deemed employer for the engagement. It is a diary entry, and it is an expensive one to forget. |
3. Employee, worker, self-employed, and the two questions nobody separates
Employment law works with three practical categories: an employee, a worker who is not an employee, and someone who is genuinely self-employed. They are not watertight compartments. The statutory definition of worker includes anyone under a contract of employment, so every employee is also a worker, and the definitions are not uniform across the statute book: the Employment Rights Act, the Working Time Regulations, the minimum wage legislation, the Equality Act and the pensions legislation each have their own wording and their own eligibility conditions. Discrimination law casts the net widest, catching anyone under a contract personally to do work.
Tax law recognises two: employed and self-employed. There is no worker status for tax.
The same facts feed both analyses and the factors overlap heavily, but the questions are separate and the thresholds differ. The Government’s own guidance states that the two frameworks are separate and not interchangeable. The practical consequence is one that catches businesses out repeatedly: the same person can be genuinely self-employed for tax and a worker for employment-rights purposes. Winning the argument with HMRC does not win the holiday pay claim.
The two questions are also approached differently by the courts. In a claim for statutory rights, the written contract is evidence but not the starting point, and terms that misdescribe the relationship or contract out of statutory protection are disregarded. The Court of Appeal has held that this approach does not apply to a tax status question, because the justification for it, which is the protective purpose of the employment legislation, is absent. In a tax dispute the tribunal applies ordinary principles of contractual interpretation. That is a real difference in method and it is one reason a single “status review” that treats both questions as one exercise tends to answer neither properly.
4. What IR35 actually tests, and who carries the risk
There are two regimes, they do not overlap, and which one applies to you depends on your own size rather than on anything about the contractor.
| The original rules (Chapter 8) | The off-payroll rules (Chapter 10) | |
| When they apply | The client is not a public authority and either qualifies as small, or has no UK connection | The client is a public authority, or qualifies as medium or large and has a UK connection |
| Who decides status | The worker’s own company | You, the client |
| Who carries the liability | The worker’s own company | The fee-payer, which is you where you contract directly with the worker’s company |
| Applies since | The original regime, and still the one that applies to small clients | Public sector 6 April 2017; private sector 6 April 2021 |
Both regimes ask the same underlying question. If the worker had contracted directly with you, rather than through their own company, would they have been your employee for tax purposes? That is a question of general employment law, and the legislation supplies almost none of the answer. One point of detail is worth correcting because it is repeated everywhere: the 5 per cent allowance in the original rules was never abolished. What happened in 2021 was that the scope of those rules was narrowed, so the allowance survives in every case still within them.
The status determination statement, and the default that bites
Where the off-payroll rules apply, you must give the worker a statement of your conclusion on status and your reasons for it. The statute requires those two things and nothing else. HMRC also asks you to pass it down to the party you contract with, and you should, because an agency that has not been given it drops out of the chain and the liability travels back up towards you.
Two features do the real work. There is no statutory deadline, and that is not a relief: you are the deemed employer unless and until you give the statement, so in practice it has to be done and passed down before the relevant payment. And a statement made without reasonable care is not a statement at all, which means the liability never left you rather than reverting to you. If the worker or the deemed employer says your conclusion is wrong, you have 45 days either to confirm it with reasons or to issue a new one. Nor is pushing the role down the chain immunity: where HMRC cannot realistically recover from the deemed employer, it can come back up the chain to the agency below you and then to you.
5. Substitution, control and mutuality: the factors that decide it
The Supreme Court restated the test in 2024 and the restatement is not the one usually reported. Mutuality of obligation and control are necessary conditions, but they are thresholds rather than answers, they are set lower than was commonly assumed, and they do not drop out of the picture once passed. Obligations that exist only while the work is being done are enough for mutuality. The bar for control is not high, and sanctions available only after the engagement has ended can form part of the framework of control. The real work is done at the third stage, on the whole of the terms and all the circumstances.
The best illustration is the same litigation. Having established that both thresholds were satisfied as a matter of law, the case returned to the First-tier Tribunal, which held in May 2026 that the referees were self-employed after all, and HMRC was reported the following month as saying it would not appeal. Two thresholds passed, and self-employment at the end of it. Anyone treating status as a three-box checklist is using the wrong instrument.
One point is commonly misunderstood, and both of the confident answers are wrong. A substitution clause is not worthless merely because it has never been exercised: a genuine right that has not yet been needed remains a genuine right. What destroys it is that it is unrealistic, that nobody on either side ever seriously contemplated it operating. The distinction is between a right that has not been used and a right that could never be used, and answering it means looking at who may be supplied, who chooses and pays them, and on what grounds you could refuse.
6. What getting it wrong costs
There are two heads of exposure and they are entirely separate. The first is assessed by HMRC and follows the tax status question. The second is claimed by the individual and follows the employment-rights question, on its own timetable.
On the tax head, a re-characterised engagement carries income tax, employee and employer National Insurance, the apprenticeship levy where it applies, interest and a penalty. Employer secondary National Insurance runs at 15 per cent above a secondary threshold of £5,000 for 2026/27, which means it bites on very nearly the whole of the fee. Interest on late-paid PAYE and National Insurance is 7.75 per cent, the rate from 9 January 2026. Penalties are behaviour-based: nothing where reasonable care was taken, and up to 30, 70 or 100 per cent as the behaviour worsens. HMRC can go back four years as a matter of course, six for carelessness and twenty where the behaviour was deliberate.
| An illustration, and it is a composite rather than a real engagement. A contractor at £500 a day for 220 days a year is £110,000. Employer National Insurance alone on that, at 15 per cent above the £5,000 threshold, is about £15,750 a year for one person. Across twenty contractors that is over £300,000 a year, before any income tax, employee National Insurance, interest or penalty. Four years of that, at current rates, is over £1.2 million in employer National Insurance alone. A real look-back runs year by year at the rate for each year, so treat that as an order of magnitude rather than a calculation. It is still the number that moves a price on a sale. |
One relief cuts the number down, and it is regularly missed. Since 6 April 2024 HMRC may set off tax already paid by the worker and their own company against the deemed employer’s liability, so the same income is not taxed twice over. On HMRC’s published position that extends to the worker’s and the intermediary’s National Insurance as well as their income tax and corporation tax, though the National Insurance element rests on a general discretion rather than on the 2024 regulations and is correspondingly softer. Three limits matter. It is a discretion rather than an entitlement; the amount may be HMRC’s best reasonable estimate rather than a reconciliation; and employer secondary National Insurance is outside it altogether, so the largest single element of the bill survives in full. Any modelling of an exposure should be run past our tax colleagues before it is relied on.
The employment-rights head is not assessed by HMRC, does not follow the tax time limits, and turns on whether the individual was a worker or an employee rather than on the tax answer. Holiday pay, the National Minimum Wage and pension auto-enrolment attach to worker status; unfair dismissal, statutory notice and redundancy pay require employee status. Unfair dismissal is about to get more expensive, because on 1 January 2027 the unfair dismissal qualifying period falls from two years to six months and the statutory cap on the compensatory award is repealed outright.
- The two-year holiday pay backstop is not the cap it is usually taken for. On its wording it applies to claims for unlawful deduction from wages, and a tribunal has accepted that a claim on termination under the Working Time Regulations sits outside it. The point has not been decided on appeal. Separately, where an employer has not recognised the right to paid leave, the four weeks of core leave carry forward. For a contractor engaged for years and then found to be a worker, the exposure can extend well beyond two years and may reach across the engagement, subject to the carry-forward conditions and the route by which the claim is brought.
- National Minimum Wage arrears are revalued upwards to the rate in force when the notice is served, with a penalty of 200 per cent capped at £20,000 per worker, and every case at £500 or more of arrears is considered for public naming.
- Auto-enrolment contributions are backdated where the individual is an eligible jobholder, and the agency worker rights run alongside all of it: twelve weeks in the same role brings equal treatment on basic pay and conditions, and neither an umbrella company nor a personal service company takes the individual outside those rules by itself.
7. Contracts that reflect reality, and what CEST will not do for you
Drafting is not a defence on its own, and it is not nothing either. What a well-drafted consultancy agreement does is describe accurately a relationship that is genuinely independent, so that when the question is asked in four years’ time the answer is written down and the evidence supports it. What a badly drafted one does is create a document that contradicts the working arrangements, which is worse than silence. The substitution right therefore has to be one you could actually honour, you have to specify what and by when while the contractor decides how, the engagement needs a defined scope and an end point rather than a rolling retainer, and the fee should carry some real risk. Strip out the employment precedent language as well: holiday, sick pay, a grievance procedure, “salary”, “annual leave” and “line manager” each belong to a different document. The guide sets each factor out against what makes the clause worthless in practice, with a worksheet for testing a contract against what actually happens.
HMRC’s Check Employment Status for Tax tool is worth running and worth keeping, with the questions and the answers you gave rather than a screenshot of the outcome. HMRC’s position is that an accurate output can itself serve as the status determination statement where the statutory conditions are met, which makes the record behind it more important rather than less. It is not a safe harbour and should never be described as one: HMRC stands by the result only where the information remains accurate and is used in accordance with its guidance, and not where the arrangement is contrived. It asks whether a contract exists, but HMRC says that answer does not affect the determination, and the tool does not weigh the nature or extent of the mutual obligations.
And a record-keeping mismatch worth fixing this week. Under the PAYE regulations, records must be kept for three years after the end of the tax year. HMRC can assess for four, six or twenty. Keep the status file, including the contract, the statement, the reasoning, the CEST inputs and the evidence of working practices, for at least seven years from the end of the tax year in which the engagement ended.
8. Status on a business sale
Contractor status is one of the reliable ways for a transaction to lose momentum in week six, because it is invisible until somebody looks in the right place. A competent buyer’s solicitor does not start with the contract file. They ask for the purchase ledger, because the contracted population and the paid population diverge, and the people paid through accounts payable for years with no contract anywhere are where the exposure sits.
On a share sale the company’s tax history goes with the shares, so the whole of the historic exposure comes across. On an asset sale it does not, but the buyer is not clean either: where there is a relevant transfer or a service provision change, anyone who is in truth an employee and assigned to the grouping that transfers moves across with their accrued rights. Whether workers, as distinct from employees, transfer at all is unresolved.
Two points decide how the exposure is handled. A warranty is the wrong instrument for a known, quantified, contingent liability, because a warranty claim is measured by diminution in value with causation and mitigation in play, where a properly drafted indemnity is a payment obligation. And the de minimis is what quietly destroys the protection, because status claims arrive as many small claims rather than one large one.
One point clients get comfortable on for the wrong reason. Where the off-payroll rules apply and you are the deemed employer, the PAYE liability is your own statutory liability to HMRC. An indemnity from the contractor’s company cannot transfer it, reduce it or discharge it. It gives you a right of recourse after you have paid, worth exactly the covenant strength of a company that is typically a single-director shell. Have one; do not rely on it.
What to do before HMRC takes an interest
- Map the population from the purchase ledger rather than the HR system. Sole traders, personal service companies, agency and umbrella workers, members of LLPs, non-executives and, above all, former employees re-engaged as consultants doing the same job.
- Ask every agency you use, in writing, which umbrella companies are in the chain, whether the agency itself is UK resident, and whether it is connected with any of them. Those last two are the questions that decide whether you are caught as well as the agency. Then get warranties to that effect into the terms of business.
- Establish whether you are small, and establish it at group level and across connected businesses. Turnover is aggregated across companies under common ownership even where there is no holding company between them.
- If you are about to drop below the thresholds, diarise the withdrawal of your outstanding status determination statements before 6 April, not after.
- Identify your three highest-risk consultancy engagements and read them against what actually happens, and talk to the hiring managers rather than to the file.
- Keep the status file for seven years from the end of the tax year in which the engagement ends.
Quick answers
We only use contractors through an agency. Are we exposed?
Less so on the off-payroll rules, provided you have issued a valid determination and passed it down: the agency is then normally the fee-payer. On the umbrella rules it depends on the agency. If the agency contracting with you is UK resident and unconnected with the umbrella, it is caught and you are not. If it is connected or non-resident, you are caught as well. And if HMRC cannot recover a deemed employer debt from the agency, it can come up the chain to you.
Our turnover is under £15 million. Are we outside the off-payroll rules?
Not yet. The threshold change applies to financial years beginning on or after 6 April 2025, and the answer does not feed through until the filing deadline for that year has passed before the tax year starts. For a 31 December or 31 March year end that is 2028/29. Size is also tested on two of three conditions, at group level, and with turnover aggregated across connected businesses.
The contractor’s company has indemnified us. Are we covered?
No. Where you are the deemed employer the liability is yours and it is you that HMRC looks to. The indemnity gives you a claim against the contractor’s company after you have paid, which is worth whatever that company is worth several years later. The protection is getting the determination right and being able to evidence the care you took.
The tax analysis is the part everyone asks about first. What decides the answer is the working arrangement, and whether your paperwork describes it or contradicts it. Download the full guide: IR35, Consultants and the Self-Employment Risk (PDF), including the contractor status risk checklist and the status review worksheets.
Book a contractor-status review. We will map your off-payroll population, read the contracts against what actually happens, tell you which engagements we consider at risk and what to do about them, and put the supply chain terms right. Call +44 (0)20 3841 7010 or email [email protected].
Published 16 September 2026.
Disclaimer: This article provides general information about the law of England and Wales and, on stamp duty land tax, England and Northern Ireland. It is not legal, tax or financial advice, and nothing in it is a recommendation to make any investment. Law and tax rates stated as at 11 October 2026. Tax rates and thresholds change, including at the Budget due on 28 October 2026, so check the current position before relying on them. Fusion Law is the trading name of Fusion Law Ltd, authorised and regulated by the Solicitors Regulation Authority (SRA No. 822590). Other services provided by companies in the Fusion Consulting Group are not regulated by the Solicitors Regulation Authority.
Legal sources
Income Tax (Earnings and Pensions) Act 2003, sections 44, 48, 49, 54, 60A to 60I, 61L to 61TA, 61V, 61WA, 61Y to 61Z2 and 688AA. Finance Act 2017, Schedule 1; Finance Act 2020, Schedule 1; Finance Act 2021, section 21; Finance Act 2026, section 24. Employment Rights Act 1996, sections 23, 27 and 230. Equality Act 2010, section 83. Working Time Regulations 1998, regulations 2, 13, 15B, 15C, 15F and 16A. Companies Act 2006, sections 382, 383 and 442. Taxes Management Act 1970, sections 34 and 36. Finance Act 2007, Schedule 24. Income Tax (Pay As You Earn) Regulations 2003, regulations 72GA to 72GC, 80, 97 and 97LA to 97LH. Transfer of Undertakings (Protection of Employment) Regulations 2006, regulation 2. The Income Tax (Pay As You Earn) (Amendment No. 3) Regulations 2020; the Companies (Accounts and Reports) (Amendment and Transitional Provision) Regulations 2024; the Income Tax (Pay As You Earn) (Amendment) (No. 2) Regulations 2024; the Social Security Contributions (Umbrella Companies) Regulations 2026. Ready Mixed Concrete (South East) Ltd v Minister of Pensions and National Insurance [1968] 2 QB 497; Autoclenz Ltd v Belcher [2011] UKSC 41; Pimlico Plumbers Ltd v Smith [2018] UKSC 29; Uber BV v Aslam [2021] UKSC 5; HMRC v Atholl House Productions Ltd [2022] EWCA Civ 501; Independent Workers Union of Great Britain v Central Arbitration Committee [2023] UKSC 43; Chief Constable of the Police Service of Northern Ireland v Agnew [2023] UKSC 33; Harpur Trust v Brazel [2022] UKSC 21; Smith v Pimlico Plumbers Ltd [2022] EWCA Civ 70; HMRC v Professional Game Match Officials Ltd [2024] UKSC 29 and, on remittal, [2026] UKFTT 654 (TC); Dewhurst v Revisecatch Ltd (Employment Tribunal, case number 2201909/2018). HMRC Employment Status Manual, in particular ESM2405, ESM2410, ESM2415, ESM2420, ESM2425, ESM2430, ESM2435, ESM10006A, ESM10010, ESM10014, ESM10037, ESM10038, ESM11005, ESM11010, ESM11015 and ESM11036; HMRC Guidelines for Compliance GfC4; GOV.UK rates and thresholds for employers 2026 to 2027. The full list is in our client guide.
