IR35 Payroll Responsibilities for Agencies, Hirers and Contractors

IR35 can feel complicated because it involves multiple parties, the contractor, the recruitment agency, the end hirer and sometimes an umbrella company or personal service company. Confusion is costly. It can cause delayed placements, incorrect expectations about pay and avoidable pressure on payroll and compliance teams.

This guide explains key IR35 payroll responsibilities for recruitment agencies and contractors at a high level. It is general information, not legal or tax advice; individual arrangements should be assessed on their facts.

What is IR35?

IR35, both within Chapter 8 of ITEPA, and also the “off payroll working rules” in Chapter 10 of ITEPA, concerns people who provide services through an intermediary, often a personal service company (PSC). The rules are intended to determine whether the individual would be regarded as an employee for tax purposes if the intermediary were not present.

HMRC provides detailed information on the off-payroll working rules.

The hirer’s role

Where the rules apply, the client or hirer has a central role in assessing the worker’s employment status for tax purposes. A clear process should consider the actual working practices as well as the contractual documentation.

The hirer should communicate the status decision and supporting reasoning through the supply chain. Unclear decisions can create delays, disputes and risk for everyone involved.

The recruitment agency’s role

For recruitment agencies, IR35 compliance is not just a box-ticking exercise. Agencies should have a process for receiving, recording and communicating status information.

Key agency responsibilities can include:

• Understanding the role and contractual supply chain.
• Obtaining the hirer’s status determination information.
• Communicating relevant information to the next party in the chain.
• Ensuring payroll arrangements align with the engagement model.
• Maintaining accurate records.
• Avoiding misleading contractor communications about expected take-home pay.
• Working with reputable payroll and umbrella partners.

For agencies supplying workers through an umbrella company, the umbrella company is usually the contractor’s employer and runs PAYE payroll. However, the agency must still understand its responsibilities in the wider labour supply chain.

The contractor’s role

Contractors should provide accurate information about their working arrangement, review the status decision they receive and understand their payment route. A contractor working through an umbrella company is employed by that umbrella company and paid through PAYE.

Contractors should also be cautious about payment schemes that claim to avoid tax or deliver unusually high take home pay. HMRC warns that some arrangements marketed through the temporary labour market may involve tax avoidance.

Payroll implications of an inside-IR35 engagement

When an engagement is inside IR35, the payment process must reflect the applicable tax treatment. Agencies, hirers and contractors should avoid treating the label “inside IR35” as a substitute for understanding the actual payment structure.

A transparent process should cover:

• The agreed assignment rate.
• The worker’s chosen and appropriate payment route.
• Applicable PAYE deductions.
• Payroll documentation and payment dates.
• Clear communication about what the contractor should expect.

Reduce IR35 friction through better communication

The most common IR35 pain points are often operational: late determinations, unclear reasoning, inconsistent paperwork, confusing rate discussions and contractors receiving incomplete information.

Recruitment agencies can reduce these issues by using a documented workflow, assigning ownership internally and ensuring consultants, compliance teams and payroll partners communicate consistently.

JMK Group UK supports recruitment agencies, contractors and the temporary workforce with payroll solutions, including umbrella payroll and support for PSCs. A clear IR35 payroll support for recruitment agencies and contractors process can help every party move from uncertainty to informed action.