Last reviewed: 4 October 2026. This guide is general information, not legal advice. The off-payroll working rules are UK tax rules; company size thresholds come from the Companies Act 2006.
TL;DR
- Under the off-payroll working rules (IR35), a public authority or a medium or large client decides the contractor's status and issues a Status Determination Statement (SDS).
- The SDS travels down the chain. The party immediately above the contractor's limited company is the fee-payer, and usually the deemed employer who deducts tax and National Insurance.
- Agencies of every size have duties: the size test applies to clients only.
- From 6 April 2025, a client is medium or large if it exceeds two of: £15m turnover, £7.5m balance sheet, 50 employees. HMRC says the change will usually affect clients from 2027 to 2028 at the earliest.
- Marvin does not handle IR35. It does not decide status, deduct tax or run payroll.
IR35 in one paragraph
HMRC's Understanding off-payroll working (IR35) explains the purpose: the rules "make sure that a worker (sometimes known as a contractor) pays broadly the same Income Tax and National Insurance as an employee would", where the worker provides services through their own intermediary, usually a personal service company (PSC), and would have been an employee if engaged directly. The rules apply contract by contract. HMRC also notes that they are "unlikely to apply" if the worker is employed by an umbrella company; umbrella chains have their own rules, covered in umbrella company PAYE rules from April 2026.
Who decides status: the client and its SDS
The responsible party depends on the client:
- Public sector client, or medium or large-sized client outside the public sector: the client decides.
- Small client outside the public sector: the contractor's own intermediary decides.
HMRC's deemed employer guidance says the client should produce an SDS "setting out its assessment, and the reasons for this". There is "no specific legal format", but best practice is to put it in writing. The client must take reasonable care and must have a process for disagreements: according to HMRC's guidance for clients, it must respond within 45 days of a disagreement raised by the worker or the deemed employer, or the tax and National Insurance become its own responsibility.
The client, the agency or the worker can use HMRC's Check Employment Status for Tax (CEST) tool. HMRC says it "will stand by all results given by the tool, as long as the information you give remains accurate and is in accordance with our guidance".
The agency's role: passing the SDS, and the fee-payer
HMRC's off-payroll working rules for agencies are clear on one point that surprises small agencies: "The conditions about size only apply to clients. If you are a small-sized agency you will still have responsibilities."
The fee-payer and the deemed employer
The SDS is passed down the labour supply chain until it reaches "the party immediately above the worker's intermediary", which HMRC calls the fee-payer. In a simple chain (client, agency, contractor's PSC), that is your agency.
The deemed employer is "the qualifying person or organisation sitting at the lowest point in the supply chain, but above the worker's intermediary, who is in possession of the SDS". To qualify, according to HMRC, 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 an associate;
- not be controlled by the worker or an associate, nor have them hold a material interest in you.
If the SDS says the contract is inside IR35, the deemed employer deducts Income Tax and employee National Insurance from the fees paid to the PSC, and pays employer National Insurance and, where applicable, the Apprenticeship Levy on top. These cannot be deducted from the payment to the contractor's company.
Three situations HMRC spells out
- You receive the SDS and do not pass it on: you become the deemed employer, with all the deductions above.
- You do not receive an SDS: pass on payment without deductions. You can ask the party above you why; often the client is small. HMRC adds that if you contract with the client, "you can ask the client to confirm its size".
- You are the first agency in the chain: liability "may transfer back to you" if HMRC cannot collect tax from parties below you, for example because they have dissolved for reasons other than genuine business failure. Choose who you contract with carefully.
The 2025 size thresholds: what changed, and when it bites
Whether a private sector client is small is decided by the Companies Act 2006 tests. The Companies (Accounts and Reports) (Amendment and Transitional Provision) Regulations 2024, in force from 6 April 2025, raised two of the three limits in section 382 of the Companies Act.
| Criterion | Before | Financial years beginning on or after 6 April 2025 |
|---|---|---|
| Turnover | More than £10.2m | More than £15m |
| Balance sheet total | More than £5.1m | More than £7.5m |
| Employees | More than 50 | More than 50 (unchanged) |
HMRC's manual ESM10006A explains how this applies to IR35:
- a corporate client is medium or large if it exceeds at least two of the three thresholds (more than £15m turnover, more than £7.5m balance sheet total, more than 50 employees) for two consecutive financial years; one year above the limits is not enough to change its status;
- the size used for a tax year is based on the last financial year whose filing deadline ended before that tax year starts;
- a transitional provision lets a company apply the new thresholds to the previous financial year.
The result: "for the usual 12-month financial year, the earliest tax year the transitional provision will impact a client is 2027/28". So a mid-sized client that becomes small under the new figures will usually keep applying the rules until then. And a small client that grows will take longer to come into scope.
Two traps for agencies:
- GOV.UK pages disagree. At the time of writing, HMRC's guidance for clients, last updated in August 2024, still quotes £10.2 million and £5.1 million. The manual ESM10006A has the new figures.
- Unincorporated clients (partnerships, for example) have their own test, which ESM10006A says is not affected by the threshold changes.
When a client tells you it has become small, ask for confirmation in writing and keep it with the assignment.
A practical IR35 routine for a contract desk
- At the brief: ask whether the client is public sector, medium or large, or small, and who will issue the SDS.
- Before the start date: get the SDS in writing, pass it to the contractor and down the chain, and record who holds it.
- In your terms of business: set out who determines status, how disagreements are handled and who bears the cost if the client fails to respond in 45 days.
- At each extension or change of role: the rules apply contract by contract, so ask whether the SDS still holds.
- Each April: check whether your larger clients' size has changed.
Where Marvin fits, and where it does not
Marvin does not make IR35 status determinations, does not calculate deemed employment deductions and does not run PAYE or RTI payroll. That stays with your process, your payroll provider and your advisers.
What Marvin does manage is the contract desk around those decisions: placements and assignments with their day rate, monthly timesheets in days and half-days signed by the client from a secure link, client invoices drafted from approved days, and a personal space where each contractor sees their assignments and the documents you share with them, such as the SDS. See contract and temp recruitment software and timesheet software for recruitment agencies, or book a demo.
Frequently asked questions
Who decides IR35 status when an agency places a contractor?
The client, if it is a public authority or a medium or large-sized organisation. It must take reasonable care, issue a Status Determination Statement (SDS) with its reasons, and pass it to the worker and to the party it contracts with. If the client is small and outside the public sector, the contractor's own company decides.
What is the fee-payer?
The party in the labour supply chain immediately above the contractor's intermediary, usually the agency that pays the contractor's limited company. The fee-payer is often the deemed employer, provided it meets HMRC's qualifying conditions and holds the SDS.
What happens if our agency does not receive an SDS?
HMRC guidance says you should pass on payment without deducting Income Tax and National Insurance, and you can ask the party above you why you did not receive it, for example because the client is small. If you receive an SDS and do not pass it on, you become the deemed employer.
What are the new small company thresholds for IR35?
For financial years beginning on or after 6 April 2025, turnover of more than £15 million and a balance sheet total of more than £7.5 million; the 50-employee limit is unchanged. HMRC says the earliest tax year these changes can affect a client is usually 2027 to 2028.
Does Marvin make IR35 determinations?
No. Marvin does not assess IR35 status and does not run PAYE or RTI payroll. It manages placements, day-rate timesheets with client sign-off and client invoices, and you can store and share the status documents you receive with the contractor.
