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Many employers routinely engage self-employed workers, often through a contract with the worker’s personal service company (PSC). Understanding the tax and legal issues involved, in particular the off-payroll rules for such engagements, is critical in order to manage any tax and employment risk.
What are the off-payroll working rules?
The off-payroll working rules seek to treat an individual worker (who is working as a de facto employee but through their own intermediary entity such as a company or partnership) as an employee for the purposes of tax, such that the worker is taxed as if they were an employee.
The off-payroll working rules must be borne in mind by any large or medium employer (and any public sector business) with a UK connection and which engages a worker through a PSC. The onus is on the employer to evaluate the legal position to determine if the worker would be regarded as an employee or de facto employee if they had a direct engagement with the employer. If so, the employer must operate PAYE to collect and account for income tax and national insurance contributions (NICs) in respect of sums paid to the PSC, typically for services rendered. Where there is another entity in the supply chain between the PSC and the end client, the obligation to make this determination under the off-payroll working rules passes to that intermediate entity (e.g. an agent), while if there are multiple entities in the chain then the obligation is on the fee-paying entity i.e. the entity which makes the payment to the PSC.
The obligation to operate the off-payroll rules falls only to large or medium entities. Small entities are exempted from having to operate the rules (and the obligation to evaluate the contractual relationship and account for any tax rests with the PSC). Helpfully for employers, the threshold for medium and large entities went up from April 2025, so fewer employers should be caught. An employer is medium or large if at least two of the following apply:
- the business has an average of over 50 employees for the relevant financial year;
- the annual turnover threshold is £15m; and/or
- the balance sheet total threshold is £7.5m;
and where in two consecutive financial years none or only one of these thresholds is met, the business will be small and so outside the scope of the rules. Employers in a group are analysed on a group-wide basis.
Businesses should be reviewing their position each year to see if they stray into ‘medium or large’ territory, while workers and their PSCs should also continue to undertake their own risk assessments to satisfy themselves if the off-payroll rules could apply to them vis-à-vis one employer or more than one (whether an arrangement with a worker is a de facto employment one is a question of fact, and generally having more than one client will assist in avoiding a deemed employment relationship).
Recent goalmouth action
The PSC arrangement is prevalent in the media and sporting fields (with many BBC newsreaders facing tax investigations on this basis). A noteworthy recent case is that of former footballer Bryan Robson (Bryan Robson Ltd v HMRC [2025] TC09408), in which a proportion of income paid to Mr Robson’s PSC for ambassadorial services provided to Manchester United FC was deemed to be remuneration for a deemed employment and subject to tax under PAYE. Mr Robson did however succeed in arguing that a portion of the PSC’s income which was for exploitation of image rights fell outside the scope of the off-payroll working rules. The topic is highly relevant to both employers and workers, particularly those in high profile roles.
Upcoming changes to the rules for umbrella companies
Umbrella companies are often found in the supply chain with PSCs. Umbrella companies are notional employers of workers whom they supply to end user clients, and such workers may often use their own PSCs as the vehicle through which services are supplied to the end-client. From 1 April 2026, new legislation will significantly impact the risk profile for parties engaging with an umbrella company.
Where an employment agency or an end-client contracts with an umbrella company, the liability for operating PAYE and accounting for tax under the off-payroll rules will be ‘joint and several’ – so HMRC can pursue not only the umbrella company for any unpaid tax but also the agency or the end client.
Umbrella companies are a separate category in respect of the off-payroll rules but employers and agencies dealing with them should be reviewing their arrangements in advance of the new legislation. For more information on how the new regime will apply and what can be done to prepare, read our prior article on this here.
Don’t forget the employment law angle
Alongside the tax considerations, how employment law engages with the off-payroll working rules must also be considered. The distinction for tax is whether a worker is a de facto employee or they are self-employed. Under UK employment law, there are three categories of employment status: employee, worker, and self-employed. An individual’s employment status depends on their employment contract, their terms of employment, and the working relationship between the organisation and the individual.
For an individual to be a worker or an employee, an express or implied contract between the company and the individual must be found. If the individual provides services via a PSC and an intermediary entity, they may only be classed as a worker if the contract bears the characteristics of an employment contract, instead of a business-to-business contract (Mr Appiah v Tripod Partners Ltd and Home Office). Where an employment contract is found, the intermediary is responsible for paying statutory payments such as Statutory Sick Pay and Statutory Maternity Pay, and for the operation of pensions auto-enrolment.
Employees and workers are entitled to varying levels of rights under the Employment Rights Act 1996. Workers often have more flexible work arrangements than employees with their contracts often including terms such as ‘casual’, ‘freelance’ and ‘zero hours’. Employees have additional statutory rights compared to workers. These include unfair dismissal, parental leave and pay, redundancy, and the right to make a flexible working request. There is no single legal definition of an employee or worker, sometimes making it a complicated area of law. If you are unsure whether an individual is an employee or a worker, and accordingly, what their rights (and your obligations) are, we recommend you seek legal advice from your lawyers. Michelmores are experts at advising on the operation of the off-payroll rules whether you are a business operating in the supply chain, an end client or a supplier of services.
This article is for information purposes only and is not a substitute for tax or legal advice, and should not be relied upon as such. Please contact Anthony Reeves or Cathy Bryant if you have any queries on the above or corporate tax issues generally, or Robert Forsyth if you have any related employment law queries.