Since the introduction of the Chapter 10 tax rules (IR35) agencies and hirers have faced tax risks when engaging limited company contractors (PSCs) except where the client is a small company (as defined). Many shifted to working with umbrella companies as a result.
However, the environment is once again set to become tougher. Where you work with an umbrella company, other than facing the upcoming tax risk or abandoning the use of umbrellas, are there other options to consider?
All the same, agencies and hirers have continued to engage with PSCs where they are satisfied that the contractor would not be considered a deemed employee under those rules. This is because there have always been certain advantages for agencies and hirers to working with company contractors. Apart from the fact that skilled individuals often want to operate their own businesses and work that way, it minimises the risk of claims for employment rights, and making gross payment on an invoice rather than payroll has the attraction of simplicity and low cost.
However it remains a fact that, where Chapter 10 applies, engaging in this manner requires the client to conduct status determination checks and many clients either simply don’t want the hassle or find the risks unacceptable. As a consequence, there has been an increased use of employment umbrella companies where tax risk is minimised and the other advantages for agencies and hirers are retained,
Applicable from next April the new proposed umbrella legislation means that agencies and hirers (as the case may be) will face tax liability when they work with umbrella companies that fail to account for the correct employment taxes.
This new liability changes the landscape. Given the upcoming tax risk, which applies in all cases, and the Chapter 10 IR35 risks attached to supplying PSCs, it may be time for agencies and hirers to reconsider their model of operation.
In each case the tax risk arises from rules that depend on the fact of supply of an individual who provides personal services, so is there an alternative?
If hirers recognise that completion of the work is paramount, not the individual doing it, then outsourcing comes into play. A business working as an outsourced service provider responsible for the hirer’s work, as opposed to working as an agency simply supplying the services of a contractor to do that work, could service such a ‘hirer’. Such a business will become the client for IR35 purposes. This relieves the end client of responsibility and tax risk under Chapter 10 and also allows for a clear chain of accountability. Such a service provider may find it easier to identify the pieces of work required and hire contractors for that work outside of IR35.
Whilst this model will not be suitable for everyone or in all cases, it could be another business model for agencies and hirers to consider. Using the right contracts and processes will be key, but PSCs working for such providers may find the IR35 process simpler, and the results for all concerned more beneficial and effective in a number of ways.
Ironically HMRCs focus on umbrella companies may end up pushing company contracting in a new direction, and agencies and hirers willing to embrace outsourcing as a new way of operating could reap the rewards.
Want to know more? Pre register for our London seminar on 14th January 2026 – email to [email protected] with “knowledge is power” in the subject line
OR book a discussion with one of our lawyers.
Lawspeed – Industry specialists since 1997.
