With the Umbrella Companies Legislation; Chapter 11 updates of the Employment Status Manual last week, we’re getting more calls than ever about all things Deemed Employment.
Why the sudden interest? Well, Chapter 11 clarifies the current position on Joint and Several liability and crucially, where the recruitment agency may become liable for any unpaid tax by any umbrella they may work with. In defining what constitutes an umbrella business, and businesses purporting to be umbrellas, the manual is very clear. In the four bullet points outlining where the purported umbrella definition applies, each bullet highlights, ‘not including deemed employment’.
Many of the enquiries seem to be from agencies focussed on Deemed Employment as some kind of ‘solution’ to the liabilities contained within Chapter 11. Perhaps that’s missing the point though. Since the 2021 reforms to the Off‑Payroll legislation, and long before the current umbrella proposals, Deemed Employment was always a fantastic option to complement umbrella use, for clients, candidates and agencies alike.
Ultimately, Deemed Employment (i.e. being inside IR35 via a Limited Company / intermediary) enables the payments to a contractor’s Limited Company to be taxed under PAYE / NICs as if an employee. So, employment taxes are deducted at source and reported to HMRC via RTI before the relevant payments are made. However, unlike agency or umbrella PAYE, there is no contract of employment in many deemed employment cases, which is where HMRC’s frequent ‘not including deemed employment’ references in legislation come from. It’s also why the currently wayward reforms to the Employment Rights Bill will potentially have little impact on this element too.
But exploring Deemed Employment as a method of navigating the legislative landscape is absolutely focusing in the wrong place if it is seen as a way simply to avoid liability. Yes, it falls outside the scope of umbrella company liability rules under Chapter 11, but as the contractor will be using their Limited Company, it absolutely falls squarely into the scope of IR35 / Off‑Payroll rules – Chapter 10. If that feels like leaping from the sizzling frying pan of umbrella legislation into the roaring fire of IR35, we’re here to put your mind at rest, remove the perceived risks, mitigate the real ones and above all, to help your recruitment business source and place more candidates.
Let’s be clear, it’s not IR35 that, as some commentators would say, has decimated the contracting marketplace, it’s the fear of repercussions from incorrect IR35 assessments that really did the damage and resulted in a default starting point for new roles being, ‘Umbrella Only’. While the IR35 legislation can be complex and nuanced, its application for clients is only superficially so; the core elements are reasonably well defined. In essence, the client makes a reasonable determination of the IR35 status of the role and produces a Status Determination Statement (SDS) accordingly. It’s very important to note; whoever holds the SDS is usually classed as the Fee Payer and is responsible for making the correct PAYE/NICs deductions, and who HMRC expect to be liable for any unpaid tax. So, having generated the SDS, the client passes the SDS (and therefore, Fee Payer liability) down the supply chain to the agency (if there is one) until it reaches the party contracting directly with the contractor’s Limited Company.
Deemed Employment, properly understood and implemented, isn’t a compliance burden, let alone a trap. When agencies, clients, and contractors embrace IR35 with clarity, transparency and good practice, it’s actually a route to more trust, more opportunity, and more flexibility. Agencies that support clients with robust IR35 status assessments and clear contract documentation will not only reduce risk for themselves and their clients, but also unlock access to a broader pool of high-quality contractors who prefer working through their Limited Company. And there are many of them!
Far from IR35 closing doors, good IR35 practice can open new ways to engage talent: offering contractors the independence, tax certainty, and professional legitimacy they require, while giving clients genuine confidence in their actual, and acceptable, risk exposure. Yet, it’s worth recognising that when comparing umbrella and deemed employment models on a like-for-like contract, the immediate financial differences are generally marginal. After all, they are both PAYE. What matters is how end clients and agencies embrace the existing, acknowledged processes of Chapter 10 with one eye on the emerging and less certain liabilities of Chapter 11, especially as the Employment Rights Bill will inevitably introduce further complexity.
The landscape is no longer about chasing incremental financial advantage; it’s about evaluating risks intelligently and ensuring robust compliance, while also benefiting from higher candidate attraction, acceptance and flexibility. In short: with the right structures in place, Deemed Employment shifts from being merely a tool for risk mitigation to becoming a strategic commercial advantage, empowering recruitment agencies and their clients to distinguish themselves, deliver tangible value, and flourish in the modern legislative landscape. And candidates get a choice.
Perhaps the most important missing piece in this jigsaw for many clients and agencies is that there are many businesses within this sector offering a third-party Fee Payer proposition: they accept the SDS, submit RTI, make the PAYE/NIC deductions, handle the employer NICs etc., and arrange payment to the contractor’s Limited Company. This can take much of the complexity and risk off the client, the agency and the contractor
So, continue with your robust due diligence on your umbrella supply chain, understand and prepare for the new liabilities from April 2026, but above all, unlock the whole contracting marketplace for every role. Deemed Employment will complement existing umbrella use by inviting candidates to use their Limited Company (with the security that a trusted Fee Payer third party can offer) without inviting unnecessary risk.
