Fee-Payer Responsibilities: Who Carries the Liability in the Supply Chain

When an engagement is determined inside IR35 under the off-payroll working rules, someone in the supply chain has to deduct PAYE and National Insurance before money reaches the contractor's limited company. That party is the fee-payer, and identifying it correctly is one of the most misunderstood parts of the off-payroll regime. The fee-payer is not always the end-client, it is not always the agency the contractor signed with, and the liability does not always stay where it first lands.

This piece explains who the fee-payer is, what deductions and reporting fall on it, and how HMRC's transfer-of-debt provisions can move the liability up the chain when a party fails to meet its obligations. Sister pieces in [the IR35 hub](/guide/ir35-off-payroll-guide/) cover [why the HMRC CEST tool is flawed](/blog/hmrc-cest-tool-flawed-protect-status/) and [how to structure B2B contracts to defend an outside position](/blog/b2b-contracts-defend-outside-ir35/).

Who the fee-payer actually is

The fee-payer is the lowest party in the supply chain above the contractor's personal service company (PSC). In the simplest chain, end-client to PSC, the end-client is the fee-payer. In the common chain, end-client to agency to PSC, the agency that pays the PSC is the fee-payer. Where there are multiple agencies, the fee-payer is the one immediately above the PSC, the party that actually pays the contractor's company.

This matters because the off-payroll rules split two roles that people often conflate. The end-client determines status and issues the Status Determination Statement. The fee-payer operates the payroll deductions if the determination is inside. They are frequently different organisations, and the obligations attach to whichever role each party holds.

The two distinct roles in the chain

What the fee-payer must deduct and pay

On an inside-IR35 engagement, the fee-payer treats the payment to the PSC as a deemed direct payment. From the contractor's rate it deducts income tax and employee National Insurance through PAYE and accounts for them to HMRC via Real Time Information. On top of that, the fee-payer pays employer's National Insurance and, where applicable, the Apprenticeship Levy. These employer costs are the fee-payer's own liability and cannot lawfully be deducted from the contractor, although in practice they are often absorbed by negotiating a lower headline rate.

• Income tax via PAYE on the deemed direct payment.
• Employee (primary) Class 1 National Insurance, deducted from the contractor's payment.
• Employer (secondary) Class 1 National Insurance, paid by the fee-payer on top.
• Apprenticeship Levy where the fee-payer's pay bill exceeds the threshold.
• Real Time Information reporting of the deemed payment to HMRC.

Why the liability sits with the lowest party

Parliament placed the deduction obligation on the fee-payer because it is the party with the money in its hands at the point of payment to the PSC. It is the natural collection point. But the legislation recognised that supply chains can be long and opaque, and that a fee-payer might fail, disappear, or be deliberately structured to evade the deductions. So the rules include a mechanism to recover the unpaid tax from someone else in the chain.

How HMRC transfers the debt up the chain

The end-client as backstop

If the fee-payer fails to operate the deductions and HMRC cannot reasonably recover the debt from it, the off-payroll legislation allows HMRC to transfer the liability to another party higher up the chain. The debt can move to the first agency in the chain (the one that contracted with the end-client) and, ultimately, to the end-client itself. The end-client is the backstop: if everyone below it fails, the unpaid PAYE and NI can land on the client that engaged the labour.

This is the structural reason end-clients care so much about supply-chain compliance. A client cannot simply outsource the risk by inserting an agency and looking away. If the agency does not operate the deductions correctly and cannot pay, the client can be left holding the bill. The transfer-of-debt provisions give every party above the fee-payer a direct financial interest in the chain below them behaving.

The reasonable care link to liability

There is a second route by which liability lands on the end-client, separate from fee-payer default. If the end-client fails to take reasonable care in making the status determination, the legislation makes the client the fee-payer for liability purposes, regardless of how many agencies sit below it. A blanket inside determination, or an outside determination reached carelessly, can therefore pull the tax debt back to the client even where the supply chain otherwise functioned. Reasonable care is not just a procedural nicety, it is the condition for the client passing the liability down at all.

What this means for the contractor

For an inside-IR35 contractor, the practical consequence is that money arrives in the PSC already taxed. The PSC must not tax it again on the corporation tax return: the deemed payment has already suffered PAYE and NI, so it passes through as taxed income. The contractor's accountant reconciles this carefully on the year-end accounts so the same income is not taxed twice. See [the inside vs outside take-home maths](/blog/inside-vs-outside-ir35-take-home/) for how the deductions flow through to net pay.

The contractor should also confirm in writing which party is the fee-payer, because that party controls the deductions, the payslips, and the RTI record. If an agency claims to be passing payment gross on an inside determination, that is a red flag that deductions are not being operated correctly, which exposes the chain to a transfer of debt.

Common supply-chain failures

• A fee-payer paying gross on an inside engagement because it never received or never read the SDS.
• An SDS that stops partway down the chain and never reaches the fee-payer, so deductions are not triggered.
• A non-compliant umbrella or mini-umbrella inserted into the chain to dilute or evade deductions, leaving the end-client exposed on transfer of debt.
• An end-client treating CEST output as reasonable care and discovering, on a compliance check, that the determination was careless and the liability has bounced back.
• Employer NI being unlawfully deducted from the contractor's rate rather than paid by the fee-payer.

Can the fee-payer pass employer NI to me?

Employer National Insurance is the fee-payer's own statutory liability and cannot lawfully be deducted from the contractor's payment. In practice, many fee-payers absorb the cost by negotiating a lower headline day rate before the contract is agreed, which is legitimate because it is a commercial rate negotiation rather than a deduction. What is not legitimate is taking the agreed rate and then deducting employer NI from it as a line item. If a payslip shows employer NI deducted from your rate, raise it immediately, because it is a sign the fee-payer is operating the chain incorrectly.

How do I check who my fee-payer is?

Trace the payment path. The fee-payer is whoever pays your limited company directly. Ask the agency you contracted with to confirm in writing whether it pays your PSC or whether another party further down does. On an inside engagement, that party should be issuing you payslips showing the PAYE and NI deductions. If no one in the chain will confirm who operates the deductions, treat it as a compliance warning and get the contract reviewed before you start work.

Small-client exemption and where the rules do not apply

The fee-payer machinery only applies where the end-client is a public sector body or a medium or large private sector organisation. Where the end-client is a small company in the private sector, the off-payroll rules do not apply and the old position continues: the contractor's own PSC remains responsible for assessing IR35 and accounting for any deemed payment itself. Small is defined by reference to the Companies Act tests, broadly two of three thresholds on turnover, balance sheet total, and employee numbers not being exceeded.

For a contractor, this changes who carries the determination and the deduction risk entirely. With a small client there is no SDS, no fee-payer deduction, and no transfer-of-debt chain, but the contractor's own company carries the full liability if the engagement is in truth inside IR35 and the PSC has not operated the deemed payment. Confirming the client's size at the outset tells the contractor which regime applies and where the risk really sits.

Keeping records that protect the chain

• A copy of the SDS received from the client, with its date of issue.
• Written confirmation of which party is the fee-payer operating the deductions.
• Payslips for inside engagements showing PAYE and NI deducted, retained for the contractor's records.
• The contract and any statement of work, kept against the year-end accounts.
• Reconciliation notes so the PSC does not double-tax income that has already suffered PAYE and NI.

Why the structure of the contract still matters

All of this fee-payer machinery only engages once an engagement is determined inside IR35. The cleanest way to avoid the deduction chain entirely is a genuine outside-IR35 position supported by a robust contract and matching working practices, where the PSC invoices gross and manages its own tax. The supply chain still exists, but no deemed-payment deductions apply. For how to build that defensible outside position into the contract itself, see [structuring B2B contracts to defend an outside IR35 position](/blog/b2b-contracts-defend-outside-ir35/).