An employment intermediary, as defined by HMRC, is any organisation that arranges for an individual to work for a third party or pays an individual for work carried out for a third party. This broad definition captures a wide range of businesses, including recruitment agencies, umbrella companies and personal service companies.
Under updated rules, employment intermediaries are required to report details of all workers they supply to clients where Pay As You Earn (PAYE) is not operated on the payments made to those workers. These reports must be submitted to HMRC on a quarterly basis following the end of each reporting period:
- 5 July
- 5 October
- 5 January
- 5 April
Why were these rules introduced?
The rules were introduced under the Income Tax (PAYE) (Amendment No. 2) Regulations 2015.
Their purpose was to give HMRC information about workers supplied through intermediaries where PAYE is not applied, enabling HMRC to identify potential non-compliance with employment tax rules.
The legislation forms part of HMRC’s wider strategy to tackle:
- False self-employment
- Use of offshore intermediaries to avoid UK employment taxes
- Misclassification of workers for employment tax purposes
By requiring intermediaries to submit quarterly reports detailing workers, engagements and payments where PAYE is not operated, HMRC is better able to identify and investigate arrangements where PAYE may have been incorrectly not applied, including cases that may fall within the agency legislation or other employment tax rules.
What information must be reported?
In practical terms, intermediaries must provide comprehensive information about the workers they supply. This includes:
- Worker name, address and National Insurance number (or alternative ID details if unavailable)
- Engagement start and end dates
- Amount paid to the worker during the reporting period
- Whether the worker is employed, self-employed or engaged through another intermediary
- Reason PAYE was not operated
- Details of the engagement structure (for example, if the worker is engaged through a limited company)
Failure to submit accurate reports can result in automatic penalties.
The late filing penalties are:
- £250 – first late report in a tax year
- £500 – second late report
- £1,000 – third late report
Continued failure to submit reports after HMRC has issued a formal notice can result in daily penalties of up to £600 per day until the report is provided.
Why this matters for owner managed businesses
Although the primary reporting obligation sits with agencies and intermediaries, the implications for Owner Managed Businesses (OMBs) are becoming increasingly significant.
Businesses that rely on agencies or labour providers are often asked to confirm details about the working arrangement, including:
- The level of supervision, direction and control
- Whether the worker is genuinely self-employed
- How the engagement operates in practice
Where incorrect or misleading information is provided, HMRC has the power to treat the end client (the OMB) as the employer for Income Tax and National Insurance purposes.
Interaction with IR35 and employment status rules
These reporting requirements sit alongside wider employment status legislation, including the off-payroll working rules under IR35 and the agency worker rules.
Together, these frameworks reinforce HMRC’s increasing focus on employment status risk.
Even where an intermediary confirms responsibility for reporting, HMRC enquiries may still extend to the end client to determine the reality of the working arrangement.
This issue commonly arises during tax due diligence exercises, where businesses cannot evidence employment status assessments because they have not used HMRC’s status assessment tool, Check Employment Status for Tax (CEST).
Practical steps for businesses
Owner managed businesses should ensure they:
- Understand how workers are supplied into their business
- Ensure contracts reflect actual working practices
- Maintain records supporting non-PAYE arrangements
- Carry out employment status assessments where appropriate
- Seek professional advice early where arrangements may carry risk
Early engagement with advisers can help identify potential exposures before any intervention from HMRC.
Final thoughts
The key message is simple: increased reporting by intermediaries means increased visibility for HMRC.
While the compliance burden may sit with agencies and intermediaries, the tax and National Insurance risk may ultimately fall on the business engaging the worker if arrangements are not robust.
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