Why Deemed Employment Matters in Recruitment

The question of whether a contractor is genuinely self-employed or is, for tax purposes, an employee has cost UK businesses hundreds of millions of pounds since HMRC began enforcing IR35 seriously. Deemed employment is the finding that triggers that liability. For staffing agencies, every contract placement involving a personal service company carries some deemed employment risk, and since 2021, medium and large private sector clients bear responsibility for assessing it correctly.

When a deemed employment determination goes wrong, the consequences are not administrative. The business designated as the deemed employer faces backdated PAYE obligations, interest, and penalties. Contractors who believed they were operating legitimately through their PSCs find themselves taxed as employees without receiving employment rights. The entire supply chain comes under scrutiny.

How Deemed Employment Works

HMRC uses a set of employment status indicators to assess whether an engagement is genuinely self-employed or whether it looks, in substance, like employment. The three primary factors are control (does the client control what work is done, how, and when?), substitution (can the contractor send someone else to do the work?), and mutuality of obligation (is there an expectation of continuing work and payment?). If an engagement satisfies these criteria, HMRC is likely to find deemed employment.

The determination process for off-payroll workers since the 2021 reforms works as follows: the end client (if medium or large) uses HMRC's CEST tool or applies the case law tests and issues a Status Determination Statement. If the finding is "inside IR35," the engagement is treated as deemed employment for tax purposes. The worker's PSC receives a net payment after PAYE deductions rather than a gross invoice, and no additional income tax or NIC is due from the worker personally beyond what the deemed employer has already collected.

CEST is not infallible. It cannot give a determination for every engagement, and HMRC does not guarantee its outcome is correct in all circumstances. Agencies and clients relying solely on CEST without reviewing the actual working practices are exposed if HMRC disagrees with the tool's output during an enquiry.

Deemed Employment vs Employment

Deemed employment is a tax status. Employment is a legal status conferring rights under employment law, including unfair dismissal protection, statutory redundancy pay, and auto-enrolment in a pension scheme. A contractor can be inside IR35, taxed as an employee, and still have no employment rights against the client. This distinction frustrates many contractors caught by IR35, who pay employment-level tax without receiving employment-level protections.

Deemed Employment in Practice

A project manager engages a media company through her PSC on a 12-month contract. The media company, as a large private sector client, runs CEST and issues an inside-IR35 SDS. The staffing agency paying her PSC becomes the deemed employer and operates PAYE. The project manager's take-home pay drops materially compared with her previous outside-IR35 contracts. She does not gain holiday entitlement, sick pay, or any other employment right from the media company. Her accountant advises her to review whether continuing to use a PSC is worth the overhead given her current mix of contracts.