A technology contract supply agency in the South East has been supplying a senior data engineer to a private-sector end-client — a UK plc in the medium-and-large bracket — for two and a half years. The contractor operates through their own personal service company. The end-client issued a Status Determination Statement at the outset declaring the engagement to be outside IR35; the agency, as the fee-payer in the chain, has paid the PSC gross throughout. In early 2026 HMRC opens a compliance check. After eight months of correspondence HMRC concludes that, on the facts of the engagement, the working practices placed the contractor inside the off-payroll rules from day one. HMRC issues a determination assessing PAYE and Class 1 employer's NIC on the gross fees paid to the PSC for the entire period — a headline figure of just under £180,000 before the April 2024 offset, and around £105,000 after the offset is applied. The agency's MD reads the determination and reaches for the policy schedule.
The first thing the agency's broker needs to explain is that the tax liability itself is not the question PI is built to answer. The PAYE and NIC owed to HMRC are the agency's own statutory liability as fee-payer; they are not insurable, and no respectable PI insurer would purport to indemnify them. The question PI does answer is what the agency's professional negligence exposure looks like — to the end-client, to the contractor, and onward — where the SDS the agency relied on is now agreed by HMRC to have been wrong, where the agency's own application of reasonable care to the chain is in issue, or where an indemnity from the end-client to the agency in the contract chain becomes the subject of a dispute. Those questions are insurable, sometimes in surprising places, and they are what this article is about.
This is a cluster article supporting our pillar guide on PI insurance for UK recruitment consultants, which sets out the broader framework of cover for the sector.
The off-payroll working rules — a short refresher
The off-payroll working rules — IR35 in its modern form — sit in Chapter 10 of Part 2 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003). The rules apply where (a) an individual ("the worker") provides services to a client through an intermediary (typically the worker's own personal service company), (b) the worker would, if engaged directly by the client without the intermediary, have been an employee of the client for tax purposes, and (c) the client is a "public authority" or, if in the private sector, a "medium or large" entity by reference to the Companies Act 2006 size tests.
The original IR35 rules in Chapter 8 of ITEPA — introduced in 2000 — placed the status determination obligation, and the PAYE/NIC consequences, on the PSC itself. The reform programme moved that obligation up the supply chain. From 6 April 2017 the public-sector rules in Chapter 10 took effect: where the end-client is a public authority, the client makes the status determination, and the fee-payer in the supply chain — typically the agency immediately above the PSC — accounts for PAYE and NIC where the determination is "inside" IR35. From 6 April 2021 the same model was extended to medium-and-large private-sector clients, leaving only "small" private-sector clients (as defined by the Companies Act tests) outside the regime; where the client is small, the original Chapter 8 rules continue to apply and the PSC remains responsible for its own status determination.
The Status Determination Statement (SDS) is the document the client must produce. It must reach a conclusion on the worker's deemed-employment status, set out the reasons for that conclusion, and be passed to both the worker and to the next party in the supply chain. Until the SDS is passed down, the client itself remains the fee-payer and carries the PAYE/NIC obligation in the worker's place. Once passed down, the obligation moves to the next party in the chain, and ultimately to the agency immediately above the PSC.
The client-led status disagreement process allows the worker or the deemed-employer fee-payer to challenge the SDS, and requires the client to respond within 45 days either confirming the original determination or issuing a revised SDS. The process is mandatory; failure to operate it returns the fee-payer obligation to the client.
A brief April 2024 update — important for current claim quantification — is the introduction of the PAYE offset rules. Where HMRC determines that an engagement should have been inside IR35 but was treated as outside, the corporation tax, dividend tax, employee NIC and other taxes paid by the worker and the PSC on the same income are now offsetable against the PAYE and Class 1 NIC otherwise due. The mechanic was introduced to address the "double-taxation" criticism that had attached to the regime since 2017. The offset is applied by HMRC by reference to the worker's actual self-assessment position. The headline gross liability figures HMRC issues are therefore now materially higher than the net cash payable, but the dispute pattern and the professional-negligence exposure for the agency are essentially unchanged.
Where the recruiter sits in the chain — fee-payer status
The standard contract-supply chain in the UK runs: end-client → agency → PSC → worker. The agency is "the lowest party in the chain". Under the operation of Chapter 10, the agency is therefore typically the fee-payer — the party that makes the contractual payment to the PSC — and is the party that becomes the deemed employer for PAYE/NIC purposes where the SDS is inside IR35.
Some chains have additional links — for example, a managed service provider sitting between the end-client and the agency, or an umbrella company sitting between the agency and the worker. The fee-payer is whichever party in the chain pays the PSC; the deemed employer is, conceptually, the same party. Where an umbrella company is engaged as the worker's actual employer, the umbrella sits in a different position — the worker is the umbrella's employee for tax purposes throughout, the umbrella operates PAYE and NIC in the ordinary way, and the off-payroll rules typically do not apply because there is no PSC in the chain. The agency's exposure on an umbrella supply is therefore different, and turns more on the agency's due diligence on the umbrella's compliance than on Chapter 10 itself.
The agency's obligations under Chapter 10 when supplying through a PSC chain are: to take "reasonable care" in operating the rules; to apply the SDS as received from the end-client (unless the agency contests it through the client-led disagreement process); to operate PAYE and NIC on the deemed direct employment payment where the SDS is inside; and to maintain records sufficient to evidence its compliance. The "reasonable care" standard is the standard against which a court will measure the agency's conduct if a dispute later crystallises into a civil claim.
How HMRC pursues recovery and how PI does (or doesn't) respond
When HMRC determines that an engagement should have been inside IR35 but was treated as outside, the recovery mechanic depends on whether the client passed an SDS down the chain at all, and on the conduct of the parties in the chain.
In the standard case — the client issued an SDS, the SDS was outside, the agency relied on it and paid the PSC gross, HMRC later determines the engagement should have been inside — HMRC's primary recovery target is the fee-payer. That is the agency. HMRC will normally pursue PAYE, employee NIC and employer NIC on the gross fees, with interest, less the April 2024 offsets for tax already accounted for by the PSC and the worker on the same income. The Treasury's "transfer of liability" rules can move the liability up the chain to the end-client where, for example, the end-client failed to take reasonable care in producing the SDS, or where the SDS was not passed down.
The PAYE and NIC liability itself is not insurable. It is the agency's own statutory tax liability and falls squarely outside the scope of a PI policy as a matter of public policy. No respectable PI insurer will indemnify it and any wording that purports to do so should be treated with caution.
What PI may respond to is the agency's onward dispute with the end-client. The contractual position between the agency and the end-client typically includes warranties from the end-client to the agency that the SDS has been produced with reasonable care, and indemnities from the end-client to the agency in respect of tax recovery that arises from a defective SDS. Where HMRC determines an engagement should have been inside and pursues the agency as fee-payer, the agency frequently brings a contractual claim against the end-client to recover the loss it suffers — and that contractual recovery action, if it produces a counter-claim by the end-client alleging that the agency itself failed to operate the rules with reasonable care, can engage PI on the defence side. The cover responds to the defence costs of the end-client's allegation and to any damages or settlement up to limit.
PI may also respond to a claim by the end-client against the agency where the supply chain mechanics produce loss to the end-client — for example, where HMRC uses the transfer-of-liability rules to move the recovery up to the end-client because the agency failed to operate the deemed-employer mechanics correctly. The end-client's claim against the agency is third-party liability arising from the agency's professional services, and is in scope of a recruitment PI policy in the ordinary course.
PI may respond to a claim by the contractor where the agency's operation of the fee-payer mechanics has caused the contractor or the PSC quantifiable loss — for example, an erroneous deduction of PAYE from a payment that ought not to have been treated as inside IR35, leading to a cash-flow loss the contractor evidences. The PI exposure on contractor-led claims is real but in practice less common than end-client-led claims, because contractors usually pursue HMRC for repayment rather than the agency for damages.
What PI does not respond to is the agency's own first-party costs of dealing with the HMRC compliance check — the time of the in-house compliance team, the cost of professional tax advice on the dispute, the agency's own accountant's fees, the cost of remediation across the contractor book. Those are the agency's own commercial costs. A separately-purchased tax investigation insurance product may cover them in some cases; PI will not.
The "reasonable care" standard — what the agency is being judged against
If a claim crystallises against the agency, the standard the court will apply is the standard of a "reasonably competent" recruitment business handling an IR35 status determination question. That standard has hardened steadily through the eight years since the public-sector reforms took effect, and the bar in 2026 is materially higher than the bar in 2018.
A reasonably competent agency in the current market is expected to: have a documented standard operating procedure for handling SDS receipt from end-clients; have a clear process for assessing whether the SDS has been produced with reasonable care (which is itself a statutory obligation on the end-client and the absence of which can vacate the SDS entirely); have a documented client-led status disagreement process and be willing to operate it where the agency believes the SDS is wrong; have appropriate contractual protections — SDS warranties and tax indemnities — in its MSAs with end-clients; have appropriate contractual flow-down — back-to-back SDS provisions and indemnities — in its contracts with PSCs and umbrellas; maintain records of the SDS, the working practices the contractor actually performed against, and the agency's operation of the rules; and operate PAYE and Class 1 NIC correctly on the deemed direct employment payment where the SDS is inside IR35, including the various edge cases around expenses, materials, and the operation of the apprenticeship levy.
An agency that can document each of those, and produce evidence to underwriters at renewal, is in a different underwriting category from an agency that cannot. The renewal market in 2026 will not write a contract supply book without specific reassurance on the agency's IR35 process maturity, and the wording differences between insurers on the "regulatory investigation" extension and the breadth of the professional-services definition have grown over the past two renewal cycles. The detail matters.
What underwriters look at on IR35
A recruitment PI underwriter writing or renewing a contract supply book will ask, as a minimum: the proportion of the agency's revenue derived from contract supply through PSCs; the agency's process for handling SDS receipt and disagreement; the agency's contract suite with end-clients and PSCs (specifically, the SDS warranty and indemnity provisions); the agency's PAYE/NIC operation evidence; whether the agency has ever been the subject of an HMRC compliance check, and if so what the outcome was; and the agency's claims history on IR35-related notifications.
Some markets will also ask to see anonymised SDS examples, the agency's standard SDS challenge letter template, and the agency's training material for onboarding consultants. Agencies that can provide that material briskly tend to get better terms.
How PI interacts with tax investigation insurance and other covers
Tax investigation insurance — sometimes called fee protection insurance — is a separate product that covers the professional fees the agency incurs in dealing with an HMRC compliance check on its own affairs. It does not cover the tax itself (which, as above, is not insurable), and it does not cover third-party civil claims (which sit on PI). Some agencies carry both products; the two cover different things and there is essentially no overlap.
Cyber insurance is unrelated to IR35 exposure in the ordinary course, but the operational consequences of an HMRC investigation — preservation orders on systems, forensic review of payroll records — can produce first-party costs that look like a cyber event. Most agencies will manage these through tax investigation cover rather than cyber, but the dialogue is worth having with the broker if the investigation becomes substantial.
Directors' and Officers' (D&O) cover may respond where an HMRC investigation into the agency's operation of the rules produces a personal claim against a director — for example, a transferred-debt liability under the Finance Act provisions that allow HMRC, in defined circumstances, to pursue an unpaid PAYE/NIC liability against a company's officers personally. The D&O policy is the right place to look for that exposure; PI is not the right vehicle.
How Apex helps
Apex Insurance Brokers is an independent, FCA-authorised broker placing PI cover for UK recruitment agencies, including agencies operating contract supply books with significant PSC and umbrella exposure. We talk through the IR35 process maturity question with directors as part of every renewal submission, and we know the wordings in the market that handle the fee-payer exposure with the most sense — including which insurers offer the broadest definition of "professional services" to capture status determination work, which carry the most useful regulatory investigation extensions, and which will engage constructively with the agency's standard operating procedure as part of the underwriting dialogue.
We are not tied to any one insurer, we do not promise particular outcomes, and our remuneration is disclosed before cover incepts. Our Terms of Business page sets out the basis of our service, and our Complaints page sets out how to raise any concerns.
What to do next
If your agency operates a contract supply book through PSCs, the question to take into the next renewal is whether your IR35 process documentation, your contractual chain, and your PI wording all line up — and whether the cover you currently hold would respond to the dispute pattern this article describes if a HMRC compliance check landed tomorrow. The April 2024 offset rules have changed the quantum picture but not the underlying dispute pattern.
To talk through your agency's IR35 exposure and how it interacts with PI, contact us or see our recruitment consultants sector page.
Frequently asked questions
Will my PI policy pay the PAYE and NIC HMRC recovers from my agency as fee-payer?
No. PAYE and Class 1 NIC owed to HMRC under the off-payroll working rules are the agency's own statutory tax liability as fee-payer and are not insurable as a matter of public policy. The tax itself sits where Chapter 10 ITEPA 2003 places it, and no respectable PI policy will purport to indemnify it. What PI may respond to is the agency's onward dispute with the end-client, claims by the end-client against the agency for consequential loss, and claims by the contractor against the agency where the agency's operation of the rules has caused quantifiable loss to the contractor or PSC.
What is the April 2024 offset rule and how does it affect the HMRC liability figure?
From 6 April 2024, HMRC has been required to offset against the PAYE/NIC recovery the corporation tax, dividend tax, employee NIC and other amounts already paid by the worker and the PSC on the same income. The mechanic addresses the long-standing "double-taxation" criticism of the post-2017 regime. The effect is that headline gross-liability figures HMRC issues in determinations are now materially higher than the net cash payable. The dispute pattern and the agency's professional-negligence exposure are essentially unchanged, but the quantum at risk in any individual case is lower than it would have been pre-April 2024.
Where in the supply chain does fee-payer status sit?
The fee-payer is the lowest party in the chain that pays the PSC — in a standard chain of end-client → agency → PSC → worker, that is the agency. Where there are additional links in the chain — a managed service provider, a master vendor — the fee-payer is whichever party makes the contractual payment to the PSC. Where an umbrella company is the worker's actual employer and operates PAYE and NIC in the ordinary way, the chain typically does not engage Chapter 10 because there is no PSC; the agency's exposure on an umbrella supply turns instead on its due diligence on the umbrella's compliance.
What is a Status Determination Statement (SDS) and what does the client have to do with it?
The SDS is the document the end-client (where the end-client is a public authority or a medium-or-large private sector entity) must produce in respect of every engagement through a PSC. It must reach a conclusion on the worker's deemed-employment status, set out the reasons, and be passed to both the worker and to the next party down the chain. Until the SDS is passed down, the client itself remains the fee-payer. The client-led status disagreement process allows the worker or the fee-payer to challenge the SDS, with a mandatory 45-day client response window.
What does "reasonable care" mean for an agency operating as fee-payer?
The "reasonable care" standard is the statutory benchmark by which the agency's conduct is judged. In current market practice it requires the agency to have a documented standard operating procedure for handling SDS receipt and disagreement, appropriate contractual protections in its MSAs and PSC contracts (SDS warranties and tax indemnities), records of the SDS and the working practices the contractor actually performed against, and correct operation of PAYE and Class 1 NIC on the deemed direct employment payment where the SDS is inside IR35. The bar has hardened steadily since 2018 and is the standard a court will apply if a civil claim crystallises.
If the end-client sues my agency over an SDS dispute, will PI respond?
In the ordinary course, yes. The end-client's claim against the agency is third-party liability arising from the agency's provision of professional services, and is in scope of a recruitment PI policy. PI responds to the defence costs and to any damages or settlement up to limit. The HMRC tax recovery itself remains uninsurable, but the contractual dispute between the agency and the end-client over which party in the chain failed to apply reasonable care is the kind of claim the policy is built for.
Do I need tax investigation insurance as well as PI for IR35 cover?
The two products cover different things and there is essentially no overlap. PI responds to third-party civil claims arising from the agency's IR35 work; tax investigation insurance responds to the professional fees the agency incurs in defending an HMRC compliance check on its own affairs. Some agencies carry both. The right answer depends on the volume of contract supply through PSCs and the agency's risk appetite for the professional-fees exposure that a compliance check produces.
Related guides
- Recruitment consultants PI insurance — UK guide 2026 (pillar)
- Right to work checks and the recruiter's PI exposure
- Recruitment consultants sector page — speak to a broker
About Apex Insurance Brokers — Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority, FCA firm reference 724952. Registered in England and Wales, Companies House 07014570. Last reviewed: May 2026.
This guide is general information about Professional Indemnity Insurance for UK recruitment agencies and employment businesses and is not advice tailored to any individual firm's circumstances. For advice on your own renewal please speak to a broker — contact@apexinsurancebrokers.co.uk or 0117 325 0027.
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