The IR35 risk most agencies don't see
Since April 2021, the agency (as the end client, if private-sector medium/large) is responsible for determining IR35 status for each freelancer engagement. Many agencies assume freelancer = self-employed = no liability. That's wrong.
The legal tests for employment status apply regardless of how someone invoices. If a freelancer:
- Works only or mostly for your agency
- Works full-time hours during the engagement
- Uses your tools, equipment, and processes
- Is told what to do, when, and how
- Has no genuine right of substitution
- Has been with you for 6+ months
...HMRC will likely treat them as your employee, regardless of what's on the invoice. The agency owes employer NI, holiday pay, and potentially apprenticeship levy. With penalties and interest, a single misclassified case can run £20-100K+.
What good freelancer compliance looks like
- Status determination per engagement — written assessment using HMRC's CEST tool plus a contract review
- Contracts that genuinely reflect the working relationship — no fake substitution clauses, real definition of services, project-based not hours-based
- Off-payroll obligations documented for inside-IR35 engagements, with deductions made via PAYE
- KYC and identity verification on every freelancer
- Periodic reviews — every 6 months for ongoing engagements, since circumstances change
How we handle it
- Initial audit — review your current freelancer roster, identify high-risk engagements, score each.
- Remediation — for high-risk, either restructure the engagement to be genuinely outside IR35 (real substitution, project-based, etc.) or move to inside-IR35 with proper PAYE handling.
- Process design — onboarding, contracts, status determination, payment workflow.
- Ongoing compliance — periodic reviews, updates, new engagement onboarding.
Frequently asked questions
What if HMRC challenges a freelancer's status?+
They open an inquiry. You'll need to provide the SDS, contract, and evidence of the actual working relationship. If your documentation is weak or inconsistent, HMRC determines status against you, with backdated tax, employer NI, penalties (typically 30-100%) and interest.
What if our agency is small (under 50 staff)?+
For small private-sector agencies, the freelancer's own limited company is responsible for determining status. But the agency is still on the hook for genuine employment misclassification under PAYE rules - the protection is narrower than people assume.
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