You run a 15-person digital agency in Manchester's Northern Quarter. You have a retainer client who needs ongoing SEO work, but you do not have the in-house capacity. So you bring in a contractor on a fixed monthly fee of £3,200 to manage that account. They also work for two other agencies through their own limited company.

On the surface, this looks sensible. The contractor is not an employee. They have multiple clients. You pay them a flat fee each month. What could possibly go wrong with IR35?

Plenty, as it turns out. The fixed-fee retainer model for contractors who serve multiple clients through your agency creates a specific set of IR35 risks that many IR35 agency founders overlook. HMRC does not just look at whether a contractor has multiple clients. They look at how the work is done, who controls it, and whether the financial structure resembles a salary rather than a genuine business-to-business arrangement.

Why the Retainer Model Raises IR35 Flags

IR35 is designed to catch contractors who are effectively employees but operate through a limited company for tax advantages. The legislation looks past the corporate structure at the reality of the working relationship.

A fixed-fee retainer creates a recurring payment that looks like a salary. If the contractor gets paid the same amount every month regardless of how many hours they work, HMRC will ask: is this really a contract for services, or is it a contract of service?

Here is what HMRC looks at specifically:

  • Mutuality of obligation. Does the agency have to offer work, and does the contractor have to accept it? With a retainer, the answer is usually yes on both sides.
  • Control. Who decides what work gets done, when, and how? If your agency directs the contractor's day-to-day tasks, you are in employee territory.
  • Financial risk. A genuine contractor bears financial risk. They cover their own costs, correct mistakes at their own expense, and can make a loss. A fixed retainer removes most of that risk.
  • Substitution. Can the contractor send someone else to do the work? If the retainer is based on their personal skills, substitution is often impractical.

The fact that the contractor has other clients does not automatically save you. HMRC can argue that the contractor has multiple "employers" rather than multiple clients, particularly if each engagement has the same retainer structure and level of control.

The Specific Scenario: Contractor Working for Multiple Clients Through Your Agency

Let us be precise about the model we are discussing. This is not a contractor who works directly for an end client on a long-term project. This is a contractor who:

  • Is engaged by your agency
  • Provides services to multiple end clients through your agency
  • Receives a fixed monthly fee from your agency
  • May or may not work exclusively through your agency

This is common in agencies that white-label services. A web design agency might bring in a freelance developer on a retainer to handle overflow work from multiple clients. A PR agency might retain a freelance copywriter to produce content for several accounts.

The problem is that the contractor starts to look like a member of your team. They attend your client meetings. They use your project management software. They follow your processes. And they get paid the same amount every month, just like your salaried employees.

Case Study: The SEO Contractor Retainer

Consider a real example. A Bristol-based digital agency engaged a contractor through their limited company to provide SEO services for three retainer clients. The contractor was paid £4,500 per month, fixed, regardless of workload. The contractor worked 20-25 hours per week across the three accounts, using the agency's reporting templates and attending weekly client calls.

When HMRC investigated, they argued that the contractor was effectively an employee of the agency. The fixed retainer meant there was no financial risk. The agency controlled the work through client briefs and deadlines. The contractor could not substitute someone else because the clients expected to deal with them personally.

The agency lost the IR35 case. They had to pay the contractor's unpaid income tax and National Insurance, plus interest and penalties. The contractor was also hit with a personal tax bill for the amounts HMRC deemed should have been paid through PAYE.

How to Structure a Retainer Safely

You can still use a fixed-fee retainer for contractors. But you need to structure it so the reality of the relationship matches the legal paperwork. Here is how.

1. Remove Control Where Possible

The contractor should have genuine autonomy over how they deliver the work. Your contract should specify the outcome (e.g. "provide monthly SEO reporting and implement on-page optimisation") rather than the process (e.g. "work 9-5, attend daily stand-ups, use our task management system").

If the contractor needs to use your systems to collaborate with your team, that is fine. But they should not be required to follow your internal processes as if they were an employee. Give them the freedom to use their own tools and methods.

2. Build in Financial Risk

A genuine contractor bears the cost of correcting mistakes. Your retainer agreement should include a clause that the contractor will rectify errors at their own expense. If they deliver substandard work, they should not get paid for fixing it.

You can also include provisions for late delivery or quality failures that reduce the fee. This introduces financial risk on the contractor's side, which supports an outside-IR35 position.

3. Include a Genuine Substitution Clause

The contractor should have the right to send a substitute to perform the work. This does not have to be unlimited. You can require that the substitute meets minimum qualifications or passes a reasonable vetting process. But the contractor must have the genuine ability to send someone else.

If the retainer is based on the contractor's personal brand or expertise, a substitution clause may be impractical. In that case, you need to lean harder on the other factors, particularly control and financial risk.

4. Avoid Exclusivity

Do not require the contractor to work exclusively through your agency. The fact that they have multiple clients is one of your strongest arguments. But make sure it is real. If the contractor only works for you, HMRC will see through a paper-only arrangement.

5. Use a Contract That Reflects the Reality

Your written contract matters, but it is not decisive. HMRC looks at what actually happens, not just what the contract says. If your contract says the contractor has control over their work, but in practice your account manager assigns tasks daily, the contract is worthless.

That said, a poorly drafted contract can hurt you. Use a specialist IR35 contract, not a template you found online. We work with digital agencies to draft contracts that match their actual working practices.

What to Do If You Already Have a Retainer in Place

If you currently have contractors on fixed-fee retainers, do not panic. But do review the arrangement now, before HMRC does.

Start by running each contractor through the CEST tool (Check Employment Status for Tax). This is HMRC's own online assessment. It is not perfect, and it tends to lean towards employment status in borderline cases. But it gives you a starting point.

Then look at the working practices. Ask yourself:

  • Does the contractor have genuine control over how they work?
  • Do they bear financial risk?
  • Could they send a substitute?
  • Is the retainer genuinely fixed, or does it fluctuate with workload?

If the answer to most of these is no, you need to restructure the engagement. That might mean moving from a fixed retainer to a time-based or project-based fee. It might mean reducing the level of control you exercise. Or it might mean bringing the contractor onto payroll as a fixed-term employee.

The Status Determination Statement Requirement

Since April 2021, medium and large agencies (those that meet two of three criteria: turnover over £10.2m, balance sheet over £5.1m, more than 50 employees) must issue a Status Determination Statement (SDS) to each contractor before work begins. The SDS must state whether the contractor is inside or outside IR35 and give the reasons for that determination.

If you are a smaller agency, you are not required to issue an SDS. But you are still responsible for getting the IR35 status right. If you get it wrong, HMRC can come after you for the unpaid tax.

We cover this in more detail in our guide on IR35 for agency founders.

When a Fixed Retainer Makes Sense

I do not want to give the impression that fixed-fee retainers are always dangerous. They can work, particularly where:

  • The contractor has genuine autonomy over delivery
  • The retainer covers a defined scope of work, not open-ended availability
  • The contractor bears financial risk for errors or delays
  • The contractor has multiple clients and does not rely on your agency for the majority of their income

The key is that the retainer must reflect a business-to-business relationship, not a disguised employment arrangement. If the contractor is effectively a member of your team who happens to invoice through a limited company, you have a problem.

What to Do Next

If you are an IR35 agency founder using contractors on retainers, here is your action plan:

  1. Review every contractor engagement within the next 30 days. Look at the contract, the working practices, and the financial structure.
  2. Run each contractor through the CEST tool. Document the results and your reasoning for any determination you make.
  3. Restructure any retainer that looks like employment. Move to project-based fees, introduce financial risk, or reduce control.
  4. Issue SDS documents if you are a medium or large agency and have not already done so.
  5. Talk to a qualified accountant who understands agency contractor models. As ICAEW qualified accountants, we see these issues regularly and can help you structure engagements that work for your business and stay compliant with HMRC.

If your contractor mix has changed in the last 12 months, or if you are planning to put a new contractor on a retainer, ask your accountant before you agree the terms. A few hours of proper structuring now can save you thousands in tax, interest, and penalties later.

Contact us to review your current contractor arrangements.