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.