Why Your Agency Needs to Get This Right
If your agency engages freelance designers through a limited company, you are responsible for determining their IR35 status. That is not optional. It is a legal requirement under the off-payroll working rules (Chapter 10, Part 2 of ITEPA 2003).
For medium and large agencies, the responsibility sits with the client. In most cases, that client is your agency. You must issue a Status Determination Statement (SDS) before the work starts. And you must do it properly.
Get it wrong and HMRC can come after you for unpaid tax, National Insurance, and interest. That includes the worker's share. We have seen assessments running into six figures for agencies that thought they could skip the paperwork.
This guide covers the specific challenges of assessing a freelance designer. Portfolio-based work, creative briefs, and subjective deliverables make this different from a standard contractor assessment. We will walk through the process step by step.
What Is a Status Determination Statement?
A Status Determination Statement is a written document that sets out whether a worker is inside or outside IR35 for a specific engagement. It must include the reasons for that determination.
Under the off-payroll working rules, the fee-paying party (your agency) must:
- Take reasonable care in making the determination
- Issue the SDS to the worker and the fee-payer (often the same entity)
- Keep a record of the determination
- Provide the reasons in writing
The SDS is not a one-size-fits-all document. It must reflect the specific facts of each engagement. A freelance designer working on a six-month retainer for a single client is different from a designer brought in for a two-week project sprint.
As ICAEW qualified accountants specialising in creative agencies, we see too many agencies treating the SDS as a tick-box exercise. That is where the risk lives.
The Three Tests That Matter for Freelance Designers
HMRC looks at three core tests when determining employment status for tax purposes. For freelance designers, the application of these tests is often nuanced.
Control
Control is the most important factor. Does the agency or end client control what the designer does, when they do it, and how they do it?
A freelance designer who receives a brief and delivers work on their own schedule with their own methods is likely outside IR35. A designer who is told to sit in the office from 9 to 5, attend daily stand-ups, and follow the creative director's instructions to the letter is likely inside IR35.
Real example: A freelance brand designer we worked with received a project brief, delivered three concepts, and had fortnightly check-in calls. They worked from their own studio in Manchester's Northern Quarter. They rejected one concept direction and the agency accepted that. That is outside IR35.
Compare that to a designer embedded in the agency's team, using the agency's Mac, attending the same daily stand-ups as employees, and taking direction from the creative director on colour palettes and typography. That is inside IR35.
Substitution
Can the designer send someone else to do the work? A genuine right of substitution, exercised in practice, points strongly to outside IR35.
For designers, substitution is tricky. Clients hire a specific designer because of their portfolio. If the contract says "John Smith will personally produce all deliverables", that is not substitution. The contract must allow for a replacement, and the client must not have an automatic right to refuse.
A well-drafted contract might say: "The Contractor may provide a suitably qualified substitute, subject to the Client's reasonable approval, which shall not be unreasonably withheld." That is the language you need.
Mutuality of Obligation (MOO)
MOO means the employer must provide work and the worker must accept it. In a genuine freelance engagement, there is no ongoing obligation. Each project or piece of work is a separate engagement.
If your agency keeps giving the same designer work month after month, and the designer keeps accepting it, HMRC may argue there is an overarching contract with MOO. This is the "hypothetical contract" approach the courts use.
The solution is clear contracts for each engagement, with gaps between them. A rolling retainer with no end date is dangerous. A series of fixed-term project contracts with breaks is safer.
How Portfolio-Based Work Affects the Assessment
Designers are different from developers or copywriters. Their work is inherently subjective. A developer either writes code that works or does not. A designer's work is judged on taste, brand fit, and creative judgment.
This subjectivity cuts both ways on IR35.
On one hand, a designer who exercises independent creative judgment is demonstrating a lack of control. They are not following instructions; they are interpreting a brief. That supports outside IR35.
On the other hand, if the creative director rejects work and demands changes until it meets their standard, that looks like direction and control. If the designer has no choice but to comply, that points to inside IR35.
The key question is: who has the final say on what is delivered? If the designer says "this is the work, take it or leave it", that is outside IR35. If the agency says "change the font, change the colours, and redo the layout", that is inside IR35.
Most engagements fall somewhere in the middle. The SDS must reflect the reality of the relationship, not what the contract says.
Step-by-Step: Writing the SDS for a Freelance Designer
Here is the process we recommend to our agency clients. Follow it for every freelance designer engagement.
Step 1: Gather the Facts
Before you write anything, collect the evidence:
- The signed contract between your agency and the designer's limited company
- The project brief or statement of work
- Any emails or messages about how the work will be delivered
- The designer's own terms of business (if they have them)
- Evidence of substitution rights (or lack thereof)
- Details of equipment: whose laptop, whose software licences, whose office
- How the designer is paid: fixed fee per project, day rate, hourly rate
Do not rely on memory. HMRC will ask for documentary evidence if they investigate.
Step 2: Assess Each Test
Work through the three tests systematically. For each one, write a short paragraph explaining your conclusion and why.
Example for control: "The designer received a written creative brief and delivered three initial concepts. They worked from their own studio and set their own hours. The agency provided feedback but the designer had final creative discretion on the chosen concept. There was no requirement to attend the agency office or work set hours."
Example for substitution: "The contract allows the designer to provide a suitably qualified substitute subject to the agency's reasonable approval. The designer has exercised this right on two previous engagements. The agency has approved substitutes in both cases."
Example for MOO: "This is a fixed-term engagement for a specific project lasting six weeks. There is no obligation on either party to offer or accept further work. The contract ends on completion of the agreed deliverables."
Step 3: Make the Determination
Based on your assessment, state whether the engagement is inside or outside IR35. Be clear and unambiguous.
"Based on the above assessment, this engagement is determined to be OUTSIDE the scope of the off-payroll working rules (IR35)."
Or: "Based on the above assessment, this engagement is determined to be INSIDE the scope of the off-payroll working rules (IR35)."
Step 4: Issue the SDS
Send the completed SDS to the designer and to the fee-payer (if different). Keep a copy for your records. Do this before the work starts.
HMRC recommends using the Check Employment Status for Tax (CEST) tool as part of your assessment. We find CEST unreliable for creative roles. It struggles with subjective work. Use it as a directional guide, not a definitive answer.
If CEST says "outside IR35" and your assessment agrees, you are in a strong position. If CEST says "inside IR35" but your assessment disagrees, get professional advice before proceeding.
Common Mistakes Agencies Make
We see the same errors repeatedly. Avoid them.
Copying a template without adapting it. Your SDS must reflect the specific engagement. A generic SDS that says "the contractor has control" without explaining why is not a valid determination. HMRC can argue you did not take reasonable care.
Ignoring the reality of the relationship. If the contract says one thing but the working relationship says another, HMRC looks at the reality. We had a client whose contract said "outside IR35" but the designer sat in the agency office every day, used the agency's equipment, and attended team meetings. That is inside IR35 regardless of what the contract says.
Not updating the SDS for changes. If the engagement changes mid-project, you need a new SDS. Extending a two-week project to three months is a material change. So is moving from remote work to on-site work.
Failing to keep records. You need to keep the SDS and supporting evidence for at least six years after the end of the tax year. HMRC can ask for it at any point.
What Happens If You Get It Wrong?
If HMRC investigates and finds the designer was inside IR35 but you treated them as outside, the liability transfers to your agency. That means:
- Unpaid income tax on the deemed employment payment
- Unpaid employee NI (13.8%) and employer NI
- Interest on the late payments
- Potential penalties of up to 100% of the tax due
For a freelance designer billing £60,000 per year over three years, that is roughly £45,000 in tax and NI, plus interest and penalties. That is a painful bill for any agency.
If you have taken reasonable care and used a reasonable assessment process, HMRC may reduce penalties. But the underlying tax is still due.
Practical Steps for Agency Founders
Here is what we recommend you do today:
- Audit your current freelance designer engagements. Review every SDS you have issued in the last 12 months. Do they reflect the reality of the relationship? If not, correct them now.
- Update your contract templates. Make sure they include genuine substitution clauses, fixed-term engagements, and clear statements about control.
- Train your project managers. They are the ones managing the day-to-day relationship. They need to understand what creates IR35 risk.
- Use a consistent process. Every freelance designer engagement should go through the same SDS process before work starts.
- Get professional advice on borderline cases. If you are unsure, ask. The cost of advice is tiny compared to the cost of an HMRC assessment.
If you work with multiple freelancers regularly, consider a structured IR35 review process with your accountant. We help agency clients set up compliant processes that reduce risk without slowing down your hiring.
Final Thoughts
Writing a Status Determination Statement for a freelance designer is not complicated, but it requires care. The subjective nature of design work means you cannot rely on templates or generic assessments. You need to look at the specific facts of each engagement.
Take reasonable care. Document your reasoning. Keep your records. And if something feels off, get advice before you start the engagement.
Your agency's IR35 compliance is not just about avoiding penalties. It is about building a sustainable business that can hire the talent it needs without creating unnecessary tax risk.
If you are unsure about any of your current freelance designer engagements, speak to our ICAEW qualified team before your next year-end. We can review your SDS process and help you identify any exposure.