You have a contractor who works for you two days a week. They also work for two other agencies. You pay them a flat £2,500 per month, same amount every month, regardless of how many hours they actually put in. It is simple. It is predictable. And it might be the exact thing that puts you inside IR35.
This is the fixed-fee retainer trap. It feels like a clean commercial arrangement. In reality, it can look to HMRC like disguised employment. The fact that the contractor works for other clients is not enough on its own to keep you safe. HMRC looks at the nature of the engagement with you, not the contractor's overall portfolio.
This article is part of our IR35 agency complete guide, covering the specific risks agency founders face when using retainers with contractors who serve multiple clients.
Why a Fixed-Fee Retainer Raises IR35 Flags
IR35 (off-payroll working rules) exists to catch workers who operate through a limited company but would be employees if they were engaged directly. HMRC applies three core tests to determine employment status: control, substitution, and mutuality of obligation (MOO).
A fixed-fee retainer can create problems on all three fronts.
Control
If you pay a flat monthly fee, you are less likely to track hours closely. That sounds harmless. But it can indicate that you control the output, not the time. HMRC views control over what is done and when it is done as a strong indicator of employment. If the contractor is expected to attend weekly stand-ups, use your Slack, and work within your project management system, you are exerting control regardless of the fee structure.
Mutuality of Obligation (MOO)
This is the biggest risk with a retainer. MOO means you are obliged to offer work and the contractor is obliged to accept it. A fixed-fee retainer that runs month after month, with no variation, creates an ongoing obligation. If the contractor cannot refuse a piece of work without risking the retainer, you have MOO. HMRC sees that as employment.
Substitution
If the contractor is personally delivering the work because the retainer is based on their specific expertise, substitution is unlikely. Most fixed-fee retainers are agreed because the client wants that person. If the contractor cannot send a substitute without your approval, you lose one of the strongest defences against IR35.
The Multi-Client Myth
Many agency founders assume that because a contractor works for multiple agencies, they are automatically outside IR35. That is not how HMRC sees it.
HMRC assesses each engagement separately. The fact that your contractor also works for a PR agency in Bristol Harbourside and a web design agency in Manchester Northern Quarter does not change the nature of their engagement with you. If your retainer creates control, MOO, and no genuine substitution, you are inside IR35 with that contractor even if they have ten other clients.
We have seen this tested in tribunals. In Uber BV v Aslam (though not an IR35 case), the Supreme Court made clear that a worker's overall portfolio does not automatically make them self-employed. The same logic applies to IR35. HMRC will look at your specific contract and working practices.
What HMRC Actually Looks At
When HMRC investigates a fixed-fee retainer arrangement, they request three things:
- The written contract. Does it include a right of substitution? Is it a fixed-term or ongoing? Does it specify deliverables or just time?
- Working practices. Does the contractor attend your office (or Slack)? Do they use your equipment? Are they included in team meetings? Do they work set days or flexible hours?
- Financial reality. Is the retainer the contractor's main source of income? Do they bear any financial risk? Do they invoice you monthly without variation?
If the answer to most of these points leans toward "yes, they are treated like an employee", you are inside IR35. The multi-client factor does not override the working practices.
The Status Determination Statement (SDS) Requirement
If your agency is medium or large (meeting two of three criteria: turnover over £10.2m, balance sheet over £5.1m, over 50 employees), you are legally required to issue a Status Determination Statement (SDS) to the contractor before they start work. This applies regardless of whether the contractor works for other clients.
You must also pass the SDS down the chain. If you use an agency or umbrella company, you still need to determine the status and communicate it.
HMRC's CEST tool (Check Employment Status for Tax) can help, but it is directional. It often gives an "unable to determine" result for complex arrangements. If you are using a fixed-fee retainer with a multi-client contractor, CEST may not give you a clear answer. That is when you need professional advice.