The situation
By early 2025, a Manchester-based recruitment agency with 40 staff and a turnover of £18m had built a strong reputation placing senior contractors into financial services, tech and engineering roles across the North West and London. The agency operated from a converted warehouse in the Northern Quarter, with a satellite office in Leeds Holbeck. Most of its 200+ active contractors worked through their own limited companies, and the agency had historically treated all engagements as outside IR35.
Then the landscape shifted. HMRC had been running targeted IR35 compliance campaigns in the recruitment sector since 2023, and the agency's directors knew they were a prime candidate for an enquiry. Their largest client, a London-based fintech, had already announced it would conduct its own IR35 status determinations for all contractors starting in April 2025. The agency had 90 days to assess every single contractor placement across all clients, or face the risk of retrospective tax bills, penalties and reputational damage.
The directors had never formally documented their IR35 decision-making process. They relied on verbal agreements and standard contracts that didn't reflect the actual working practices of each engagement. A single HMRC enquiry could easily reclassify 30-40 contractors as inside IR35, triggering a liability for unpaid PAYE, National Insurance and interest stretching back six years. The potential exposure was north of £2m.
The decision
The agency needed a mass determination process that could assess every active contractor placement within 90 days, produce defensible status determination statements, and flag any engagements that clearly fell inside IR35. They also needed a clear plan for what to do with contractors who were reclassified: would the agency move them onto an umbrella company, offer a fixed-term employment contract, or simply stop working with them?
The directors had three core questions:
- How do we assess 200+ placements quickly without relying on guesswork?
- What happens to contractors who are reclassified mid-contract?
- How do we protect the agency if a client disagrees with our determination?
What we modelled
We ran three scenarios with the agency's finance director and compliance lead. Each scenario assumed a 90-day implementation window and used real contractor data from the agency's Xero and FreeAgent records.
Scenario A: Full external IR35 assessment firm. The agency would hire a specialist IR35 consultancy to assess every placement individually. Cost: £150-£200 per contractor, plus a £5,000 setup fee. Total: £35,000-£45,000. Timeline: 12-16 weeks, which was too slow. The agency would miss the client's April deadline.
Scenario B: In-house assessment using HMRC's Check Employment Status for Tax (CEST) tool. The agency would train two staff members to use CEST and run assessments themselves. Cost: minimal software cost, plus two days of training at £800 per person. Total: £1,600 plus staff time. Timeline: 6-8 weeks. The risk: CEST has a high rate of "undetermined" results, especially for complex financial services roles. The agency could end up with 40% of assessments unresolved.
Scenario C: Hybrid approach, in-house triage using CEST plus external review for complex cases. The agency would run all 200+ placements through CEST first. Any "undetermined" or borderline results would be sent to a specialist IR35 solicitor for a written opinion. Cost: £1,600 for training, plus £250-£400 per complex case. Estimated 40-50 complex cases. Total: £11,600-£21,600. Timeline: 8-10 weeks. This was the only scenario that met the deadline and kept costs under control.
We also modelled the financial impact of reclassification. If 30 contractors were moved inside IR35, the agency would need to deduct employer's National Insurance at 13.8% and apprenticeship levy at 0.5% on top of the contractor's fee. The contractors would see their net income drop by roughly 12-15%. The agency would need to renegotiate rates with clients to absorb some of the cost, or risk losing contractors to competitors who offered better terms.
The outcome
The agency chose Scenario C. They trained two compliance staff on CEST in early January 2025, then ran all 200+ active placements through the tool over three weeks. The results were sobering: 62 placements came back as "undetermined," and another 18 were flagged as "inside IR35." The remaining 120 were assessed as "outside IR35" with a reasonable degree of confidence.
The 80 problematic cases were sent to a specialist IR35 solicitor in London, who reviewed the actual contracts, working practices and client relationships. After four weeks, the solicitor confirmed that 45 of the 62 "undetermined" cases were genuinely outside IR35, but 17 were inside. Combined with the 18 already flagged, the agency had 35 contractors who needed to be reclassified.
The agency then had difficult conversations with those 35 contractors. They offered two options: move onto an umbrella company arrangement (where the agency would handle PAYE and NI deductions), or accept a fixed-term employment contract with the agency itself. 28 contractors chose the umbrella route; 7 left the agency altogether. The agency also renegotiated rates with the fintech client, securing a 5% uplift on all inside-IR35 placements to offset the additional employer costs.
By the end of March 2025, the agency had issued status determination statements for every single placement. The total cost was £18,400, well within budget. The fintech client accepted all determinations without challenge. HMRC has not opened an enquiry as of September 2025, and the agency now runs quarterly IR35 reviews as standard practice.
What others can learn
- Start early, even if you think you're low-risk. The 90-day window felt tight, but it would have been impossible if the agency had waited until HMRC came knocking. Any agency with 50+ contractors should run a mass determination at least once a year.
- CEST is a useful triage tool, not a definitive answer. It works well for simple, standardised roles, but it struggles with senior contractors who have genuine control over their work. Budget for external review on at least 20-30% of your placements.
- Reclassification is a commercial problem, not just a tax problem. Contractors will push back, and some will leave. Have a clear offer ready, umbrella company, fixed-term contract, or rate renegotiation, before you start the process.
- Document everything. The agency now keeps a digital file for every contractor with the CEST output, the solicitor's opinion, the signed status determination statement, and a record of the contractor's response. If HMRC ever does open an enquiry, they can produce a defensible paper trail within hours.
- Clients will appreciate proactive compliance. The fintech client was impressed that the agency had done the work before being asked. It strengthened the relationship and led to a larger contract in Q2 2025.