IR35 and HMRC rules on who pays for a contractor creative's seat

What to take away

What the off-payroll working rules decide about contractor status

IR35 asks one question. If the contractor worked for the end client directly, would the arrangement look like employment? If it would, the off-payroll working rules apply and the fee is taxed much like a salary.

Agency finance managers meet that question whenever a freelance creative sits on a long retainer. Status decides who carries the tax. It also decides who carries the tools the work needs.

How the determination reaches the agency

Medium and large private-sector clients make the status determination and issue a status determination statement. That statement goes to the contractor and to the agency paying the fee.

Small clients are exempt from the rules. Where the client is small, the contractor's own company decides its own status and keeps the tax position.

If the contractor disagrees with the determination, the client must consider the reasons and reply within a set window. Until the matter is settled, the fee payer carries the liability.

That liability is why agencies care. A wrong determination can leave the agency with PAYE, National Insurance and interest, even though the client made the call.

The end client decides, the agency applies the decision, and the contractor works inside it. That is who decides what in most creative resourcing setups, from Soho shops to studios in Manchester, Bristol and Glasgow.

Equipment as a status signal

Status tests turn mainly on control, substitution and mutuality of obligation. A contractor told when, where and how to work looks employed.

Equipment sits lower down the list, but it still counts. A contractor who brings their own laptop, their own accounts and their own licences looks like a business.

A contractor who logs into the client's platform every morning looks less like one. Software seats are evidence, and they end up in the file if HMRC asks questions.

HMRC enforces the rules and collects the resulting tax. Its guidance sits under the employing people hub on GOV.UK, which is the sensible starting point for status questions.

Broadcast work can add pre-clearance requirements, but clearance does not change who pays for the seat.

Who pays for a contractor creative's software seat under IR35

Inside IR35, the engagement is taxed like employment. The fee payer deducts PAYE and National Insurance, and the client normally provides the tools needed for the work, including software seats.

Outside IR35, the contractor runs a business. They supply their own equipment, hold their own licences and invoice for output. The client buys the work, not the contractor's overheads.

Seat costs are not trivial. A single creative platform seat typically costs between £250 and £700 a year, and contractors working across several clients may hold several at once.

A contractor who provides the seat can claim the cost as a business expense through their own company.

The employ people guidance on GOV.UK covers who pays contractor costs in employment-like arrangements. Read it alongside the determination, not instead of it.

Account ownership and cost responsibility are separate questions. An agency may hold the platform account for billing convenience while the client bears the cost, or the reverse.

Where the agency holds the account, it usually pays the vendor and recharges the cost. Where the contractor holds the account, the licence fee belongs in the fee, not in a separate expense line.

VAT treatment needs care. Licence fees carry UK VAT at the standard rate, and a VAT-registered agency can usually reclaim the input tax on tools it buys for client work.

Data residency matters too. If the client provides the seat, the client's workspace holds the work in progress. The ICO enforces UK GDPR, and the party holding the account is usually the data controller.

Client tools versus freelance licences: the practical split

Most engagements follow one of two patterns. Either the client provides client provided tools, or the contractor holds freelance creative licences and moves between clients.

Mixed arrangements are common. A contractor may use the client's platform for one campaign and their own licence for another. That works if the contract says which is which.

Without a clause, the cost falls to whoever holds the account. That is how costs that never appear on the quote end up on the agency's books at year end.

Map every contractor to a seat before the engagement starts. The map should record the platform, the licence tier, the holder, the annual cost and the determination date.

Reimbursing a contractor's own licence as an employment expense can muddy the status picture. Pay it inside the fee, or leave it with the contractor.

Client tools also carry workflow advantages. Shared workspaces, version history and brand libraries sit with the client, which suits cleared advertising work and keeps assets in one place.

Agencies in the IPA and ISBA membership base often run their own platform seats for staff and freelancers alike. Smaller shops hand over a login for the length of the booking and take it back when the booking ends.

HMRC and Companies House records that settle the question

When status is questioned, HMRC looks at what actually happened, not at the label on the contract. Invoices, timesheets, emails and equipment records all feed the picture.

Companies House records show whether the contractor runs a real company. Filed accounts, a registered office, a director and a trading history all point to a business rather than a payroll arrangement.

A company with dormant accounts and no trading history weakens an outside IR35 position. Check the company number, the filing history and the stated nature of business at onboarding.

HMRC is the body that enforces contractor tax and the off-payroll rules. Its HM Revenue and Customs organisation page sets out its remit, including compliance checks and determinations.

For seat costs, a short set of documents answers most questions: the licence invoice, the contract clause that assigns the cost, and the status determination. Keep them together.

Hold those records centrally rather than in a resourcing manager's inbox. If HMRC asks who paid for a contractor's seat, the answer should take minutes.

HMRC's Check Employment Status for Tax tool can support a determination, but it does not bind HMRC. Record the reasoning alongside the result.

Seat fees also belong in the wider budget model. The guide on charging unit to exit provision shows where licence costs sit alongside platform, storage and exit charges.

Under UK GDPR the ICO expects records of processing. A contractor working inside a client workspace is processing the client's data, so the client's retention rules apply.

Contract clauses that assign seat and licence costs

The contract is where the seat question is settled. Loose wording pushes the argument to year end, after the money has gone.

A workable clause names the platform, names the licence holder and states who pays. It also says what happens to the seat when the engagement ends.

These are the steps to get the clause right.

Contracts of employment and working hours guidance on contracts of employment and working hours covers written terms on the employment side. Use it to check that client-provided tools are described consistently with the rest of the engagement.

Check vendor terms before signing. The checklist in contract clauses to read twice covers the clauses that decide who keeps the seat and who keeps paying.

Public sector engagements usually carry the same clause structure, with the determination made by the client body and the cost following it.

Freelance creatives should read the seat clause as carefully as the day rate. A seat they must supply can cost more than the difference between two rates.

A worked example of a contractor engagement inside IR35

A Manchester agency books a freelance motion designer for a six-month retainer with a retail client. The client sets the hours, supplies the briefs and hands over a platform login.

The designer works only for that client for the term and uses the client's seat. On those facts the engagement sits inside IR35, and the fee payer deducts tax at source.

Because the client provides the tools, the client pays for the seat. The designer does not invoice for software. The agency records the seat as a client cost.

The agency also records the determination, the platform name, the licence tier and the term end date on its contractor seat map.

Now change one fact. The designer holds their own licence, works for two other clients in the same period and invoices for output rather than hours.

The engagement may then sit outside IR35, and the designer keeps the seat cost. The agency pays for output and nothing else.

The difference is not the software. It is the working relationship.

Agencies that get this right avoid two costs: licence bills they did not budget for, and status challenges they cannot answer with paperwork.

Common questions