IR35 has long been a legislation that has held back the UK economy, but cutting corners is likely to cost you dearly.
Lately, the perception of authenticity has been challenged, whether by the endless torrent of AI-generated content or by business models that appear to be fundamentally misrepresenting their true operating structure.
And after 20+ years observing this market, our compliance concerns are heightened.
The latest trend we are observing—one that should prompt VCs and Founders to exercise extreme caution—is the Recruiter-Turned-Intermediary setup. This arrangement presents an immediate and significant IR35 compliance risk.
With HMRC increasing its compliance checks and an increasing resource allocation to scrutinising these exact arrangements, UK-based Enterprise, SMEs, and start-ups alike must look past the labels and ensure their compliance and due diligence processes are robust.
The High-Risk Setup: A Service Company with Single-Client Reliance
The specifics of Control, Mutuality of Obligation (MOO), and Substitution are key, but HMRC’s attention is often first drawn to arrangements that suggest a lack of genuine commercial intent.
The classic, high-risk scenario is this:
A long-serving employee or contractor (or perhaps a recruiter who worked closely with a client) leaves a major SaaS scale-up (let’s call them “Client X”).
They immediately set up a Limited Company, call it “Innovate Strategy Services,” and begin supplying contractors predominantly or exclusively to Client X.
The contract may be based on an informal arrangement or a template that labels the service a “consultancy” providing a managed service—rather than a standard recruitment or labour supply firm.
What is the Commercial Reality?
If a business has one primary client, no demonstrable pipeline of other sales, no proprietary IP, bears no significant financial risk (i.e., the entire operation would fold if Client X ceased trading), and is essentially billing for the day-rate of the people it places… the commercial reality is that it functions as a staffing or recruitment agency.
Defining yourself as a “Consultancy” does not automatically confer the legal status of a genuinely contracted-out service. It relates to the legal and commercial definition of the service provided. Furthermore, inflated margins relative to the end client’s costs will certainly attract further scrutiny.
The IR35 Liability Transfer Risk for the Scale-Up
Under the Off-Payroll Working Rules (IR35), the End Client (Client X) is responsible for determining the IR35 status of the worker.
If Client X engages “Innovate Strategy Services” on the basis that they are a genuine outsourced service provider—meaning the intermediary should manage the IR35 status—and the structure is later deemed a mere labour supply arrangement, the End Client has likely failed to take “reasonable care” in its due diligence.
Here is the liability disaster when the HMRC audit hits:
The Intermediary is the Fee Payer: That brand-new, single-client “Innovate Strategy Services” (the Intermediary) is the entity expected to deduct and pay the tax.
The Liability & Penalties: When HMRC proves that the contractors supplied are Inside IR35 (because their working practices resemble those of employees), the tax liability for all unpaid Income Tax and National Insurance falls on the Intermediary.
Critically, the End Client (Client X) can also be hit with penalties for failing to take “reasonable care.” Penalties for careless errors can run in to big numbers dependant on the Potential Lost Revenue (PLR). For deliberate errors, penalties can be as high with fines being issued on top of the tax recovery.
Insolvency: A single-client company with no established balance sheet or reserves cannot typically pay a retrospective, multi-million-pound tax bill plus penalties. It enters insolvency. The Liability then transfers to Client X.
Where the Fee Payer becomes insolvent, HMRC can and will chase the End Client (Client X) for the entire original tax liability, asserting that the client failed in their duty of reasonable care by permitting this commercially unsound structure to operate without proper IR35 status checks.
Seeking a seemingly low-cost, single-source recruitment channel may instead result in a significant, multi-million-pound tax, penalty, and legal liability risk.
Authenticity is the Superpower: Apply Due Diligence
As our founder has noted: Focus your efforts on genuine, value-creating relationships. That applies to your vendors, too.
If an “Intermediary” is proposing services, and their only business is built on an informal relationship, a commercially flimsy contract, and inflated pricing for what is essentially a recruitment service… step back and conduct rigorous due diligence.
If you are the line manager approving this, be aware that the decision to support an former employee / Friends new venture could result in both poor commercial value and a severe HMRC compliance exposure for your CEO and the company.
Being authentic means being honest about your intentions and your business model:
If you are a recruiter, be a great recruiter. If you are a genuine consultancy, prove it with multiple clients, clear Statements of Work (SOWs), and demonstrable financial risk transfer.
If you are a Founder, value the genuine partners who are transparent about their services and can back up their claims. These partners will help you scale securely, not leave you with a crippling tax liability a year down the line. Find the authentic people, and support them.
