IR35 for Scottish creator agencies and contractors, explained

What to take away

• Talent management in Scotland now sits inside the off-payroll working rules, so any agency that engages a creator through a limited company must decide whether that creator looks like an employee for tax purposes.
• HMRC off-payroll working tests turn on supervision, direction, control and substitution, not on what the contract calls the arrangement.
• The fee payer must issue a status determination statement and pass it to the creator and, if different, to the agency that supplied them.
• PAYE, umbrella and limited company models carry different admin and risk, and Scottish agencies often use all three across one roster.
• The small company exemption still exists for private sector clients, but a Scottish agency's own size is measured by Companies House accounts, not by headcount.
• Records of determinations, disagreements and payments need to be kept for HMRC and for any later dispute.

What off-payroll working means for Scottish creator agencies

Off-payroll working rules apply when a worker provides services through their own limited company, often called a personal service company, to a client. The client must decide the worker's employment status for tax. If the worker would have been an employee if engaged directly, the fee payer must deduct PAYE and National Insurance from the deemed employment payment.

Scotland has a distinct creative market. Glasgow and Edinburgh host production companies, agencies and freelance creators who work across film, television, advertising and digital content. Aberdeen and Dundee add energy, games and design clients.

A Scottish agency may place a creator with a London broadcaster, a Glasgow studio or an Edinburgh advertiser. Each engagement can carry a different tax result.

The rules changed for public sector engagements in 2017 and for private sector engagements in 2021. Since 2021, medium and large private sector clients have been responsible for determining status, not the creator's limited company. That shift moved risk up the chain to the client and, in many cases, to the agency that pays the creator.

HM Revenue & Customs sets out the tax obligations that apply to agencies, freelancers and creators, including PAYE, National Insurance and the construction industry scheme where relevant (HMRC tax obligations).

For talent management firms, the practical question is simple: who is the fee payer? In a typical Scottish arrangement, the agency contracts with the client, then contracts with the creator's limited company or with an umbrella company.

The fee payer is the party that pays the creator's company or the umbrella. That party must operate PAYE if the engagement is inside the rules.

A Scottish agency that only introduces creators and takes a commission may not be the fee payer. An agency that pays creators from its own account usually is. The distinction matters because the fee payer carries the deduction and payment duty, and HMRC can pursue it for unpaid tax.

HMRC tests: supervision, direction and control

HMRC off-payroll working tests look at the reality of the working relationship. The main tests are supervision, direction and control, plus substitution and mutuality of obligation. No single test decides the case; HMRC weighs all the facts.

Supervision means someone oversees how the work is done. Direction means someone tells the creator what to do and when. Control covers hours, place of work, equipment and the ability to refuse work.

A creator who must attend a Glasgow studio from 9am to 6pm, use the client's kit and follow a producer's notes looks more like an employee than a business.

The right to send another person to carry out the work is known as substitution. A genuine right of substitution, exercised or not, points away from employment. A clause that lets the client veto any substitute weakens the argument. Scottish agencies should check whether the creator's limited company actually has that right in practice.

Mutuality of obligation means the client must offer work and the creator must accept it. A series of short engagements with no guarantee of further work suggests self-employment. A rolling contract with regular hours suggests employment.

GOV.UK publishes employment status and employment rights guidance that helps engagers classify creators using these tests (employment status and rights guidance).

Acas offers practical guidance on employment status for engagers of freelance talent, including how to weigh control and substitution in real engagements (Acas employment status guidance).

A useful habit for Scottish agencies is to keep a short file note for each engagement. Record who sets hours, who provides equipment, whether the creator can refuse work and whether a substitute is allowed. That note supports the status determination statement if HMRC asks questions later.

Status determination statements and who carries the risk

A status determination statement is a written statement that says whether a worker is inside or outside the off-payroll working rules, and gives the reasons. The client must issue it and pass it to the worker and to any agency in the chain.

The statement must be given before the first payment, or as soon as possible after the client has enough information.

The client must take reasonable care when making the determination. A blanket statement that every creator is outside the rules is not reasonable care. HMRC can set aside a determination that was not made with reasonable care and treat the fee payer as responsible.

Risk sits with the party that fails. If the client issues a valid statement saying the engagement is outside the rules, and HMRC later disagrees, the client normally carries the tax.

If the client does not issue a statement, or issues one without reasonable care, the fee payer carries it. In many Scottish agency arrangements, that fee payer is the agency.

A creator who disagrees with a determination can ask the client to reconsider. The client must respond within 45 days. If the client does not respond, the statement is treated as withdrawn and the fee payer becomes responsible for PAYE.

Scottish agencies should track those 45 day windows, because a missed response can move a tax bill onto the agency's books.

Detailed employment status guidance for HR and legal professionals sets out how to document a determination and how to handle disagreements (detailed employment status guidance).

A worked example. An Edinburgh agency places a presenter with a Glasgow production company for six months. The presenter works three fixed days a week on site, uses the client's equipment and cannot send a substitute.

The client issues a status determination statement saying the engagement is inside the rules. The agency, as fee payer, deducts PAYE and National Insurance from each payment to the presenter's limited company. The presenter's company receives the net amount and the agency keeps the payslip records.

Agency engagement models used in Scotland: PAYE, umbrella and limited company

Scottish agencies use three main engagement models. Each shifts cost, admin and risk in a different way.

PAYE is the simplest. The agency employs the creator, or the client does, and deducts tax and National Insurance through payroll. The creator has employee rights, including holiday pay and statutory sick pay. The agency carries employer National Insurance and pension auto-enrolment duties. This model suits long placements and creators who want security.

Umbrella is common for short engagements. The creator becomes an employee of an umbrella company, which handles payroll and deductions. The agency pays the umbrella company a gross amount, and the umbrella pays the creator net of tax. The creator does not run a limited company.

Umbrella companies charge a margin, which reduces take-home pay. The agency should check that the umbrella is compliant, because HMRC can pursue the agency if the umbrella fails to pay over tax.

Limited company is the traditional freelance model. The creator works through their own company, invoices the agency or client, and takes a salary and dividends.

If the engagement is inside the off-payroll rules, the fee payer must deduct PAYE and National Insurance from the deemed employment payment before paying the company. The creator's company cannot simply invoice the full amount.

A Scottish agency may use all three models across one roster. A presenter on a long contract might be on PAYE, a voice artist on a short campaign through an umbrella, and a director through a limited company. The agency must apply the right model to each engagement, not to the roster as a whole.

A commercial contracts review can help an agency map which model fits each engagement and where the risk sits (commercial contracts review).

Commission rates, VAT and other deductions interact with these models. A creator on PAYE does not invoice VAT; a limited company may need to register for VAT if turnover passes the threshold. The agency should show the creator how each model affects net pay before the engagement starts (commission rates, VAT).

How business models differ across the UK affects which engagement model is standard in each market (business models differ).

Small company exemption and client size in Scottish engagements

The small company exemption means that small private sector clients are outside the off-payroll working rules. If the client qualifies as small, the creator's own limited company decides its own tax position, as it did before 2021. The client does not need to issue a status determination statement.

A client is small if it meets two or more of three tests: annual turnover of no more than 10.2 million pounds, a balance sheet total of no more than 5.1 million pounds, and no more than 50 employees. The tests are measured on the client's own accounts, not on the agency's.

A small Scottish agency working for a large broadcaster still applies the rules, because the client is large.

Client size is measured at the time the engagement starts. A company that grows above the thresholds during the engagement does not become large until the next accounting period. A company that shrinks may become small from the next period. Scottish agencies should check the client's latest accounts on Companies House before deciding whether the exemption applies.

If the client is small, the agency may still be the fee payer if it pays the creator, but the off-payroll rules do not force PAYE. The creator's company remains responsible for its own tax. That is a different risk profile from a large client engagement.

The exemption does not apply to public sector clients. A Scottish agency placing a creator with a public body, such as a national health board or a local authority, must apply the rules regardless of the client's size. Public sector engagements have been inside the rules since 2017.

A checklist for Scottish agencies before each engagement:

• Check the client's latest accounts on Companies House to confirm small or large status.
• Confirm whether the client is public sector, because the small company exemption does not apply there.
• Ask the client whether it has issued a status determination statement.
• Record who sets hours, place of work, equipment and the right of substitution.
• Decide whether the agency is the fee payer or only an introducer.
• Choose PAYE, umbrella or limited company and explain the net pay effect to the creator.
• Keep the determination, the contract and the payment records together.

Disputes, repayments and record-keeping for talent management firms

Disputes usually start when HMRC disagrees with a status determination. HMRC can open a compliance check into the client, the agency or the creator's company. The party that made the determination must show it took reasonable care.

If HMRC decides tax is due, it can recover from the fee payer. The fee payer may then seek to recover from the client if the client failed to issue a valid statement or did not take reasonable care.

That recovery route depends on the contract between the agency and the client. Scottish agencies should include a tax indemnity clause that says who pays if HMRC succeeds.

Repayments can also arise when an engagement was treated as inside the rules but should have been outside. The creator's company may be able to reclaim overpaid PAYE. The fee payer must correct the payroll and issue amended records. HMRC can charge interest and penalties for late payment.

Record-keeping is the agency's best defence. Keep the status determination statement, the reasons for it, the contract, the invoices and the payroll records. Keep the client's size evidence, such as accounts filed at Companies House. Keep notes of any disagreement and the 45 day response.

A simple process for each new engagement:

1. Gather the client's size evidence and confirm public or private sector.
2. Ask the client for a status determination statement and check it has reasons.
3. Apply the HMRC tests to the actual working arrangements.
4. Choose PAYE, umbrella or limited company and document why.
5. Issue the contract with a tax indemnity clause.
6. Operate PAYE if the engagement is inside the rules.
7. File the determination, contract and payment records together.

A checklist for the annual review:

• Recheck each client's size against the latest accounts.
• Review any engagement where the working pattern changed.
• Confirm umbrella companies are paying over tax.
• Update contracts with tax indemnity clauses.
• Train bookers and account handlers on the HMRC tests.
• Keep records for at least the statutory period.

A checklist for employers and other engagers helps agencies work through the employment status questions in a consistent order (employment status checklist).

Common questions

Does IR35 apply to Scottish agencies differently from the rest of the UK? No. IR35 and the off-payroll working rules apply across the UK, including Scotland. Scottish agencies follow the same HMRC tests, status determination statements and small company exemption as agencies in England, Wales and Northern Ireland. The difference is the local market, not the law.

Who issues the status determination statement in a Scottish engagement? The client, meaning the party that receives the creator's services. If the client is a large private sector company or a public sector body, it must issue the statement and pass it down the chain. The agency should ask for it before the first payment.

What happens if a creator disagrees with a determination? The creator can ask the client to reconsider. The client must respond within 45 days. If it does not, the statement is treated as withdrawn and the fee payer becomes responsible for PAYE. Scottish agencies should track those deadlines.

Can a Scottish agency use the small company exemption for its own business? The exemption depends on the client's size, not the agency's. A small agency working for a large client still applies the rules. A large agency working for a small client does not. Check the client's accounts on Companies House.

Do umbrella companies remove the agency's risk? No. An umbrella company handles payroll, but the agency can still be pursued if the umbrella fails to pay over tax. Scottish agencies should check that the umbrella is compliant and keep records of payments.

How long should talent management firms keep IR35 records? Keep status determination statements, contracts, payroll records and client size evidence for at least the statutory period, and longer if a dispute is open. HMRC can check earlier years, so a six year retention habit is safer.