Beyond Compliance: A Smarter IR35 Strategy for Local Authorities

Why IR35 Compliance Demands a Smarter Strategy

IR35 compliance is a critical issue for local authorities not just because of the financial risks involved, but because it directly impacts their ability to deliver services through flexible, skilled interim support. Since the 2017 public sector reforms and the 2021 private sector rollout, councils have faced increasing scrutiny from HMRC, with penalties for incorrect determinations reaching into the millions. The pressure to "get it right" has led many authorities to adopt overly cautious approaches, often defaulting to blanket inside IR35 determinations. While this may seem like the safest route, it’s a false economy. Blanket determinations can:

• Inflate costs by forcing contractors into PAYE arrangements, increasing day rates to offset tax burdens.

• Shrink the talent pool, as many experienced interims will only consider outside IR35 roles.

• Undermine service delivery, especially in transformation, regeneration, and infrastructure projects where niche expertise is essential.

In this blog, I argue that councils must move beyond a risk-only mindset. A smarter approach to IR35 means understanding the nuances of employment status, applying HMRC’s CEST tool with context, and staying informed about evolving case law and tribunal outcomes. It also means recognising when a role genuinely falls outside IR35 and having the confidence and governance structures to make that determination. By doing so, councils can unlock significant cost savings, attract a broader range of consultants, and build more agile, responsive teams. This isn’t about gaming the system it’s about using it properly, fairly, and strategically.

The Compliance Imperative: What CEST Can and Can’t Do

For local authorities navigating the complexities of IR35, HMRC’s Check Employment Status for Tax (CEST) tool remains the most widely used mechanism for assessing employment status. It’s free, accessible, and endorsed by HMRC but it’s far from fool proof. CEST is designed to help public bodies determine whether a contractor should be taxed as an employee (inside IR35) or as self-employed (outside IR35). However, it has long been criticised for its binary logic, lack of nuance, and inability to account for real-world working practices. It doesn’t always reflect the subtleties of control, substitution, and mutuality of obligation three key pillars of employment status in case law.

The National Audit Office has highlighted the consequences of over-reliance on CEST. In a damning report, it revealed that government departments had accrued £263 million in back taxes and penalties due to incorrect IR35 determinations many of which were made using CEST without sufficient context or documentation.

“CEST is only the government’s free-to-use IR35 status tool. It can guide you towards making a decision on status, but it should not be used in isolation.” Ryan Dawson, IR35 Project Manager, Kingsbridge

This is a crucial point for councils. While CEST can be a helpful starting point, it must be part of a broader compliance strategy that includes:

• Contractual analysis

• Review of actual working practices

• Legal advice or third-party assessments

• Training for hiring managers and procurement teams

Without these layers of due diligence, councils risk not only financial penalties but also reputational damage and disruption to service delivery.

Case Study: PSTAX and the Trainer Amnesty

A powerful example of the importance of a robust compliance strategy comes from the LAUPSTREAM1 campaign launched by HMRC in 2023. This initiative targeted councils that had engaged freelance trainers, arguing that many of these individuals were misclassified and should have been treated as employees under IR35. HMRC’s position was based on several factors:

• Trainers had no substitution rights

• Councils exercised significant control over how training was delivered

• Trainers bore minimal financial risk

However, several local authorities, supported by tax consultancy PSTAX, successfully challenged HMRC’s assumptions. PSTAX helped councils demonstrate that their trainers were genuinely self-employed by providing:

• Structured processes for assessing employment status

• Clear policies and training for hiring managers

• Evidence of multiple clients, flexible working arrangements, and lack of mutual obligation

Outcome: HMRC granted an amnesty, meaning no retrospective penalties were applied. Councils were given time to onboard trainers via payroll where necessary, avoiding disruption and financial loss.

“This case demonstrates the importance of maintaining clear, up-to-date employment status policies and engaging with HMRC early where disagreements arise.” PSTAX Knowledge Hub

This case underscores a vital lesson: compliance is not just about ticking boxes it’s about understanding context, applying judgement, and documenting decisions. Councils that invest in these capabilities can protect themselves from risk while maintaining access to the flexible expertise they need.

Tribunal Outcomes: Lessons from the Public Sector

The financial and reputational risks of mismanaging IR35 compliance are no longer theoretical they’re well-documented and increasingly severe. Several high-profile public bodies have faced substantial liabilities due to incorrect determinations and failure to demonstrate “reasonable care” in their IR35 processes:

• Department for Work & Pensions (DWP): £87.9 million

• Ministry of Justice (MoJ): £72.1 million, plus a £15 million penalty

• Home Office: £29.5 million, plus a £4 million fine

• HM Courts & Tribunal Service: £12.5 million

These figures reflect not only unpaid tax but also penalties for non-compliance and interest accrued over time. In each case, HMRC found that the organisation had failed to apply IR35 rules correctly often due to systemic issues rather than isolated errors.

Common Mistakes Identified

1. Over-reliance on CEST without context

   Many departments used HMRC’s CEST tool as a standalone solution, without considering the actual working practices of contractors. CEST can be helpful, but it does not account for all nuances especially in complex or hybrid roles.

2. Lack of documentation showing “reasonable care”

   HMRC requires organisations to demonstrate that they took reasonable steps to assess employment status. This includes keeping records of determinations, rationale, and any legal or expert advice sought. In these cases, documentation was either missing or insufficient.

   Failure to train hiring managers on working practices

   IR35 status is determined not just by contracts, but by how work is actually carried out. Hiring managers are often best placed to understand this but in many cases, they were not trained or involved in the determination process, leading to inaccurate assessments.

Implications for Local Authorities

These tribunal outcomes should serve as a wake-up call for councils. While local authorities may not face liabilities on the same scale as central government departments, the principles are the same. Without a robust, well-documented, and context-aware approach to IR35, councils risk:

• Financial penalties and backdated tax liabilities

• Disruption to critical services if contractors disengage

• Reputational damage and loss of trust with suppliers

The lesson is clear: IR35 compliance must be treated as a strategic governance issue, not just a transactional HR or procurement task. Councils that invest in training, documentation, and expert support will be better positioned to avoid costly mistakes and maintain access to the flexible workforce they need.

The Cost of a Blinkered Approach

Despite years of reform and guidance, blanket IR35 determinations where all contractors are automatically deemed inside IR35 remain common practice across many local authorities. While this approach may appear to reduce risk, it often creates new and avoidable challenges that undermine both financial efficiency and workforce agility.

The Hidden Costs of Blanket Determinations

1. Higher Contractor Rates

   Contractors working inside IR35 are subject to PAYE tax and National Insurance, which significantly reduces their take-home pay. To compensate, many increase their day rates sometimes by 25–30% to maintain income parity. This inflates project costs for councils unnecessarily.

2. 
   

3. Reduced Access to Specialist Talent

   Many experienced interims, particularly those in transformation, infrastructure, and strategic advisory roles, will only consider outside IR35 engagements. Blanket determinations can deter these professionals, leaving councils with a narrower pool of candidates and potentially lower-quality outcomes.

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   Missed Opportunities for Genuine Self-Employment

   Not all consultancy work falls inside IR35. Roles with clear deliverables, autonomy, and limited control from the client may legitimately be outside IR35. By failing to assess each engagement on its own merits, councils risk overlooking compliant, cost-effective arrangements.

“Businesses sacrifice flexibility, skills and savings when they default to inside IR35. A compliant outside IR35 engagement is achievable despite reform.” Seb Maley, CEO, Qdos

Strategic Implications for Councils

A blinkered approach to IR35 doesn’t just affect budgets it affects outcomes. Councils that default to inside IR35 for all roles may struggle to:

• Deliver transformation programmes on time and within budget

• Attract high-calibre interims for short-term leadership or turnaround roles

• Compete with other public bodies offering more flexible, compliant arrangements

The smarter path is to build a governance framework that enables confident, case-by-case determinations. This means training hiring managers, documenting working practices, and engaging expert support where needed. It’s not about taking risks it’s about managing them intelligently.

Recommendations for Councils

To strike the right balance between compliance and cost-effectiveness, local authorities must move beyond reactive IR35 practices and embed proactive governance. Here’s how:

1. 
   

   Use CEST but not in isolation

   CEST can be a useful starting point, but it should never be the sole basis for a determination. Councils should supplement CEST results with legal advice, contract reviews, and assessments of actual working practices. Where ambiguity exists, seek independent IR35 consultancy support to validate decisions.

2. 
   

   Document reasonable care

   HMRC expects public bodies to demonstrate “reasonable care” in their determinations. This means maintaining clear audit trails: who made the decision, what evidence was considered, and why the conclusion was reached. Councils should create a standardised template for recording IR35 assessments and ensure it’s used consistently.

3. 
   

   Avoid blanket policies

   Every engagement is different. Applying a blanket inside IR35 policy may feel safe, but it undermines fairness, flexibility, and financial efficiency. Councils should assess each role individually, considering both contractual terms and day-to-day working arrangements.

4. 
   

   Train hiring managers

   Hiring managers are often closest to the reality of how work is delivered. Yet they’re frequently excluded from IR35 decisions. Councils should invest in training to help managers understand the principles of employment status, the risks of misclassification, and how to contribute to accurate determinations.

5. 
   

   Review contracts and working arrangements regularly

   IR35 status is not static. A role that begins outside IR35 may evolve into one that falls inside, and vice versa. Councils should build in periodic reviews especially for long-term engagements and ensure that contracts reflect the actual working relationship.

By embedding these practices, councils can build a defensible, transparent, and agile IR35 framework that supports both compliance and workforce strategy.

Conclusion: Compliance with Confidence

IR35 doesn’t have to be a barrier to innovation, flexibility, or cost-efficiency. With a smarter, more strategic approach, local authorities can remain compliant with HMRC expectations while unlocking access to the specialist talent they need to deliver complex programmes and services.

This is not about taking risks it’s about managing them intelligently. Councils that invest in governance, training, and case-by-case assessment will be better equipped to:

• Avoid costly penalties and reputational damage

• Attract high-quality interims and consultants

• Deliver transformation with confidence and control

If you’re a hiring manager, HR lead, or procurement officer in local government, now is the time to reassess your IR35 strategy. Let’s move beyond fear and towards informed, confident decision-making where compliance and capability go hand in hand.