Not–for-Profits at Risk: Hidden IR35 Liabilities in the Third Sector (and How to Fix Them)

TL;DR Summary

• Robust, fully executed Off-payroll (IR35) compliance is no longer optional - it is critical because the not-for-profits, not contractors, are liable for getting worker status right.

• Multiple multi-million pound liabilities and disclosures have been settled in the private and NFP sector, which will filter into the headlines over the coming 12 months, with hundreds of HMRC investigations on-going.

• Misclassification risks equate to approximately 20–90% of spend on external workers, for up to six years, plus interest and reputational damage. A potentially catastrophic impact for a lot of NFPs.

• In our experience working with NFPs, 12-15% of suppliers in a not-for-profit’s Accounts Payable ledger are typically unknown contractors or sole traders, representing hidden spend and risk that can run into millions of pounds.

• If an NFP buys external workers from a larger supplier or service provider, the not-for-profit are legally responsible for making the IR35 classification. The supplier being labelled as a ‘service provider’ does not mean the not-for-profit avoids scrutiny and risk, and provides a false sense of security.

Survey Results:

CoComply surveys and data suggests NFPs that do not conduct a regular audit or implement a robust system are by far at the greatest level of exposure, often blind to the risk they are carrying due to a lack of internal education.

Across a sample of 127 UK not-for-profit organisations – including charities, community housing providers, and social enterprises, worrying trends emerged:

• Only 18% felt prepared to respond to an initial HMRC enquiry requesting detailed information on their off-payroll workforce.

• 78% said they would struggle to provide the required data within HMRC’s 30 day deadline.

• 82% reported they did not have all workers recorded on a single platform, limiting their visibility and control.

• 62% of senior managers in finance, tax, and procurement agreed they felt exposed to risk under IR35 and off-payroll working rules.

• 87% believed that at least some of their status determinations were likely to be inaccurate due to a lack of internal controls.

Back to Basics: IR35 and Off-Payroll Rules

At its simplest, IR35 (also called the off-payroll working rules) determines whether a worker is effectively an employee for tax purposes, even if engaged through a personal service company (PSC) or as a sole trader.

Since 2017 (public sector) and 2021 (private/third/other sectors), the liability for making the determination rests with the organisation engaging the worker, not the individual. If HMRC finds misclassification, the organisation, not the contractor, pays.

The rules are nuanced. Factors such as:

• Control (who directs how the work is done),

• Substitution (can the contractor send someone else?), and

• Mutuality of obligation (is there an ongoing expectation of work?)

all contribute to whether someone is “inside” (employee) or “outside” (independent worker) IR35. If you don’t have clear documented processes evidencing how status determinations are reached, HMRC knows you haven’t taken reasonable care, which normally leads to a further enquiry and could end with a significant liability.

Why Classification Matters to CFOs, Tax, HR, and Procurement

External workers provide agility and expertise for NFPs such as charities, housing groups, educational institutions and sporting bodies. They fill skills gaps, deliver critical services, and enable organisations to scale flexibly and cost effectively - critical in not-for-profits. But this flexibility without governance comes with risk if it is not managed robustly.

For HR, procurement and finance leaders, the stakes are high.

• Misclassifying a contractor as “outside IR35” when they should be “inside” can lead to serious liabilities.

• HMRC has the power to claw back liabilities which equate to between 20–90% of the spend on contractors annually for up to six years, with penalties and interest compounding.

• Sole traders are in scope and provide the same exposure, albeit under different legislation. 

• The Government Check Employment Status for Tax (CEST) tool lacks context of the engagement and is often used incorrectly leading to inaccurate status outcomes.  

• In the Third Sector where budgets are often tight, such exposure could critically impact service delivery, reserves, and stakeholder trust.

For NFPs, a six-figure clawback doesn’t just hit the balance sheet. It can mean significant reputational damage, resulting in a loss of trustee and donor confidence.

The Complexity of NFP Roles

The diversity of roles in not-for-profits makes classification particularly challenging. Examples include:

• IT specialists – project-based, often integrated with internal teams.

• Clinical supervisors – engaged ad hoc for regulated oversight.

• Engineers and maintenance contractors – on-call, sometimes overlapping with employee functions.

• Fundraising consultants – hired intensively for campaigns.

• Property or building maintenance workers

• Olympic and performance coaches – seasonal or part-time

• Specialist tutors and educators – delivering community workshops, fill-in-lessons or lectures on a flexible basis.

• Therapists and counsellors – engaged a few hours a week on wellbeing projects.

• Campaign managers or communications advisors – engaged for fixed-term awareness initiatives.

• Finance or grant compliance specialists – contracted for funding audits or reporting cycles.

• Event managers and coordinators – engaged around major fundraising or sporting events.

Each role has different working patterns, some “a day here and there,” others 10–15 days per month. While their working models vary, if the contract terms and practices are the same in principle, they can be grouped into a single role-based determination. We advise doing this with professional advice.  Irrespectively, without monitoring, these arrangements can quickly drift and create liability.  Keeping a regular handle on worker employment status is essential.

Where the Key Issues Lie

Despite the risks, many Third Sector organisations still struggle with contractor management. Common pitfalls include:

• Spreadsheets as the primary compliance tool – prone to human error and not scalable.

• Poor visibility over what contractors are doing or how they are paid.

• Line managers under pressure to secure “outside IR35” determinations, often without the right expertise.

• Large populations of ad hoc contractors (“day here and there” workers) not consistently tracked or assessed.

• Hidden contractors in Accounts Payable – typically, 12% - 15% of suppliers are PSCs or sole traders, representing significant spend and risk that goes unnoticed.

Often, the first step to tackling this is a mini audit or health check, surfacing hidden exposure and providing a baseline for compliance.  This can be done internally if you have the expertise, or with an external partner.

The Importance of Monitoring

Status determinations are not a one-time exercise. Working arrangements can evolve:

• A fundraising consultant initially engaged for two days a month may grow into a more regular role.

• A clinical supervisor covering ad hoc sessions may take on ongoing responsibilities more akin to employment.

To remain compliant and meet HMRCs threshold for reasonable care, organisations must:

• Maintain records of contracts and actual working practices.

• Review determinations regularly, especially when scope or frequency changes.

• Educate line managers so they understand the risks of making informal changes to contractor roles.

Penalties, Liabilities and High-Profile Cases

HMRC is taking an increasingly tough stance. In the public sector, several bodies have faced multimillion-pound liabilities totalling over £500m, due to incorrect determinations.  High profile cases such as IUK, DWP and the NHS have resulted in huge liabilities, ranging from £4m to £98m.

This is HMRC penalising other public sector bodies - leaving in little doubt that HMRC does not discriminate in who they will target.

CoComply has often heard senior figures in NFPs state - “surely they won’t come after a charity or school”. Unfortunately, the category of organisation does not have any bearing when HMRC believes tax has been underpaid.  It is a relentless, complex and long process to remediate, often taking years of time, stress, sleepless nights and frustration to get to an unwanted conclusion.

With HMRCs increased scrutiny, hundreds of investigations ongoing, including with ITV who have reportedly now placed £61m in reserve for liabilities.  Hundreds of liabilities and penalties have been issued, many not making the headlines, with a volume in SMEs in the 6-figure range.

Takeaway: The message is clear.  This is not an optional compliance tick box and Not-for-Profit organisations are not immune.  Each day non-compliance exists, it presents a compounding risk for your organisation.

Conclusion

External workers are essential to the Third Sector, providing flexibility, specialist skills, and resilience. But classification errors can have severe financial, reputational, and operational consequences.

To manage this risk effectively, organisations should:

1. Understand and apply IR35 and off-payroll rules.

2. Conduct an audit of contractors, especially hidden suppliers in AP.

3. Use role-based group determinations where appropriate.

4. Implement regular monitoring processes.

5. Partner with experts with technology and professional expertise for assurance.

What to do next - recommended steps

NFPs cannot afford to gamble on IR35 compliance – and it cannot be backdated. If your organisation relies on external workers, now is the time to act.

A safe first step is a compliance audit. This helps surface hidden workers and challenge internal assessment processes, giving leadership:

• A clear risk profile

• Best and worst-case scenario planning

• A costed plan for remediation

Key areas to consider include:

• Understanding your full contractor population across all departments

• Capturing workers supplied via service providers, as these often fall in scope and count towards your external workforce

• Evaluating total spend on external workers

• Seeking an independent expert view where required

If your organisation engages more than 10 external workers and lacks in-house expertise, it is strongly advisable to consult an expert.

About CoComply

Managing this complexity requires more than spreadsheets and good intentions. Trusted by organisations across NFPs and the third sector, CoComply blends award-winning technology with Employment Status Experts, acting as an extension of your internal team.

With CoComply, organisations gain:

• Peace of mind - knowing off-payroll compliance is systemised, accurate and managed by experts - leaving you to focus on your core business.

• Visibility across the supply chain – surfacing hidden contractors in AP.

• Accurate role-based determinations aligned with HMRC guidance.

• Monitoring tools to track evolving arrangements.

• Expert advice to support HR, procurement, and finance teams under pressure.

If you currently feel exposed, CoComply can deliver a rapid, independent audit to give you a full picture of your risk profile, strengths and weaknesses, along with estimated implementation costs. Please contact [email protected] or enquire via the website for further information.

This combination ensures compliance while giving leadership confidence that risks are controlled.