Aipedia: Recruitment agencies

AI tools for IR35 and employment status

Aipedia, by the Apex broking team · Last reviewed 2026-10-27

An automated status tool can help with IR35, but it does not move responsibility for a wrong determination onto the software. Agencies sit in the middle of contractor supply chains, so a wrong answer can create tax liabilities and claims from both sides.

Part of: AI in recruitment agencies

In short

Agencies placing contractors may use questionnaires, HMRC's own status tool and AI-driven platforms to assess whether the off-payroll working rules apply. GOV.UK says that in most cases the client is responsible for the status determination and should give a status determination statement explaining its reasoning. Agencies of any size have some responsibilities, particularly where they act as the deemed employer that deducts tax and National Insurance. If an AI tool or an agency's advice produces a wrong outcome, HMRC liabilities and claims from clients or contractors can follow. PI may respond to negligent advice claims, but tax itself is commonly not covered.

How agencies use automated status tools

Contractor desks use online questionnaires and status platforms to assess roles before placement. Some tools use AI to read contracts and working practice evidence and produce an "inside" or "outside" result with a report. Agencies may offer this as a service to clients, run it on the client's behalf, or rely on it to decide how to pay the contractor. HMRC's own check employment status for tax tool is also available.

The rules that apply

GOV.UK guidance on off-payroll working says:

in most cases the client is responsible for determining the worker's employment status;
where the rules apply, the client should give a status determination statement explaining its reasoning;
if the worker is deemed employed, the deemed employer deducts Income Tax and employee National Insurance from the fees, and pays employer National Insurance and any Apprenticeship Levy;
agencies of any size have some responsibilities, particularly where they act as the deemed employer;
HMRC's check employment status for tax tool can help the client decide.

Different rules apply depending on the client's size. The Conduct Regulations also matter: reg 18 requires enough information from the hirer about the role, and the agency must give accurate information to the contractor. REC Code principle 6 requires professional knowledge, which includes knowing the limits of any tool you rely on. See the Conduct Regulations guidance.

Where an AI tool goes wrong

Status depends on the real working arrangements, not only the contract. An AI tool that reads a contract well may still miss what happens in practice: control, substitution and integration into the client's team. Questionnaires answered by a busy hiring manager may describe the role as the agency hopes it works. A tool is also only as current as its last update. If the result is wrong, HMRC may later seek unpaid tax and National Insurance from the party it treats as the deemed employer.

What can go wrong

Illustrative: an agency offers clients an AI-driven status review as part of its contractor service. The tool assesses a long-running IT role as outside IR35 based on the contract. In practice the contractor manages permanent staff and works fixed hours. An HMRC enquiry concludes the role was inside the rules. The client argues it relied on the agency's review, the contractor complains about a sudden change to their pay, and the agency faces questions about its own role in the chain.

How PI usually responds

There is no statutory PI requirement for agencies. If an agency gave status advice as part of its professional service, a client's claim that the advice was negligent may fall within PI, subject to the wording. The tax and National Insurance themselves are commonly not recoverable under PI, because they are liabilities the business would have had anyway, and penalties and interest may be excluded. Claims where the agency itself is treated as the deemed employer may be a business risk rather than an insured loss. See IR35 status determination and the recruiter's PI exposure and IR35 reclassification and PI cover.

Practical controls

Be clear in writing whether you give status advice or only pass on the client's determination.
Make sure the client's status determination statement is received and passed on.
Test any AI result against what actually happens in the role, and review it when the role changes.
Keep the evidence and answers used for each determination.
Do not promise contractors or clients an outcome.
Tell your broker if you sell status reviews as a service.

How Apex helps

Apex arranges PI for recruitment agencies; a broker can check whether your policy covers status advice and how it treats tax-related claims. See the AI in recruitment agencies hub, AI checks and reg 19 and does recruiters' PI cover AI mistakes?.

Sources

Frequently asked

Who decides IR35 status for a contractor placed by an agency?

GOV.UK says that in most cases the client is responsible for determining the worker's employment status and should give a status determination statement explaining its reasoning. Agencies have responsibilities too, particularly where they are the deemed employer.

Can we rely on an AI status tool?

Use it as evidence, not a final answer. Status depends on how the role works in practice, which a tool reading a contract may miss. Record what the tool was told and check the result against the actual working arrangements.

Should agencies offer IR35 status reviews to clients?

If you do, treat it as advice and make sure your PI covers it. Make clear in writing that the client remains responsible for its determination, explain the limits of any automated tool, and tell your broker about the service.

Does PI pay unpaid tax after an IR35 reclassification?

Usually not. Tax and National Insurance are commonly not recoverable under PI, and penalties and interest may be excluded. A client's claim that the agency's status advice was negligent may be covered, subject to the wording.

Check your PI covers how you use AI

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Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales, company number 07014570. This page is general information about how AI is used in the profession and how insurance may respond. It is not legal, regulatory or insurance advice on your circumstances, and it does not guarantee that cover will be available or on what terms.