Public sector IR35 compliance bills hit £300m

Innovate UK is hit with £36m IR35 bill and becomes the latest public sector body to fall foul of off-payroll working rules

Innovate UK, an arm of the non-departmental government body, UK Research and Innovation (UKRI), has revealed it was issued a £36m tax bill as a result of misclassifying contractors’ IR35 status.

First reported by Computer Weekly last Thursday (25th May), the news was included in the body’s 2021/22 annual accounts. 

HMRC’s review covered the 2018/19, 2019/20 and 2020/21 tax years. UKRI was launched in 2018, after the introduction of the off-payroll working rules in the public sector in 2017.

UKRI’s accounts state that some workers engaged by the Innovate UK arm of the organisation “should have been considered to be inside the scope of IR35 regulations, and thus subject to income tax and national insurance contributions”.

As a result, “UKRI has estimated a liability related to these income tax and national insurance contributions”. Quoted in the report as £36 million, the body said it expected that the liability would be settled in 2022/23.

The annual accounts also show that, as of 31st March 2022, the organisation engaged 184 contractors. Between April 2021 and March 2022, however, the body engaged 350 contractors at more than £245 per day for six months or longer.

Of these 350 contractors, 285 were deemed inside IR35, with 65 operating outside the legislation. UKRI also conducted 166 reassessments “for consistency/assurance purposes”, according to its annual report.

 

Repeated non-compliance across public sector

UKRI is the latest in a long line of public sector bodies that have been hit with significant tax bills for non-compliance under the off-payroll working rules. 

Other bodies and government departments include the Ministry of Justice (£12.5m), the Department for Work and Pensions (DWP; £87.9m), and the Department for Environment, Food and Rural Affairs (DEFRA; £48m).

In total, the tax liability for IR35 non-compliance in the public sector is around £300m. Responding to the news, our CEO, Seb Maley, called the figure “astonishing”.

“It’s wooden dollars in the public sector, but if a private sector business was hit with a £36m bill, it would be curtains”, he said. 

As such, this is the latest warning sign to businesses. Ensuring compliance with the off-payroll working rules is essential.

 

CEST remains problematic

The annual accounts also state that its payroll workers “are on arrangements in which the supplier agencies process their payments through PAYE to ensure full tax compliance”. 

However, “the only exception to this is in rare cases where the HMRC tool has shown that an off-payroll worker’s engagement arrangements fall outside the scope of the intermediaries legislation”. 

The UKRI’s use of HMRC’s Check Employment Status for Tax (CEST) tool is in-line with other public sector bodies, which have also used it for IR35 status assessments. These include DEFRA and the DWP – departments which have also landed significant tax bills.

There’s no further detail in the report on how CEST was used. But this is yet another reference to HMRC’s own tool in a case carrying significant tax liability, highlighting the risk of relying on it.

 

The key takeaways

• HMRC’s CEST tool remains unfit for purpose, and should not be relied on for employment status decisions
• Given the values at stake in the event of an incorrect status determination, businesses must prioritise compliance with IR35
• Alongside compliance, expert defence can shut down an HMRC enquiry 
• IR35 insurance offers protection, both from the costs of legal representation and from any tax liabilities owed to HMRC as the result of non-compliance