Natural Resources Wales (NRW) has announced that its IR35 mistakes engaging contractors have resulted in a £14.6million settlement with HMRC.
The Welsh government environment agency also said HMRC had added an extra £2.9million penalty for "historic non-compliance with the off-payroll working rules."
'Scary reminder'
Status specialists Bauer & Cottrell yesterday told ContractorUK that NRW's total bill for IR35 errors — £17.5m — is a "scary reminder of what's at stake if hirers get IR35 wrong."
Separately, in a statement sent to ContractorUK, IR35 contract reviewer Qdos said the penalty alone (almost £3million) proves that "mismanaging IR35" inflicts a "staggering cost."
'HMRC still pursuing many organisations under IR35'
Also yesterday, asked by ContractorUK for its take, PSTAX, an expert in public sector taxation, said NRW's settlement aligns with what it's seeing — "HMRC still pursuing many organisations" under IR35.
The £14.6m HMRC liability for Natural Resources Wales under the off-payroll working (OPW) rules looked even steeper back in March 2024.
'Without admission'
Following an HMRC inquiry into its contractor usage in 2017 (the OPW rules took effect in April that year), NRW made a payment on account to HMRC of £19.1million.
The Welsh government agency has explained that the "without admission" payment was made to head off HMRC interest building up on any IR35 liability.
As to how £19.1m has ultimately reduced to £14.6m, Natural Resources Wales added online that the former was only a "preliminary, prudent estimate."
'IR35 offset rule'
In a statement on its website yesterday, NRW also said the "final figure" paid to HMRC "reflect[s] the recent introduction of the offset rule".
Effective since April 6th 2024, the offset lets taxes already paid by contractors and PSCs be 'set-off' against how much HMRC deems their engagers owe, where those PSC contractors' engagements are assessed by tax officials to be "inside IR35."
Supporters of the offset had hoped that once it was in force, engagers would be less risk-averse in their approach to PSCs.
The thinking was that knowing they won't be 'double-taxed' if their "outside IR35" Status Determinations Statements got overturned, engagers would rethink offering predominantly "inside IR35" roles.
'Reasonable care'
Now, potentially feeling stung for not showing "reasonable care" (which triggers an IR35 penalty by HMRC), NRW has explained that such a risk-averse approach will be its approach too.
Sir David Henshaw, NRW's chair, yesterday said the agency has 'implemented procedures to provide assurances' relating to our "approach to compliance with IR35 regulations".
But then Sir David added: "We are no longer using off-payroll contractors and our default position is that we should not use them in the future."
'IR35 status misinterpretations and errors'
Natural Resources Wales engaged limited company contractors over many years, mainly when the expertise it required was not available internally.
But NRW found that "some" IR35 assessment aspects were "misinterpreted", with "errors" in how the agency classified "some" contractors' IR35 employment status.
'Complex OPW rules can be managed'
The Welsh government agency's plan to no longer engage any PSC contractors is disappointing OPW specialists.
"Stopping engaging contractors altogether isn't necessary," says Qdos CEO Seb Maley.
"I'd urge them to reconsider their stance. It's widely accepted that the off-payroll working rules — while complex — can be managed."
'Broad-brush approach to avoid engaging off-payroll workers'
Charlie Hemsworth, a director of Bauer & Cottrell, says: "While NRW says its processes have now changed, this was not to improve their OPW compliance.
"Instead, [the agency now appears to be] taking the broad-brush approach to avoid engaging off-payroll resources altogether.
"This blanket ban follows in the footsteps of many other large organisations and bodies, so clearly the burden of correctly managing OPW is simply too much for many."
'No significant improvement in IR35 compliance in the public sector'
HS2 was the last taxpayer-funded body to hit the headlines due to not correctly implementing the OPW rules.
The IR35 embarrassment for High-Speed Rail 2 happened in August 2024, when its accounts showed it paid HMRC £6.2million for misapplying the OPW rules.
Yesterday, PSTAX's Angela Ferguson said, unfortunately, it's not the case that more taxpayer bodies are now up to speed with the IR35 rules.
"We've seen absolutely no significant improvement in IR35 compliance in the public sector," Ferguson, PSTAX's head of employment taxes, told ContractorUK.
"And [so] HMRC is still pursuing many organisations [under IR35]."
'HMRC doesn't always understand IR35 difficulties'
Ferguson caveated that HMRC is "not always correct" in its interpretations of IR35 compliance.
And nor does the tax department "always understand the difficulties and complexities that organisations face" with the OPR rules, the public sector tax expert said.
On social media, a contractor suggested 'HS2' is a bit like 'NRW,' insofar as both government bodies set aside more for their IR35 mistakes than HMRC eventually collected.
'National Resources Wales' penalty by HMRC suspended subject to conditions'
In the case of NRW, though, its £2.9m penalty has been suspended "subject to NRW complying with specified conditions for a period of 12 months," the Welsh government said.
Elsewhere, Natural Resources Wales risks being accused of trying to downplay its IR35 missteps.
'Like many organisations before us'
It said that, "like many other public and private sector organisations before us," it too has discovered the IR35 rules to be "complex."
It also said that the type of settlement discussions it has had with HMRC "are not unique to NRW, as they have "been seen across the public and private sector over recent years."
Bauer & Cottrell's Charlie Hemsworth agrees the Welsh government environment body is the latest in a long line to fall foul of IR35 and OPW; not that she implied such a claim was enviable.
"Many of these public sector organisations [to have now paid HMRC for IR35 errors], including NRW, have historically relied heavily on contractors to fill vital skills gaps and provide the flexibility needed to deliver their operations effectively.
"With that now off the table for NRW, the agency risks losing access to specialist expertise, project delays, and, of course, higher employment costs," she said.
'Umbrella companies won't be a risk-free option for NRW'
The status adviser further cautioned that NRW putting contractors through umbrella companies, instead, "won't be a risk-free option either…as the JSL legislation comes into force from April 2026."
Hemsworth continued: "The whole framework needs overhauling so that businesses can engage confidently with the flexible, skilled contractor market, while creating a fairer environment that supports and sustains genuine self-employment.
"For now, though, OPW is not going anywhere — so to protect your organisation from finding it in the same boat as NRW and many before it, ensuring you have robust processes in place, well-drafted contracts, and are undertaking thorough and accurate IR35 determinations with evidence to support them remains as important as ever."
'Followed HMRC's IR35 guidance in good faith'
NRW's chair Sir David Henshaw said: "At the time of our [IR35 status] assessments, we believed we had followed HMRC guidance and procedures in good faith. But we accept that the errors that eventually came to light should not have been made.
"Our focus throughout has been on resolving the matter with HMRC, working collaboratively with them and [the] Welsh government and taking the advice of the legal and tax experts available to inform our decisions."
'Phased budget reduction'
Of the £19.1million it previously paid to HMRC, Natural Resources Wales said:"[We] will transfer the funds returned from HMRC to [the] Welsh government and [we have] agreed a phased budget reduction to cover the remaining balance.
"This approach will be spread over the next few years, enabling us to fully reimburse [the] Welsh government while safeguarding the delivery of our…objectives."
