UK Research & Innovation admits to £36million in IR35 off-payroll errors

UK Research & Innovation (UKRI) has admitted IR35 blunders totalling £36million, in what experts have told ContractorUK is a harbinger of what’s to come in the private sector.

Buried in its 2021-22 annual accounts, the admission that it misapplied the April 2017 off-payroll rules is ironic because of the executive non-departmental body’s role and purpose.

'Terribly wrong'

“The government in the shape of HMRC is set to take £36m from a body that’s sole aim is to encourage growth and innovation in business,” says status specialist Rebecca Seeley Harris.

“There’s something terribly wrong here. Impeding UKRI from supporting innovation due to it now having a hefty tax bill to pay to another department [over that department’s rules].”

Called on to help outfits grasp the off-payroll rules, Seeley Harris today says UKRI paying £36m for one of its councils, Innovate UK, miscategorising its monitoring and assessment officers represents a "humiliating own goal.”

'Wooden dollars'

The IR35 mis-categorisations didn’t affect Mike Blackburn, UKRI’s CFO since July 2019 however, as his role was “assessed as being within scope” of IR35, the accounts make clear.

But in a sign that the IR35 liabilities (incurred from tax year 2017-18 onwards) are a live issue, UKRI is expected to pay HMRC the £36million before April 6th 2024.

“It’s wooden dollars in the public sector,” reflects Qdos CEO Seb Maley, who calculates the total tax bill for public sector body IR35 mistakes to now stand at £300million.

“[You] can’t help but wonder who’s next [in the public sector]. But if a private sector business was hit with a £36million bill, it could be curtains.”

'Reminder to the private sector of what to expect'

According to Status Determination Statement expert Patrick Joyce, exorbitant HMRC demands on firms -- stemming from off-payroll errors -- are a case of ‘when’ not ‘if.’

“This [admission by UKRI of a £36m IR35 liability] is a stark reminder to the private sector of what to expect”, Mr Joyce, of Project Scopes told ContractorUK.

“The problem is; so many companies now feel they have an internal handle on their IR35 procedures -- when realistically they are just going through the motions.

“[Redrafting] paperwork without aligning it in actual practice is leaving huge gaps and inconsistency for any HMRC investigation, with backdated penalties inevitable.”

'Early adopter'

But Brookson’s Matt Fryer points out that like the previously IR35-non-compliant MoJ and more recently Defra, UKRI was an “early adopter” of the reformed IR35 legislation.

Lessons have since been learnt, he hints, including that depending on an algorithm for IR35 status is risky to the point of unrecommended.

UK Research and Innovation does not specify in its accounts whether CEST or another IR35 tool was used on the Innovate officers whose status determinations were blundered.  

'Trap'

“It appears most fell into the trap of relying solely on an automated employment status review process”, Mr Fryer, the People 2.0 company’s managing director said of public bodies and their collective £300m IR35 bill.

He added: “As best practice emerges, the contractor market is now becoming wise to the fact that sole reliance on automated tools is not seen as adequate.”

But relying on a number of days to gauge IR35 seems worse, even though a source familiar with IR35 testing at UKRI says such contract duration is now being prioritised at the body.

'UK Research & Innovation said to be basing IR35 on 128 days'

“It’s not a status-test as many of your readers will be aware, but Research & Innovation’s [latest approach is to] base everything on 128 days,” the source began to ContractorUK.

“There are therefore UKRI contractors in the same role, under the same conditions who have completely opposite SDSs, just due to how many days [worked] in the last 12 months.”

The source added last night: “Last I heard, there was event talk that they were in discussion with HMRC as to a suitable number of days-threshold. Bizarre.”

'Six years to get to grips with IR35 reform'

In its annual accounts, UKRI indicates contract duration is a criterion, saying off-payroll workers are those with assignments over six months (the equivalent of 182.5 days).

But whatever IR35 assessment criteria was used between April 1st 2021 and March 31st 2022, when 285 contractors were determined inside IR35, UKRI’s accounts do not indicate “reasonable care” was not taken, as HMRC penalties in relation to the £36m do not feature in the 188 page document.

Bauer & Cottrell, an IR35 advisory, told ContractorUK: “Engagers need extremely robust processes and effective mechanisms to determine the IR35 status of their contractors and demonstrate ‘reasonable care.’

“It appears to have taken UK RI six years to get to grips with their obligations, signalling that the legislation is extremely complex.

“With IR35 case law constantly evolving, relying on simple processes and tools isn’t advised whereas engaging specialist expert advice is. We’d go as far as saying – in relation to the private sector – that such advice could potentially save millions -- and even your business -- in the long-run.”

'Accrual of £36million for IR35 tax'

On page 180 of its annual accounts, UKRI admits making “an accrual of £36 million for IR35 tax relating to years 2017-18 to 2021-22.”

Mr Maley of Qdos, which offers IR35 contract reviews, said: “I’m not sure what’s more worrying – the sheer size of this bill, or the fact that it’s something we’ve come to expect in the public sector.”

Maley added that because a similarly-sized tax bill for a commercial end-user (which isn’t a ‘small company’) could obliterate it, “private sector firms must priortise their compliance.”

But “to grab the market’s attention” it will ultimately need a “high-profile” company in a similar ‘many millions-of-pounds IR35 misapplication scenario,” believes Project Scopes’ Mr Joyce.

'Rumoured improvements to CEST'

Either way, HMRC “needs to deliver on their rumoured improvements to CEST”, according to law firm ReLegal Consulting.

“Those improvements would help both the public and private sectors to get the determinations right,” says the firm’s founder, Ms Seeley Harris. “But we’ll need a fair balance [from HMRC], so businesses can still utilise a flexible workforce.”

Sounding in agreement -- insofar as end-clients regardless of sector still need help with the off-payroll rules -- is Charlie Hemsworth of Bauer & Cottrell.

A tax consultant, Hemsworth told ContractorUK: “While this £36million is only going to be paid from one public sector body to another and is not going to bring UK Research and Innovation’s operations to a halt, the amount should certainly alert the attention of private sector engagers. It shows both what and just how much can be at stake and highlights the importance of getting things right from the outset, rather than just fumbling along hoping for the best.”