An IR35 bill for HS2 of £6.2m underlines OPW’s complexity

The contractor sector has become somewhat accustomed to IR35 horror stories from the public sector.

And, ironically enough, many of them have originated from government departments – which was probably the last thing anyone would have expected or hoped for, writes Seb Maley, CEO of IR35 contract review firm Qdos.

Government rules that government departments get wrong

The Off-Payroll Working (OPW) rules were always going to present considerable challenges. It was one of the major reasons contractors – and experts from across the sector – were so against them.

But surely government departments could grasp the OPW rules and their obligations under them?

Not always the case, unfortunately, as we’ve learned in the years since the rules’ introduction in the public sector in 2017, followed by the rollout in the private sector four years later.

The public sector IR35 mistakes bill stands at £250million

In fact, mismanagement of the rules among public bodies has, to date, cost departmental and non-departmental government departments over £250million in backdated taxes.

This includes the Ministry of Justice (MoJ), DEFRA, and even the Courts & Tribunal Service, which ironically has itself been central to HMRC’s IR35 enforcement activity!

Of course, other public sector organisations have mismanaged the OPW rules too, including HS2, the body in charge of delivering the high-speed railway line between London and Birmingham.

What are the key details of HS2’s OPW non-compliance?

As one of the UK’s largest and most complex infrastructure projects of recent years, it’s no surprise that HS2 relied on highly skilled, highly knowledgeable contractors – ranging from engineers to project managers.

In 2023/24 alone, for example, this non-departmental public body engaged 556 off-payroll workers.

However, in earlier tax years, it clearly ran into some issues in its engagement of flexible workers, as its most recent set of annual accounts disclosed.

How HS2’s £6.2m in IR35 liabilities started out as £10.2m

HS2 faced an HMRC compliance review “concerning the historic assessment of contractor’s employment status” in previous tax years. As a precautionary measure, it had set aside up to £10.2m for the tax liability it was expecting to receive.

Following the HMRC review, HS2 ended up making a payment of £6.2m to HMRC “to cover the full value of the identified liability”.

Now, along with highlighting the sheer complexities of the OPW rules, the sheer size of the bill indicates the potential cost of IR35 non-compliance.

Why does all of this matter?

Ultimately, IR35 reforms have proven challenging for many businesses since they were rolled out – and the situation hasn’t been helped by HMRC’s Check Employment Status for Tax (CEST) tool, either, which is often used to determine the IR35 status of contractors.

While public sector bodies did initially struggle with the reforms, there seem to be far fewer liabilities being issued now than there have been in previous years – judging by recent sets of accounts published.

Seven years a charm, finally

The implication is that seven years on from public sector IR35 reform, bodies and organisations have (finally) become more adept at managing the rules, having had time to iron out the creases in their processes and systems.

So have we reached an inflection point? Potentially. The key factor to consider is that we only learn about liabilities for previous tax years – these accounts only give us a retrospective view.

We can’t draw conclusions about the current financial year – yet. We’ll have to wait and see, but the long-term trend seems to suggest things are heading in the right direction – albeit with work to do to ensure that limited company contractor bans in the public (and private) sector are confined to the past.

Unconvinced as a contractor?

In closing, we assert that HS2’s £6.2m tax bill is an indication of the complexity of the off-payroll rules -- and the ease in which organisations can mismanage them. As a contractor, if you’re not convinced that your clients are conducting accurate status assessments – or reaching accurate conclusions – it’s always worth seeking an expert second opinion, even where you’re not on the hook for any incorrect status determinations.