An IR35 bill of £19m for National Resources Wales may be just the tip of its iceberg

Another public sector body must be feeling red-faced for paying IR35 liabilities running into the many millions, writes Nikola Nowak, a contractor solutions consultant at Markel Tax.

Joining a string of previously embarrassed government departments and bodies, it’s now Natural Resources Wales (NRW) that has handed over £19 million to HMRC following an IR35 enquiry into how it engaged specialist contractors.

NRW hopefully manages the environment better than it manages off-payroll worker status

Natural Resources Wales is a government-sponsored body which ensures that natural resources such as air, water, soil and wildlife are sustainably managed.

Following an inspection, HMRC highlighted a potential liability under the IR35 rules, meaning the environmental agency wasn’t managing its off-payroll workers well enough.

Only the tip of its iceberg?

Although there has been no definitive conclusion as the HMRC off-payroll investigation appears to be continuing, NRW has made a payment on account to HMRC -- the hefty £19 million, but reportedly without any admission of liability.

This means that the final IR35 bill may be larger still, if penalties and interest are considered.

Similar uncertainty over how big the IR35 iceberg actually is, or could end up being, affected HS2, too.

(More) wooden dollars

Nonetheless, as with all public sector tax enquiries, the money flows in a circular motion. The Welsh Government has provided financial support for NRW (which it may well claw back from any future grant payments), which will end up in HMRC’s coffers -- only to be inevitably dished back out to public bodies. Minus the interest and penalties of course.

At the time of writing, we cannot be sure exactly what has happened in terms of the IR35 minutiae, as there are no further (public) details regarding the circumstances, and how NRW operates internally. 

A stark reminder that HMRC is actively enforcing its 2017 OPW rules

Butt a lack of available information shouldn’t stop the agency’s expensive brush with the taxman serving as a stark reminder that HMRC is actively enforcing the IR35 off-payroll working rules of April 6th 2017.

Since April 6th2021, in the private sector, where the end-user is a medium or large-sized UK entity, the contractor need not worry, insofar as liabilities sit higher up the contractual chain.

That said, shocking stories like this one -- where liabilities are substantial -- and the fact that HMRC has promised to ramp up compliance investigations, seemingly discourage businesses from engaging with limited company contractors.

Point blank refusal

We have seen this in recent years and in some industries in particular, where organisations point blank refuse to take on limited company contractors, and/or where organisations only take on contractors on an ‘inside IR35’ basis.

HMRC would say at this stage of my narrative that the changes to the IR35 legislation were introduced to increase compliance across the board.

Yet the impact we are seeing ‘on the ground’ is a diminishing pool of flexible workers and increased use of umbrella companies -- even where the individual could be genuinely self-employed.

As 2025 comes into sight, the financial pressure is too much for many to change IR35 tack

The long and short of the OPW rules in the current landscape, as 2025 comes into sight, is that where IR35 is concerned, financial pressures prevent most businesses from being able to take any risks.

But if your end-client is small or based wholly overseas, now is the time to consider IR35 compliance, as any HMRC liabilities will sit with you; the limited company contractor.

Practical steps for outside IR35 contractors to take, in wake of NRW paying £19m to HMRC

As a minimum, you need to ensure that your contractual arrangements reflect your working reality, and that the two demonstrate an ‘outside’ IR35 position.

Very likely to have been a question posed to NRW, HMRC will ask how you came to the conclusion of an ‘outside IR35’ engagement, and so will keenly look into your ‘due diligence’ and/or processes that formulated that determination. If you cannot show that you satisfy the status tests, you could be leaving yourself open to liabilities -- a lesson that seemingly comes too late for Natural Resources Wales.