IR35 compliance issues leave Innovate UK with unpaid tax bill of £36 million 

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In a development that has been described by one industry expert as “somewhat ironic”, it has emerged that the non-departmental funding body UK Research and Innovation (UKRI) owes HM Revenue & Customs (HMRC) backdated tax amounting to £36 million.

The significant tax bill – as reported by Computer Weekly – was discovered after a review of the public sector organisation’s arrangements for IR35 compliance found that historic errors had been made in how it classified some of its contractors’ employment status.

UKRI receives sponsorship from the Department for Science, Innovation and Technology (DSIT), and supports the work of nine different research councils – one of which is Innovate UK, the country’s innovation agency.

What else is known about the organisation’s unanticipated tax bill?

It was UKRI’s annual report and accounts for the financial year of 2021-2022 that revealed Innovate UK had been in breach of HMRC’s IR35 legislation that is designed to tackle tax avoidance. A review revealed that mistakes had been made in the agency’s classification of its monitoring and assessment officers.

As a consequence of these errors, UKRI has been left owing the tax body some £36 million in unpaid income tax and National Insurance Contributions (NICs) for the tax years from 2018-2019 to 2021-2022, according to the organisation’s accounts.

The document stated: “Following a review of the IR35 status of monitoring and assessment officers engaged by Innovate UK, UKRI has concluded that some of these monitoring and assessment officers should have been considered to be inside the scope of [the] IR35 regulations, and thus subject to income tax and National Insurance Contributions”.

The mistakes happened after the way in which IR35 rules work in the public sector was reformed in April 2017. Prior to that date, it had been permitted for contractors to determine for themselves whether the work they undertook – and how it was performed – meant they should be taxed the same way as salaried workers (inside IR35) or off-payroll employees (outside IR35).

By contrast, from April 2017 onwards, it became the responsibility of public-sector end-hirers to determine whether the contractors they engaged ought to be classified as working inside or outside IR35.

If there is any solace for Innovate UK, though, it is that it is far from the only public-sector organisation to have ended up with a hefty unpaid tax demand from HMRC following the 2017 IR35 reforms; others have included the Department for Work and Pensions (DWP) and the Department for Environment, Food and Rural Affairs (Defra).

Nonetheless, the irony of the situation was not lost on Dave Chaplin, the CEO of an IR35 compliance firm, who said to Computer Weekly that it illustrated the difficulties IR35 imposed on public-sector organisations that depended on “frictionless access to talent” in order to thrive and expand.

He observed: “UKRI is supposed to be helping firms to innovate to ensure that the UK can compete and succeed on a global stage – to do that, the likes of Innovate need frictionless access to the talent they need when they need it, without risk.

“It is therefore somewhat ironic to learn that the very arm of the UK that is funded by the taxpayer to promote UK growth is being hit with a significant IR35 tax bill.”

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