Natural Resources Wales (NRW), a body sponsored by the Welsh government, has settled a £14.6 million tax dispute with HM Revenue & Customs (HMRC) following an admission of past failures to adhere to the UK’s IR35 off-payroll working rules. The settlement includes a suspended penalty of £2.9 million that will remain on hold for a year. The tax liability arose from incorrect determinations of the employment status of contractors hired between 2017 and recent years.
The issue began in 2017, when the responsibility for assessing IR35 status shifted from contractors to the organisations employing them, as part of broader off-payroll reforms for public sector bodies. NRW acknowledged that it had been in discussions with HMRC since these changes came into effect.
In response to the settlement, NRW stated that its procedures have now been transformed. The organisation declared that it has stopped using off-payroll contractors and intends not to resume this practice in the future. NRW admitted that misinterpretations of contractor status under the IR35 regulations led to tax liabilities amounting to £14,631,191.13 and the issuance of the suspended fine by HMRC.
NRW’s chair, Sir David Henshaw, accepted the organisation’s responsibility for the mistakes. He described the IR35 rules as complex but stated that the focus is now on resolving the issue and strengthening internal processes. He said, ‘As many other organisations in both the public and private sectors have discovered, the IR35 rules are complex. But we accept that the mistakes that came to light should not have been made. Our focus has been to resolve the issue with HMRC and the Welsh Government, taking advice from legal and tax experts to inform our decisions.’
The case has attracted criticism from compliance experts who warn that public bodies continue to grapple with the interpretation of IR35 eight years after the reform was implemented. According to Seb Maley, CEO of Qdos, an IR35 compliance specialist, the NRW case demonstrates the ‘staggering cost of mismanaging IR35 reform’ and serves as a cautionary tale for all organisations working with contractors.
Maley stated, ‘The sheer numbers shine a spotlight on the cost of getting IR35 wrong. Misinterpreting or misapplying the rules can easily result in a huge tax bill. But cutting off contractors altogether isn’t the answer — IR35 can be managed with the right processes in place.’ He pointed out that many public and private sector organisations now successfully engage contractors compliantly, combining workforce flexibility with robust governance.
IR35 reform was first introduced to the public sector in 2017 and later extended to the private sector in 2021. It was designed to prevent tax avoidance by individuals working through limited companies but operating like employees. However, the rules have been criticised for their ambiguity and administrative burden, leading to a series of high-profile settlements. HMRC has recouped millions from government departments and public bodies including the BBC, Defra, and the Department for Work and Pensions in similar cases.
NRW stated that it has revamped its recruitment and contractor engagement procedures. The organisation plans to continue liaising with HMRC and advisers from the Welsh Government to ensure complete compliance in the future. ‘Our focus is on maintaining transparency, learning from this experience, and preventing future errors,’ a spokesperson said.
The case underscores the complexity and potential pitfalls of the IR35 legislation. It serves as a reminder for all organisations engaging contractors to ensure they fully understand and comply with these rules, or face potentially significant financial penalties.
