HS2 pays HMRC a ‘staggering’ £6.2million for mismanaging IR35 off-payroll rules

HS2 has been forced to pay out £6.2million to HMRC because it “mismanaged” the IR35 Off-Payroll Working rules.

In its latest annual accounts, High Speed Two says its OPW liability “could have been” as much as £10.2m, so it set aside this mega sum.

That represents an upwards revision on the £9.5m initial provision which HS2 made for IR35 liabilities in the 2021-22 financial year.

'Compliance Review'

But following a now “concluded” HMRC “compliance review,” HS2’s 2023-24 accounts show it paid less -- but a still hefty £6.2m.

Ironically, it is a limited company and further ironically, HS2 is led by the ex-CEO of HMRC who oversaw the introduction of IR35 reform, Sir Jon Thompson.

Thompson left the Revenue in Oct 2019, more than two years after the off-payroll working rules took effect in the public sector under his watch on April 6th 2017.

Despite the former top taxman being HS2’s deputy chair at the time when the first liability was set aside in 2021-22, and is its executive chair now, the 2024 accounts acknowledge that HS2 blundered the “assessment of contractor’s [sic] employment status.”  

In a section innocuously entitled “Other,” the annual accounts go on to stipulate that HS2 Ltd paid £6.2m to HMRC as a result.

'Astonishing'

Rebecca Seeley-Harris, founder of ReLegal Consulting, believes such a large IR35 tax liability, for a government body run by a former HMRC CEO, beggars belief.

“This is an astonishing [development related to]…IR35 mishandling,” Seeley-Harris told ContractorUK.

“There’s really no excuse [for HS2] to get it wrong. Perhaps it’s time for the government to engage some private sector help with assessing IR35? 

“Alternatively, the new Labour government needs to look again at a statutory test or some measure that makes it easier for all organisations to assess off-payroll working.

'Better working relationship with HMRC'

 A former tax inspector, Carolyn Walsh, is both stunned and puzzled.

She says: “You’d think a public sector body like this would have a better working relationship with HMRC that it needn’t rely solely on CEST”.

However, back in its 2021-22 accounts, HS2 confirmed: “We use HMRC’s own Check of Employment Status for Tax tool and accompanying guidance to make…[our IR35] assessments.

“During 2020, internal checks and additional HMRC’s guidance highlighted some cases of workers who were engaged through other suppliers that had not been appropriately reviewed.”

'HS2 mismanaged the off-payroll working rules'

A non-departmental public body tasked with developing the UK’s high speed rail network, HS2 is far from alone.

Defra, UKRI, the MoJ, the DWP and the Home Office have each paid over millions to HMRC for managing IR35 poorly, after using CEST.

In that sense, High Speed Two is “yet another government-funded body…[that has] mismanaged the OPW rules,” says Qdos’ Seb Maley.

'Staggering'

“A staggering £6.2m tax bill acts as a stark reminder of the costs of non-compliance where the off-payroll rules are concerned,” he says.

“CEST…was used [by HS2] to determine the IR35 status of contractors [even though] time and time again, CEST is at the heart of incorrect IR35 assessments.”

As the public sector IR35 non-compliance bill approaches £300m, the root of the problem is that IR35 status is initially determined by managers who misunderstand, says Walsh, now of Oblako Ltd.  

'Wrong decision filters down'

Walsh told ContractorUK: “The manager takes the wrong advice and makes a decision; the wrong one -- and that filters down through the entire organisation.

“Yes, CEST could be better, but equally some quite senior and quite well-paid managers could probably make better decisions too”.

In its latest annual accounts, which cover the 12 months to March 2024, HS2 states that it engaged a total of 339 off-payroll workers.

Out of those 339, some 320 were engaged inside IR35, meaning 94% of contractors at HS2 were determined as ‘caught’ (compared with 95% and 93% ‘caught’ in 2022-23 and 2021-22, respectively).

In its 2023-24 annual accounts, HS2 continues: “The HMRC review has now been formally concluded and accordingly, there is no provision included for the year ended 31 March 2024.”