Post Office won’t use IR35 offset, despite ‘biggest ever’ £104m HMRC bill

Post Office contractors who worked on the Horizon IT project face a closing window to potentially claim a refund on tax that they would have paid on their then-outside IR35 roles.

Such is the consensus of experts who spoke yesterday with ContractorUK, after an official report on the Post Office's £104m IR35 bill revealed that the IR35 offset will not be used.

Put another way, the government has "chosen" not to use a mechanism that it itself introduced to offset taxes already paid by PSCs from the Post Office Ltd's (POL's) overall IR35 liability, says Qdos.

When was the IR35 offset mechanism introduced?

The IR35 offset was introduced by HMRC on April 6th 2024.

The offset aims to stop effective 'double taxation,' as it lets "Outside IR35" contractors' already paid corporation tax, PAYE and dividend tax, be set off against their deemed employer's "Inside IR35" liability, Qdos adds.

But pointing to the Competition & Markets Authority's Subsidy Advice Unit March 10th report into the POL's "IR35 liability costs," the IR35 contract review firm said the mechanism got turned down.

How is the decision not to use the IR35 offset for the Post Office being described?

In a statement that it sent to ContractorUK, Qdos was critical of what it described as "a conscious decision by the public authorities involved" not to use the IR35 offset mechanism for the Post Office's IR35 bill.

And this 'conscious decision' was taken on the basis that it was simply "faster and easier not to offset the tax already paid," deduces Qdos' Seb Maley, citing p12 of the Subsidy Advice Unit (SAU) report, which states:

"Following discussion with HM Treasury, it was agreed that the off-setting calculation process would not be undertaken…

"[This is because]…whilst the total sum of the IR35 tax liability would be reduced, this would save time and resource for both POL and at HMRC."

What's driving the decision for the Post Office Limited (POL) not to use the IR35 offset?

Translating the report's words last night for ContractorUK, a leading status advisory said the decision to reject the IR35 offset was "no doubt driven by the sheer number of workers involved."

Given that POL's Horizon remediation project began in 1999, it was 'likely deemed a task too far to gather the [contractor] data required to apply the offset,' added the advisory, Bauer & Cotrell (B&C).

"It is ironic but also extremely unfortunate that what is potentially the largest IR35 tax bill that the UK has ever seen— the Post Office's £105million — will not make use of HMRC's IR35 offset mechanism," B&C told ContractorUK.

What does the Subsidy Advice Unit conclude about the decision not to use the IR35 offset?

With affected contractors in mind, B&C's Charlie Hemsworth said it would be hard for them to now accept the SAU's stated conclusion — that not offsetting constitutes "best value for money."

The SAU report states: "DBT [The Department for Business and Trade] explains that this [not undertaking the IR35 offset process], therefore, represents the best value for money for the taxpayer."

But the big upshot of the offset not being applied to the Post Office's IR35 liability is that its former contractors may now have grounds (themselves) to claim for a refund on the tax they would have paid during their engagement, when operating Outside IR35, advises Qdos.

What does the IR35 offset calculation process not being run open the door to?

Chief executive Seb Maley says: "The very fact that the off-setting mechanism won't be used opens the door to hundreds, potentially thousands of contractors having grounds to submit a claim for a refund on the tax they've paid.

"The amount that could be claimed back is staggering, too — even if much of it can't be claimed back because it sits outside of the four-year window."

What do HMRC's own rules say about the IR35 offset?

Maley was referring to the fact that, under HMRC's own rules, the Revenue should have written to affected contractors — those on the Horizon IT project.

Those communications from HMRC should notify POL contractors of their potential to claim back taxes, "which must be done within four years of the end of the relevant tax year," he said.

However, the SAU's report is "silent" about the HMRC process, under which workers/intermediaries should be notified of entitlement to claim tax refunds where the engager has footed the entire PAYE bill.

What does an IR35 expert recommend HMRC should now do?

B&C's Charlie Hemsworth continued in a statement: "HMRC should at the very least ensure it obtains the data to undertake this exercise, although given the apparent reason for not applying the offset — the time and resource involved in working through a likely very large contractor population at the Post Office — it's difficult to be confident that HMRC will have the information needed to identify and contact all affected individuals."

B&C's director, Hemsworth added that if the final settlement of POL's IR35 liability takes much more time, "more contractors could find themselves outside of the statutory time limits before they are even made aware that they may have a claim."

Do Post Office /Horizon IT contractors need to take any action?

The status adviser also told ContractorUK: "Post Office contractors who believe they may be affected should not sit back and wait for a letter. They should take advice on their position, and once the Post Office Limited's settlement is concluded, take steps to pursue any repayment claim available to them."

What is a 'trigger event' under the IR35 set-off rules?

Yesterday, Re Legal Consulting, an off-payroll working rules advisory, told ContractorUK: "On what is publicly known so far, there is no sign of the 'trigger event' HMRC would need before it can use the set-off rules under SI 2024/355. [And] a 'trigger event' might be a Regulation 80 determination, for example."

What's the biggest problem that Post Office IT contractors face?

Re Legal's founder Rebecca Seeley Harris added, "That means a contractor may still be able to reclaim tax, in principle, pre-2024.

"But the bigger problem [here for contractors] is time limits, because most earlier years are already out of time and, for many individuals, 2021/22 must be claimed by April 5th 2026."

What if a contractor is 'time-barred' from claiming because they're outside the 4-year cut-off?

Ryan Dawson, IR35 project manager at Kingsbridge, told ContractorUK: "If contractors can make an overpayment relief claim, then there are time limits for doing so, which is four years from the end of the relevant tax year/accounting period.

"Where a person is time-barred, then they may have recourse to claim special relief, which is a form of overpayment relief that can only apply where there is no statutory remedy available."