UK Research and Innovation (UKRI), a non-departmental funding body sponsored by the Department for Science, Innovation and Technology (DSIT), has been hit with a hefty £36m tax bill by HM Revenue & Customs ...
An in-depth review of UKRI's 2021-2022 Annual Report and Accounts revealed that Innovate UK failed to correctly categorise its monitoring and assessment officers following the implementation of the IR35 rules. As a result, UKRI now owes HMRC £36m in unpaid income tax and National Insurance Contributions (NICs) for the tax years 2018-2019 to 2021-2022.
The IR35 rules, reformed in April 2017, put an end to contractors independently determining their tax status based on the nature and execution of their work. Post-April 2017, public sector organisations, as end-hirers, assumed responsibility for designating whether contractors fell inside or outside IR35, thus dictating their tax status. UKRI's misclassification of certain roles post-reform has led to the substantial tax liability it now faces.
UKRI is not the only public sector organisation to find itself facing a substantial tax demand from HMRC in the aftermath of the IR35 reforms. Other notable cases include the Department for Work and Pensions (DWP) and the Department for Environment, Food and Rural Affairs (Defra), with unpaid tax bills amounting to £87.9m and £86.5m, respectively.
IR35 and off-payroll rules have always been seen as economically damaging and disproportionately impacting the self-employed. I do question the Government's claim of fostering a business-friendly environment in light of these punitive rules!
In another twist, HMRC recently announced potential legislative changes to be introduced by April 2024. The proposed changes aim to prevent the over-collection of tax in non-compliance cases, which has been a point of contention for the Revenue in recent years.
At present, HMRC does not account for corporation and dividend tax already paid by contractors when calculating the tax due from non-compliant organisations. This leads to a situation where contractors can claim back any tax they have already paid.
If UKRI settles before April 2024, it will pay the entire £36m bill and HMRC will then need to notify contractors they are due a tax refund.
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