High Speed Two (HS2), the public body responsible for developing the UK’s high-speed rail network, has confirmed it paid HM Revenue & Customs (HMRC) a final settlement of £6.2m for failing to comply with the IR35 tax avoidance legislation.
The settlement amount is several million pounds lower than HS2 originally budgeted for, as confirmed by the contents of its 2023–2024 annual report and accounts, which states the organisation initially set aside £10.2m to cover the cost of its IR35 liabilities.
As previously reported by Computer Weekly in August 2022, HS2’s compliance with the IR35 legislation has been subject to an ongoing review since May 2022, after concerns were raised about how the organisation adapted to the roll-out of the public sector IR35 reforms in April 2017.
“In [the] 2022–23 [financial year], the company made a provision for £10.2m for tax that could have been due to HMRC in relation to the Off-Payroll Working Legislation introduced in April 2017,” the HS2 accounts document stated.
“HMRC [has] now undertaken a compliance review covering the historic assessment of contractors’ employment status resulting in the company making a payment of £6.2m to cover the full value of the identified liability,” it added.
“The HMRC review has now been formally concluded and accordingly, there is no provision included for the year ended 31 March 2024.”
The accounts, which cover the 12 months to 31 March 2024, also show that HS2 engaged a total of 339 off-payroll workers during this period, with 320 (94%) determined to be working on an inside IR35 basis.
Dave Chaplin, CEO and founder of IR35 compliance firm IR35 Shield, said these figures are concerning, and suggest the HS2 could be paying over the odds for the highly-skilled individuals it needs to deliver the project. “The human cost is concerning, with only 5% of contractors deemed to be outside IR35, we’re likely to see top talent blackball the HS2 project, leading to higher cost alternatives,” he said.
This is because inside IR35 contractors may typically request higher day rates to compensate for the fact they will be paying additional employment-related tax on their earnings, compared with individuals working on an outside IR35 basis.
It’s an issue Computer Weekly recently reported on, in the wake of chancellor Rachel Reeves announcing a clampdown on government departmental spend on external consultancies, as part of a push to close the £22bn public spending gap the new government claims to have inherited from the Conservatives.
This is not the only way the public sector IR35 reforms are costing the public sector money, added Chaplin, as the HS2 accounts neatly show.
“[This HS2 bill] is highlighting the circular and counterproductive nature of off-payroll legislation in the public sector,” he said. “HS2, funded by the government, pays £6.2m to HMRC, which goes to the Treasury, only for the Treasury to then fund HS2 with monies including this £6.2m. It’s a bureaucratic circus that serves no real purpose.
“The compliance efforts themselves are a net loss for the Treasury,” added Chaplin. “HMRC caseworkers’ salaries result in only about a third returning as tax revenue. Add to this the increased costs from pushing contractors onto payroll and the use of consultancies, and we’re looking at a significant net loss for the public purse.”
When details of HS2’s IR35 compliance issues first emerged, the organisation’s accounts confirmed it had relied on HMRC’s much-maligned Check Employment Status for Tax (CEST) online tool to assess the employment status of its contractors.
Handle with care
Seb Maley, CEO of contractor insurance provider Qdos, said the situation raises “serious questions” about whether CEST is fit for purpose, but should also highlight the reasons why contractor status determinations are something that need to be handled with care.
“Time and time again, CEST is at the heart of incorrect IR35 assessments,” he said. “This eye-watering tax bill serves as a lesson for other businesses engaging contractors. Given the complexity and the concerns of these rules, it’s crucial that compliance is prioritised.”
There is another concerning element to the story, said Maley, which is the length of time HS2 appears to have been under investigation by HMRC, and how long it has taken the organisation to get clarification on how big its IR35-related tax bill would be.
“Such lengthy delays breed uncertainty, which isn’t good for any organisation – and in many ways, contractors,” he said. “It’s one thing for a public sector organisation to have a £10m tax bill hanging over its head, but it’s another thing altogether for private sector firms.
“The reality is, the longer an IR35 investigation is open, the bigger the impact it can have on whether a business engages contractors. Time spent waiting on HMRC is a huge problem. We see it day in day out here at Qdos, where businesses can’t look too far ahead because of an ongoing – and lengthy – investigation.”