A document, published on the Competition and Markets Authority’s (CMA) pages on the Gov.uk website late last month, confirmed the UK competition watchdog’s Subsidy Advice Unit has been approached to advise the DBT on bailing out the Post Office to the tune of £141.8m.
In a statement to Computer Weekly, a Post Office spokesperson said the organisation had “in common with many government departments” been informed by HMRC that it had incorrectly assessed the IR35 status of the contractors it had engaged to assist with the fallout from the Horizon IT scandal.
“This population [of contractors] had been unusually large to enable the provision of information and documents to the public inquiry, handle thousands of remediation claims and the development of systems to move off Horizon,” the spokesperson said. “It is a historical and complex issue that has been under discussion for many years with HMRC.”
In response to the HMRC investigation, the Post Office spokesperson said the organisation has taken steps to prevent any further mistakes in its approach to IR35.
“Post Office has taken action to amend our policy and approach regarding IR35, undertaking exercises to reassess all contractors, and since being under new leadership, many contractors have left the business,” the spokesperson confirmed.
In a statement to Computer Weekly, a DBT spokesperson confirmed the link between the Post Office’s IR35 bill and the Horizon IT scandal.
“The Post Office used contractors to support replacing the faulty Horizon IT system and delivering financial redress to victims of the scandal,” the spokesperson said. “It has taken action to resolve this issue with HMRC, and we will continue to support them in the interests of progressing their network and transformation plans.”
Post Office bailout
Further details of the financial support the DBT wants to provide to the Post Office are set out in the Gov.uk document.
“DBT intends to provide the Post Office Limited (POL) with a subsidy of up to £141,841,811 to enable the company to continue to take action in response to the Horizon IT scandal, as well as enabling POL’s historic IR35 tax liability to be settled,” it stated.
Specifically, the document stated that DBT will foot the bill for the £104.4m the Post Office owes HMRC in IR35-related liabilities “with the aim of protecting the Post Office network”, because the “Post Office Limited is not in a position to fund it”.
Seb Maley, CEO of contracting insurance provider Qdos, said the amount the Post Office owes to HMRC for incorrectly applying IR35 could constitute the largest liability any organisation in-scope of the legislation has been hit with so far.
“This is an astonishing amount – figures that you associate with football transfers, not necessarily IR35,” said Maley. “It could easily be the biggest liability issued to any organisation as a result of mismanaging IR35 and the off-payroll rules.”
Computer Weekly has previously covered numerous instances where public sector bodies have found themselves saddled with costly tax bills for incorrectly assessing the IR35 status of the contractors they engage.
Some of the largest amounts payable to HMRC by public sector bodies for historic IR35 assessment errors include the £86.5m owed by the Department for Environment, Food and Rural Affairs (DEFRA) and the £87.9m unpaid tax bill the Department for Work and Pensions (DWP) owed to the government tax collection agency for the same reason.
“It raises an important question: how have so many public sector bodies got IR35 so wrong? The legislation itself is known for its complexity, but to engage huge numbers of contractors under the wrong employment status is a sign of systematic failure,” Maley continued.
“You are left to wonder if IR35 assessments were carried out. If so, how detailed were they? Was HMRC’s Check Employment Status for Tax [CEST] tool used? And if that’s the case, should businesses rely on it to determine IR35 status? The answer to the final question, in my opinion, is no.”
The Post Office’s 2023-2024 annual report confirmed the organisation’s approach to IR35 was under review by HMRC, with that document stating a provision of £72m had been set aside to cover its costs in this area.
“A provision totalling £72m has been recognised in the financial year as – after considering views presented by HMRC during the year, including challenge regarding the classification of contractors previously deemed to be inside IR35 legislation, and the scale of contractors used by Post Office historically to primarily support change and exceptional activity – it is considered probable that a cash outflow will occur,” the document stated.
The following year’s annual accounts, however, stated that provision had risen to £101m, with the expectation the matter would be settled with HMRC during the 2025-2026 financial year.
Dave Chaplin, CEO of IR35 compliance firm IR35 Shield, has pointed out that the final amount that DBT might need to stump up to cover the cost of the Post Office’s IR35 assessment errors might end up being far lower than expected.
“The headline figure of £101m certainly raises eyebrows, but a closer reading of the Post Office’s own annual accounts over the past two years reveals the underlying story,” Chaplin told Computer Weekly.
“The actual tax exposure sits closer to £81m, with the remaining £20m attributed to potential penalties that may be suspended. But that’s not all. The £81m figure is far from final and does not take into account offsets for tax already paid by contractors, potential contractual clawbacks and corporation tax overpayment relief. These fundamental elements of IR35 settlements materially reduce liabilities. When factored in, the final bill may be closer to £10-£15m.”
Even so, the situation “illustrates the absurdity of the off-payroll reforms in the public sector”, he said, adding: “One government department investigates another, claims success in recovering a missing £100m for the Treasury, only for another arm of government to step in and pay.
“The stark reality is that there is an unrecoverable cost of taxpayers’ money spent on HMRC investigators, spending their time on an investigation which can only ever have a zero net yield. Overall, the Treasury loses money.”