HS2 preparing to pay £9.5m IR35 bill for non-compliance

The organisation, which is sponsored by the Department for Transport, is under review by HMRC for suspected non-compliance between April 2019 and March 2021

It has come to light that High Speed 2 (HS2) may have failed to comply with the IR35 legislation over a period of years, according to the organisation’s latest set of accounts. 

As a result, HS2 is preparing to pay a tax bill amounting to £9.5m. However, in its accounts it states that “there is inherent uncertainty in the amount and timing of the actual liability that will be incurred”.

The news, broken by the publication Computer Weekly, comes just months after the revelation that there has been “widespread non-compliance” with regard to IR35 across central government departments. 

To date, the Ministry of Justice, Defra, HM Courts & Tribunal Services, the Home Office and NHS Digital have all been hit with IR35 bills that combined exceed £270m. 

In the HS2 case, potential non-compliance may be the result of confusion over which party was responsible for determining IR35 status. 

Speaking to Computer Weekly, an HS2 spokesperson confirmed that they are “working with HMRC on a compliance review to assess any historic tax liability”.

Where does responsibility for IR35 determination lie?

The investigation hinges on the possibility that HS2 contractors – provided through a third party – were not appropriately reviewed for IR35 status.

This was due to uncertainty over which party was responsible for assessing IR35 status. Questions have been asked if the onus was on HS2 or the third party, which supplied the contractors to HS2. 

Under the IR35 legislation, if the third party provides a genuinely outsourced provision of labour, the third party must assess IR35 status. If not, the responsibility lies with the end client, which is HS2.

This has been a source of confusion for other businesses in the past, says Dave Chaplin, CEO of IR35 Shield, a tax compliance firm. 

Ultimately, the end client needs to understand the distinction between the provision of labour and “wholly outsourced services” says Chaplin. 

Former HMRC CEO at the helm at HS2

The news comes despite the fact that HS2 has, as its Deputy Chair, Sir Jon Thompson, who was the CEO of HMRC at the time that IR35 reform was introduced.

Additionally, HS2 had used HMRC’s own Check Employment Status for Tax (CEST) tool to assess the IR35 status of contractors. 

The news will be another blow to the credibility of the CEST tool, which has been widely criticised across the industry since its introduction prior to the IR35 reform in the public sector in 2017. 

Dave Chaplin has been equally scathing, calling it “risible and alarming” that a company with a former CEO of HMRC as its Deputy Chair is under investigation for non-compliance.

Chaplin also called for the end of IR35, calling it “unworkable” due to the complex nature of legislation, and the impact it has on contractors and the businesses that engage them. 

He also went on to criticise the CEST tool, highlighting that it “has no statutory basis… and its use is not mandatory”.

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