UK innovation body hit with £36m IR35 tax bill 

Innovate UK is the latest public sector organisation fined for IR35 non-compliance

The UK’s innovation body, Innovate UK, has reported that it owes £36m in tax to HMRC for IR35 non-compliance across three tax years, a development that one industry expert has called “somewhat ironic”.

The disclosure was made in the UK Research and Innovation (UKRI) annual accounts for the 2021/22 financial year. The news was first reported by Computer Weekly last week. 

Innovate UK is part of UKRI, a non-departmental public body launched in April 2018 and sponsored by the government Department for Science, Innovation and Technology (DSIT).

HMRC’s review into the body concerned suspected non-compliance across the 2018/19, 2019/20, and 2020/21 tax years. In this time, Innovate UK was found to have placed workers outside of IR35 when, according to HMRC, they “should have been considered to be inside the scope of IR35”.

As a result of the incorrect status determinations, UKRI has “estimated a liability related to these income tax and national insurance contributions” of £36m, to be settled in 2022/23.

The annual report gives an indication of the extent to which UKRI engages contractors: as many as 350 between April 2021 and March 2022, on rates in excess of £245 per day for more than six months. 

While the 2021/22 tax year wasn’t part of HMRC’s review, the number of contingent workers engaged offers some insight into how UKRI built up such a substantial tax liability.

The cost of non-compliance in the public sector

The organisation is just the latest in the public sector that has been ordered to pay a significant amount of backdated tax for IR35 non-compliance. 

Government departments including the DWP (Department for Work and Pensions) and DEFRA (Department for Environment, Food and Rural Affairs) have also failed to comply with the off-payroll working rules in recent years. 

As a result, these, and other public sector bodies, have been issued with tax bills amounting to millions of pounds. UKRI’s tax bill brings the total, collective cost of IR35 non-compliance in the public sector to around £300m.

Speaking to Computer Weekly, Dave Chaplin – CEO of IR35 Shield – said it was “somewhat ironic” that a body which champions innovation is unable to manage the off-payroll working rules.

Firms need “frictionless access to talent”

Chaplin went on to say that the “punitive” off-payroll working rules are “strangling the UK economy” rather than “helping it to thrive”.

“UKRI is supposed to be helping firms to innovate to ensure that the UK can compete and succeed on a global stage”, Chaplin said.

To achieve that, businesses must have “frictionless access to the talent they need when they need it, without risk”.

Instead, Chaplin said that it was “somewhat ironic to learn that the very arm of the UK that is funded by the taxpayer to promote UK growth is being hit with a significant IR35 tax bill”.

Rather than encouraging businesses to engage with flexible workers, Chaplin said it was more likely that “HMRC will club you with a big tax bill if you try to engage with the self-employed to fuel growth”.

As a result, he concluded that “the punitive off-payroll working rules are causing untold damage and hitting the self-employed and those who want to hire them hard”.