Innovate UK hit with £36m unpaid tax invoice over IR35 contractor employment standing errors


Non-departmental funding physique UK Analysis and Innovation (UKRI) should pay HM Income & Customs (HMRC) £36m in back-dated tax after a evaluate of its IR35 compliance procedures uncovered historic errors in the way it categorized the employment standing of a few of its contractors.

UKRI is a funding physique sponsored by the Division for Science, Innovation and Know-how (DSIT) that’s chargeable for supporting the work of 9 completely different analysis councils, together with the UK’s nationwide innovation company, Innovate UK.

The organisation’s Annual Report and Accounts for the 2021-2022 monetary yr verify that Innovate UK, particularly, has fallen foul of HMRC’s IR35 tax avoidance laws after a evaluate revealed errors in its classification of its monitoring and evaluation officers.

Consequently, the organisation now owes HMRC £36m in unpaid earnings tax and Nationwide Insurance coverage Contributions (NICs) for the tax years spanning 2018-2019 to 2021-2022, its accounts confirmed.

“Following a evaluate of the IR35 standing of monitoring and evaluation officers engaged by Innovate UK, UKRI has concluded that a few of these monitoring and evaluation officers ought to have been thought of to be contained in the scope of [the] IR35 rules, and thus topic to earnings tax and nationwide insurance coverage contributions (NICs),” the doc said.  

The errors occurred following the April 2017 reform of how the IR35 guidelines work within the public sector, which marked the top of contractors having the ability to resolve for themselves whether or not the work they do and the way it’s carried out means they need to be taxed in the identical manner as salaried staff (inside IR35) or off-payroll staff (outdoors IR35).

From April 2017 onwards, public sector end-hirers assumed accountability for figuring out if the contractors they interact ought to be categorized as working inside or outdoors IR35.

“UKRI has estimated a legal responsibility associated to those earnings tax and nationwide insurance coverage contributions for the interval to 2018-2019 to 2021-22…it’s anticipated that this legal responsibility will likely be settled in 2022-2023.”

The estimated legal responsibility is confirmed elsewhere within the report as totaling £36m, with the organisation now amongst a handful of public sector organisations to have discovered themselves on the receiving finish of a sizeable unpaid tax demand from HMRC within the wake of the 2017 IR35 reforms.

Amongst them is the Division for Work and Pensions (DWP), which ended up owing £87.9m in unpaid tax to HMRC, and the Division for Setting, Meals and Rural Affairs (Defra) which had a similar-sized tax invoice of £86.5m.

Pc Weekly contacted UKRI for touch upon this story, in addition to perception into the way it plans to make sure its compliance with the IR35 laws in future, however was directed to the organisation’s annual report for its full touch upon the state of affairs.

In the meantime, a HMRC spokesperson stated it can’t touch upon particular organisations and their strategy to IR35 compliance, however offered Pc Weekly with the next assertion: “The off-payroll working guidelines be certain that individuals who work like staff, however via their very own restricted firm, are taxed like staff, making a stage enjoying area with different staff.”

Dave Chaplin, CEO of IR35 compliance agency, IR35 Protect, instructed Pc Weekly the UKRI case highlights the difficulties IR35 places in the best way of private and non-private sector organisations that depend on “frictionless entry to expertise” to thrive and develop.  

“UKRI is meant to be serving to corporations to innovate to make sure that the UK can compete and succeed on a worldwide stage – to do this, the likes of Innovate want frictionless entry to the expertise they want after they want it, with out danger. It’s due to this fact considerably ironic to be taught that the very arm of the UK that’s funded by the taxpayer to advertise UK development is being hit with a major IR35 tax invoice,” he stated.

“IR35 and its newer model, off-payroll, is strangling the UK financial system [and] not serving to it to thrive. The Tories purport to be the get together and authorities of enterprise, however the punitive off-payroll working guidelines are inflicting untold harm and hitting the self-employed and those that wish to rent them onerous.”

He added: “While the Tory message to the world could also be that the UK is open for enterprise, the underlying message ought to be that HMRC will membership you with an enormous tax invoice in case you attempt to interact with the self-employed to gas development.”

Information of UKRI’s unpaid IR35 invoice additionally comes a number of weeks after HMRC confirmed that it might have legislative modifications launched in time for April 2024 that may cease it over-collecting tax in IR35 non-compliance instances.

As beforehand detailed by Pc Weekly, HMRC has come below fireplace lately over the problems, which originates from the truth that when calculating how a lot tax a non-compliant organisation should pay, HMRC fails to consider the company and dividend tax the contractors engaged by these entities have already paid.

In such conditions, the affected contractors are entitled to assert again any tax they’ve already paid, and HMRC has a  notification course of in place to alert them that they’re due a refund.

Pc Weekly understands that if UKRI settle earlier than April 2024, the organisation can pay your entire £36m invoice and HMRC will then need to set about notifying contractors that they’re entitled to a full tax refund.

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