Natural Resources Wales (NRW), a Welsh Government-funded organization, has paid HMRC a £14.6 million settlement after admitting historic non-compliance with the UK’s IR35 non-payroll work rules.
The settlement, which includes a £2.9 million penalty (with a 12-month suspension), stems from errors in determining the employment status of contractors hired between 2017 and recent years.
NRW confirmed it had been in discussions with HMRC since 2017, when non-payroll reforms first came into force for public sector bodies, shifting responsibility for assessing IR35 status from contractors to the commissioning organisation.
In a statement, the organization said: “Our processes have now changed. We no longer use external contractors and our default position is that we should not use them in the future.”
Following NRW’s disclosure, incorrect assessments of contractor status under the IR35 framework resulted in tax liabilities totaling £14,631,191.13, with HMRC also imposing the suspended fine.
NRW chairman Sir David Henshaw said the organization took responsibility for the failures, described the IR35 rules as “complex” and noted the focus was now on “solving the problem” and tightening internal processes.
“As many other organizations in the public and private sectors have discovered, the IR35 rules are complex,” he said.
“But we accept that the errors that came to light should not have been made. Our focus has been on resolving the issue with HMRC and the Welsh Government, seeking advice from legal and tax experts to inform our decisions.”
The case has drawn sharp criticism from compliance experts, who warn that public bodies continue to have problems interpreting IR35, even eight years after the reform was introduced.
Seb Maley, CEO of Qdos, an IR35 compliance specialist, said the NRW case highlights the “staggering costs of mismanaging IR35 reform” and serves as a warning to all organizations engaging contractors.
“The numbers alone make it clear how high the costs of taking the wrong IR35 approach are,” said Maley. “Misinterpretation or misapplication of the rules can easily result in a huge tax bill. But eliminating contractors entirely is not the solution – IR35 can be managed with the right processes in place.”
He added that many public and private sector organizations are now managing to engage contractors in a compliant manner, combining workforce flexibility with robust governance.
The IR35 reform, first introduced in the public sector in 2017 and later extended to the private sector in 2021, was intended to prevent tax avoidance by individuals working through limited companies but working as employees.
However, the rules have been criticized for their ambiguity and administrative burden, leading to a number of high-profile comparisons. HMRC has recovered millions in similar cases from government departments and public bodies such as the BBC, Defra and the Department for Work and Pensions.
NRW said it has revised its recruitment and engagement procedures for contractors and will continue to work with HMRC and Welsh Government advisers to ensure full compliance in the future.
“Our focus is on maintaining transparency, learning from these experiences and preventing future mistakes,” a spokesperson said.
