Natural Resources Wales hit with £14.6m IR35 bill including £2.9m penalty after off-payroll failings

Natural Resources Wales (NRW), a Welsh government-sponsored body, has paid a £14.6 million settlement to HMRC after admitting historical non-compliance with the UK’s IR35 off-payroll working rules.

The settlement, which includes a £2.9 million fine (suspended for 12 months), stems from errors in determining the employment status of contractors employed between 2017 and recent years.

NRW confirmed it had been in discussions with HMRC since 2017, when off-payroll reforms first came into force for public sector bodies – shifting responsibility for assessing IR35 status from contractors to the participating organisation.

“Our operations have now changed. We no longer use off-payroll contractors, and our default position is that we should not use them in the future,” the organization said in a statement.

According to an NRW disclosure, incorrect assessments of a contractor’s status under the IR35 framework resulted in tax liabilities totaling £14,631,191.13, with HMRC also issuing the outstanding fine.

NRW chairman Sir David Henshaw said the organization had accepted responsibility for the errors, describing the IR35 rules as “complex” and noting that 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 mistakes that have come to light should not have been made. Our focus has been on resolving the issue with HMRC and the Welsh Government, taking advice from legal and tax experts to guide our decisions.”

The issue has drawn sharp criticism from compliance experts, who have warned that public bodies are still struggling to interpret IR35 eight years after the reform was introduced.

Seb Maley, CEO of IR35 compliance specialist Qdos, said the NRW case highlights “the staggering cost of mismanaging IR35 reform” and serves as a warning to all organizations engaging contractors.

“The huge numbers highlight the cost of getting IR35 wrong,” Maley said. “Misinterpreting or incorrectly applying the rules can easily result in a huge tax bill. But cutting contractors completely is not the answer – IR35 can be managed with the right processes in place.”

He added that many public and private sector organizations have now succeeded in engaging contractors in a compatible manner, combining workforce flexibility with strong governance.

The IR35 reform, which was first introduced to the public sector in 2017 and later extended to the private sector in 2021, is designed to prevent tax evasion by individuals who work in limited companies but act as employees.

However, the rules have faced criticism for ambiguity and administrative burden, leading to a series of high-profile compromises. HMRC has recovered millions from government departments and public bodies including the BBC, Defra and the Department for Work and Pensions in similar cases.

NRW said it had overhauled its recruitment and contractor engagement procedures and would continue to liaise with HMRC and Welsh Government advisers to ensure full compliance in the future.

“Our focus is to maintain transparency, learn from this experience and prevent future mistakes,” a company spokesperson said.