HMRC Rules Against NRW in Major Tax Case
Natural Resources Wales (NRW) has been ordered to pay £14.6 million to HMRC after the tax authority concluded that the public body misclassified contractors under the UK’s IR35 rules. The case followed a multi-year investigation into whether NRW had incorrectly treated short-term specialists as self-employed rather than employees.
HMRC found that the misclassification led to underpaid tax liabilities, including unpaid National Insurance contributions. The authority also imposed £2.95 million in penalties, which will remain suspended for 12 months as NRW’s compliance practices are monitored.
Errors in Contractor Assessments Identified
NRW admitted that it had “misinterpreted aspects of the assessment process” when determining contractor status. Its internal review confirmed that several individuals hired for temporary or project-based roles should have been classed as employees for tax purposes.
Chair Sir David Henshaw acknowledged that mistakes had been made but emphasised that the organisation acted in good faith based on HMRC guidance available at the time. He said NRW “accepts the findings of the review” and is committed to ensuring full compliance going forward.
Public Sector IR35 Challenges Continue
The case has highlighted the ongoing challenges public bodies face in interpreting the complex IR35 legislation, which determines how off-payroll workers are taxed. Many government departments and agencies have faced similar compliance issues since the rules were tightened in recent years.
NRW, responsible for managing Wales’s land, water and environmental resources, relied on specialist contractors for major infrastructure and environmental projects. The HMRC findings underline the risks of unclear employment arrangements within public bodies.
Changes to Contracting and Resourcing Policies
Following the settlement, NRW announced it has ended the use of off-payroll contractors and implemented a new “Ways of Resourcing with People and Skills” procedure. The policy includes stricter employment status checks and mandatory senior-level approvals for all contractor engagements.
The process has undergone an independent review to ensure future compliance. NRW said the reforms were part of a broader plan to improve transparency and reduce financial exposure to similar issues in the future.
Financial Settlement and Budget Impact
In March 2024, NRW made a £19 million payment on account to HMRC to stop further interest from accruing while the final amount was assessed. After applying the 2024 offset rule, which deducts taxes already paid by contractors, HMRC confirmed the final liability at £14.6 million including interest.
Funds returned by HMRC will be transferred back to the Welsh government, which has agreed to a phased repayment schedule. NRW will reduce its budget over several years to absorb the financial hit while maintaining delivery of its Corporate Plan objectives.
HMRC Monitoring Future Compliance
HMRC confirmed that the £2.95 million in penalties would remain suspended for one year, contingent upon NRW demonstrating full compliance with employment and tax regulations. If the agency meets the standards required, the penalties could be waived.
An HMRC spokesperson said the case serves as a reminder of the importance of accurate employment status assessments. The department continues to work with public bodies to ensure they properly apply the off-payroll working rules.
