Natural Resources Wales settles discussions with HMRC
Natural Resources Wales (NRW) has reached a settlement with HM Revenue and Customs (HMRC) in relation to its enquiry into NRW’s historic tax treatment of contractors, more commonly known as IR35.
NRW has actively engaged in discussions with HMRC since the IR35 off-payroll reforms were introduced in the public sector in 2017. These sorts of discussions are not unique to NRW, as has been seen across the public and private sector over recent years.
Over this period, clarity has been sought on the use of off-payroll working arrangements for contractors used by NRW for time-limited periods over many years, when the required skills were not available in the organisation.
Following a review of the organisation’s engagement of contractors, it became clear that some aspects of NRW’s assessments had been misinterpreted and there were errors in how it classified the employment status of some of its contractors.
In February this year, NRW’s Board considered a report from its advisers, and accepted its recommendation with respect to the level of liability.
Sir David Henshaw, Chair of NRW said that the organisation recognises that mistakes had been made but that lessons had been learned.
He also emphasised the efforts that had been made to address HMRC’s concerns, to reduce the financial penalties, all the while improving monitoring and implementing procedures to provide assurances in relation to our approach to compliance with IR35 regulations in the future.
Following a period of engagement with HMRC, a settlement figure of £14,631,191.13 (including interest) has been reached. In addition to the settlement, HMRC has added penalties of £2.951m. However, these penalties are suspended subject to NRW complying with specified conditions for a period of 12 months.
Sir David Henshaw said:
“Like many other public and private sector organisations before us, and other bodies currently facing similar issues across the UK have discovered, IR35 rules are complex.
“At the time of our assessments, we believed we had followed HMRC guidance and procedures in good faith. But we accept that the errors that eventually came to light should not have been made.
“Our focus throughout has been on resolving the matter with HMRC, working collaboratively with them and with Welsh Government and taking the advice of the legal and tax experts available to inform our decisions.
“Our processes have now been changed. We are no longer using off-payroll contractors and our default position is that we should not use them in the future. We have developed a new ‘Ways of resourcing with people and skills procedure’ to support colleagues when recruiting additional external resource. This has been independently reviewed, and we have also put measures in place to ensure the right checks and approvals are done at the right level, and at the right stage.
“We would be happy to share our learnings with any other public bodies currently going through a similar process.”
With the support of the Welsh Government, a payment on account of £19 million was made to HMRC in March 2024, without admission, to prevent any accumulation of further interest on any liability. This figure was based on a preliminary, prudent estimate of the total liability.
Detailed work has since been undertaken to establish precise liability in each individual case. The total figure confirmed is the result of this analysis and extensive collaborative working between NRW, its advisers and HMRC.
The final figure also reflects the recent introduction of the offset rule in 2024. This allows for taxes already paid by the contractors and by their personal services companies to be offset.
NRW will transfer the funds returned from HMRC to Welsh Government and has agreed a phased budget reduction to cover the remaining balance. This approach will be spread over the next few years, enabling us to fully reimburse Welsh Government while safeguarding the delivery of our Corporate Plan objectives.