Natural Resources Wales (NRW), a Welsh government-sponsored body, has paid a £14.6 million settlement to HMRC after admitting to historic non-compliance with the UK’s IR35 off-payroll working rules.
The settlement, which includes a £2.9 million penalty (suspended for 12 months), stems from errors in determining the employment status of contractors engaged between 2017 and recent years.
NRW confirmed it had been in discussions with HMRC since 2017, when off-payroll reforms first came into effect for public sector bodies — shifting the responsibility for assessing IR35 status from contractors to the engaging organisation.
In a statement, the organisation said: “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.”
According to NRW’s disclosure, incorrect assessments of contractor status under the IR35 framework led to tax liabilities totalling £14,631,191.13, with HMRC also issuing the suspended fine.
NRW’s chair, Sir David Henshaw, said the organisation accepted responsibility for the errors, describing the IR35 rules as “complex” and noting that the focus now was on “resolving the issue” and tightening internal processes.
“As many other organisations in both the public and private sectors have discovered, the IR35 rules are complex,” he said.
“But we accept that the mistakes that came to light should not have been made. Our focus has been to resolve the issue with HMRC and the Welsh Government, taking 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 struggle with IR35 interpretation eight years after the reform was introduced.
Seb Maley, CEO of Qdos, an IR35 compliance specialist, said the NRW case highlights the “staggering cost of mismanaging IR35 reform” and serves as a warning for all organisations engaging contractors.
“The sheer numbers shine a spotlight on the cost of getting IR35 wrong,” Maley said. “Misinterpreting or misapplying the rules can easily result in a huge tax bill. But cutting off contractors altogether isn’t the answer — IR35 can be managed with the right processes in place.”
He added that many public and private sector organisations now successfully engage contractors compliantly, combining workforce flexibility with robust governance.
IR35 reform, first introduced to the public sector in 2017 and later extended to the private sector in 2021, was designed to prevent tax avoidance by individuals working through limited companies but operating like employees.
However, the rules have faced criticism for ambiguity and administrative burden, leading to a string of high-profile settlements. HMRC has recouped 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 on maintaining transparency, learning from this experience, and preventing future errors,” a spokesperson said.
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Welsh government body hit with £14.6m IR35 tax bill after compliance errors