Innovate UK is the latest public sector body facing a hefty tax bill as a result of non-compliance with off-payroll working (IR35) legislation. 

The UK’s national innovation agency received the £36m bill after misclassifying the employment status of some contractors between the 2018/19 and 2021/22 tax years.

Auditors revealed the misclassification after reviewing IR35 compliance procedures. The £36m represents the amount of unpaid income tax and National Insurance Contributions accrued during the period.

Innovate UK, part of UK Research and Innovation (UKRI), which is sponsored by the Department for Science, Innovation and Technology, is one of many publicly funded bodies facing IR35 non-compliance penalties. 

Public sector organisations, including the Department for Work and Pensions (DWP) and the Department for Environment, Food and Rural Affairs (Defra), have also faced significant unpaid tax bills in recent years. 

Introduced in April 2000, IR35 tax legislation aims to combat tax avoidance by workers that supply services through an intermediary (also called a personal service company). In some cases, these workers would be employees if they weren’t operating through an intermediary. 

Recent changes to IR35 rules mean that clients are usually responsible for determining the employment status of their workers. This means the public or private sector clients bear responsibility if they misclassify a worker. 

Contractors are still responsible for judging their employment status if they supply services to a smaller organisation not in the public sector. 

Umbrella companies and IR35 compliance

One solution to IR35 compliance for public sector organisations, private sector companies, and contractors is to use umbrella companies. 

An umbrella company is an employer for contractors working on fixed-term contracts. The umbrella company handles tax and National Insurance contributions, removing the risk of incorrect status determinations.

Many public and private sector organisations have removed the risk of IR35 non-compliance by requiring contractors to use an umbrella company. 

Miles Grady, director of Umbrella.co.uk, said:

“When large public bodies like the DWP, Defra, and now Innovate UK can’t keep up with IR35 tax legislation, it’s little wonder that so many organisations and contractors are turning to Umbrella avoid compliance issues.

Umbrella companies help companies maintain easy access to the best talent, without worrying about big tax penalties if they get a judgement wrong.”

For more information about IR35 and working through an umbrella company, speak to a member of the team today. Call: 01625 544 460.