The fallout from the Post Office’s £104m IR35 liability has taken a new turn, with contractors potentially owed millions in tax after it emerged that HMRC will not offset tax already paid.
HMRC will not apply an IR35 offset to the £104m tax bill, meaning that tax already paid by contractors will not be taken into account.
As a result, some contractors may need to claim refunds directly, with estimates suggesting the total could reach tens of millions of pounds.
The liability – confirmed earlier this year and funded by the Department for Business and Trade – relates to contractors engaged between 2017 and 2022, many of whom were supporting work linked to the Horizon remediation programme.
As previously reported, the case builds on the £104m IR35 liability, one of the largest disclosed under the off-payroll working rules.
Further detail has now been highlighted by IR35 specialist Qdos, following publication of the government’s report into the subsidy.
What is the IR35 offset?
The IR35 offset takes into account tax already paid by a contractor – such as Corporation Tax, dividend tax and PAYE – when calculating any liability under the off-payroll rules. The aim is to avoid taxing the same income twice. Where no offset is applied, HMRC can still collect the full PAYE bill from the organisation, leaving contractors’ limited companies to reclaim any overpaid tax separately. The offset was introduced from 6th April 2024. Read more here.
The report confirms that an offset calculation will not be undertaken to account for tax already paid by contractors.
“The Assessment states that following discussion with HM Treasury, it was agreed that the off-setting calculation process would not be undertaken – as whilst the total sum of the IR35 tax liability would be reduced, this would save time and resource for both POL and at HMRC.”
Why the offset matters
In many IR35 cases, the same income will already have been taxed, typically through Corporation Tax, dividend tax and PAYE.
If no offset is applied, HMRC can collect the full PAYE bill from the engaging organisation, even though the contractor has already paid tax on the same income.
That can lead to the same income being taxed twice, something recent changes have tried to address.
Seb Maley, CEO of Qdos, told IR35 Update:
Whilst it’s certainly easier for HMRC – initially at least – not to apply the offset mechanism on an IR35 liability, it completely undermines the point of the government introducing it. As a result, the contractors engaged by the Post Office during the relevant time period could well be owed a significant tax refund – millions of it, collectively
Changes introduced in 2024 were intended to reduce this issue.
Contractors may be able to claim refunds
The practical consequence is that affected contractors may need to reclaim any overpaid tax directly from HMRC.
Under current rules, claims are generally subject to a four-year time limit from the end of the relevant tax year. For earlier engagements within the 2017–2022 period, this may restrict how much can be recovered.
Even so, the potential scale of repayments is significant, with early estimates suggesting the total could run into tens of millions of pounds.
Another IR35 compliance warning
The development adds to a growing list of public sector bodies facing substantial IR35 liabilities following incorrect status determinations.
Recent examples include Natural Resources Wales and disclosures from departments such as the Home Office and the Department for Work and Pensions.
For contractors, the case is a reminder that even when the client is responsible for IR35 status under the off-payroll rules, the tax position may still need to be addressed on an individual basis.
For organisations, the £104m bill shows the financial risk of getting IR35 status wrong under the off-payroll rules.
Useful resources
- Read more in the government’s report here: Report on the Post Office IR35 liability subsidy.
- Read our summary of the IR35 offset and the problem with double taxation.
- You can read a good summary of how the rules work in practice on the Ross Martin site.