Natural Resources Wales’ £17.6m IR35 bill triggers blanket ban on limited company contractors

NRW: We’re no longer using off-payroll contractors and …we shouldn’t in the future.”

Natural Resources Wales (NRW) has implemented a permanent ban on engaging off-payroll contractors. This move raises serious concerns about the employment prospects and contractual rights of solo self-employed small companies and limited company directors across the public sector.

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£17.6m settlement: The price of IR35 mismanagement

Welsh government-sponsored body Natural Resources Wales (NRW) has concluded a lengthy tax dispute with HMRC, accepting a final settlement figure of £14,631,191.13 (including interest) for errors in classifying the employment status of its off-payroll contractors. An additional £2.951 million penalty was also imposed, though this is currently suspended subject to NRW’s compliance for 12 months.

The investigation into the natural resource management organisation’s use of contractors began shortly after the IR35 off-payroll reforms were introduced in the public sector in 2017. These rules shifted the responsibility for determining a contractor’s deemed employment status—and the associated tax liability—from the contractor’s Personal Service Company (PSC) to the engaging public body.

Henshaw: “Misakes have been made”

Sir David Henshaw, Chair of NRW, acknowledged that “mistakes had been made” in the organisation’s assessment processes. He stated that while they initially believed they had followed HMRC guidance, including the much-criticised CEST tool, they now accept that “the errors that eventually came to light should not have been made.”

The protracted nature of the investigation has been questioned by IR35 and contractor sector experts.

Dave Chaplin, CEO of IR35 Shield, noted that the process “appears to be a legacy issue from the early use of HMRC’s flawed CEST tool,” and pointed out that a significant portion of the final bill—potentially around £4 million—could be interest accrued due to the seven-year delay in reaching a conclusion. Chaplin underscored the case as a “cautionary tale of bureaucratic drift rather than deliberate wrongdoing.”

Chaplin shared his views on the financial impact of the investigation’s delays:

According to NRW’s own 2017/18 accounts, HMRC began investigating this matter seven years ago – so why has it taken so long to reach a conclusion? In our experience under the new rules, off-payroll compliance checks are generally resolved within 6 to 12 months.

The figure of £14.6m includes interest to March 2024, which could be around £4m of that bill, due to the unnecessary delays in the investigation by HMRC. Depending on the contractual terms, NRW may also be entitled to recover some of that money from contractors who haven’t yet settled their own tax.

This case appears to be a legacy issue from the early use of HMRC’s flawed CEST tool, a cautionary tale of bureaucratic drift rather than deliberate wrongdoing. It highlights the need for fairness, proportionality, and the need not to delay resolution in IR35 cases unnecessarily.

NRW’s blanket ban: The impact on solo self-employed

In response to the liability and penalty, NRW has fundamentally changed its resourcing strategy. Its Chair, Sir David Henshaw confirmed:

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.

This decision effectively implements a blanket ban on hiring limited company contractors, forcing freelancers to either work through PAYE via an agency or an umbrella company, or to forgo work with NRW entirely.

Seb Maley, CEO of IR35 specialist and contractor insurer Qdos, commented that this reaction is unnecessary, stating that while the rules are complex, they “can be managed.”

Maley urged NRW to reconsider, highlighting that many organisations “have the right processes in place to engage contractors compliantly” to access the “flexibility and skills of the independent workforce.”

The move by NRW highlights the risk that public sector bodies, fearing large tax bills, will choose to simply avoid using limited company contractors altogether. This trend is detrimental to business owners who operate through their PSCs and rely on the flexibility and skills-based opportunities that contracting provides.

Contractors working via PAYE or an umbrella company, while not directly affected by this ban, still face reduced market opportunities if this risk-averse approach spreads across the public sector.

Potential tax clawbacks and contractor liability

The settlement with HMRC was made possible, in part, by the recent introduction of the offset rule in 2024, which allows for taxes already paid by contractors and their PSCs to be deducted from the engaging body’s liability.

However, a concerning possibility remains for contractors whose Personal Service Companies may not have settled all outstanding tax. Dave Chaplin suggested that NRW “may also be entitled to recover some of that money from contractors who haven’t yet settled their own tax.”

Such recovery would not be through HMRC’s normal tax collection but by exercising an indemnity clause in the contract between NRW and the limited company. This mechanism would target taxes—such as corporation tax or tax on dividends—that the PSC has not yet paid, essentially unwinding the situation to ensure both parties pay an “equitable amount of tax,” Chaplin explained.

He added that contractors must be aware that while the hiring firm is liable for the bulk of the taxes under off-payroll rules—particularly the Employer’s National Insurance Contributions—contractual indemnity clauses could still expose their limited company to a clawback for taxes that would have been deducted had they been correctly classified from the start.

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