Unpacking the HS2 Project's Surprise Tax Bill: What Went Wrong?

During the HS2 project, a large number of contractors were brought in through a third-party service provider. HS2 assumed that since the contractors were supplied by an external service provider, the responsibility for determining the contractors’ IR35 tax statuses would lie with the third party. However, this assumption proved costly, as HS2 was hit with an unexpected tax bill of £6.2 million.

Supply of Labour vs Outsourced Service: A Crucial Distinction

The hefty tax bill landed on HS2 because the arrangement was classified as a "supply of labour" rather than an "outsourced service." Understanding the distinction between these two terms is critical because it determines who is responsible for assessing the IR35 status of its contractors and, by extension, who carries the tax liability.

• Supply of Labour:  In this scenario, an intermediary provides workers to the end client, but the end client (HS2, in this case) takes on the role of coordinating and managing the contractors' work. Since HS2 was directly involved with the contractors, it became their responsibility to determine whether the contractors fell inside or outside of IR35. 

• Outsourced Service: In contrast, a genuine outsourced service means the third-party provider (the intermediary) manages and coordinates the work of the contractors. In such cases, the responsibility for determining IR35 status falls on the intermediary, not the end client.

The key difference here is control. In a "supply of labour" arrangement, the end client maintains control over the contractors and their work, meaning the IR35 liability shifts to them. With a "genuine outsourced service," the intermediary takes control, along with the tax liability.

The Impact on HS2

In the case of HS2, the arrangement with the third-party provider didn’t meet the criteria for an outsourced service. The company had direct involvement in managing the contractors, which made it responsible for determining IR35 status. As a result, HS2 found itself facing a tax investigation and the subsequent £6.2 million bill, as their setup was classified as a supply of labour rather than an outsourced service.

This incident underscores the importance of properly classifying worker arrangements, particularly in large projects involving multiple parties. Misunderstandings around IR35 liability can lead to significant financial consequences for businesses.

How can CoComply help avoid these fines?

At CoComply, we have developed proprietary technology designed to help businesses navigate complex supply chains and ensure all contractors in scope are assessed. Our technology also determines whether your supplier arrangements qualify as an outsourced service or a supply of labour, helping you understand your responsibilities and avoid costly IR35 misclassification fines.