UK watchdog to rule on £246M Post Office subsidy over Horizon scandal and IR35

CMA's Subsidy Advice Unit reviewing state aid linked to redress and off-payroll tax costs

The UK competition regulator is set to report on a request for £246 million in subsidies to the Post Office, a publicly owned company, to cover its costs in compensation for the Horizon IT scandal and tax liability for IR35, a mechanism commonly used by tech consultants.

The Subsidy Advice Unit (SAU), part of the Competition and Markets Authority (CMA), will report on the proposed subsidies within 30 days following a request from the Department for Business and Trade (DBT). It intends to provide the Post Office with a subsidy of £141.8 million to continue to take action in response to the Horizon IT scandal and another £104.4 million to settle a tax liability, which together represent around 28 percent of the organization's annual revenue in fiscal 2025.

In a statement, it said the Post Office has been receiving funding from the government since 2023 to enable it to cover the costs of running its Remediation Unit and Inquiry response team. The Remediation Unit is responsible for delivering redress to subpostmasters affected by the Horizon IT scandal and other operational failures.

Horizon is an EPOS and back-end finance system that was first implemented by ICL, a UK tech firm majority-owned by Fujitsu in the 1990s and fully acquired in 1998. It has undergone two subsequent upgrades.

From 1999 until 2015, around 736 subpostmasters were wrongfully prosecuted and convicted over Horizon errors, devastating lives in the process. A statutory inquiry into the mass miscarriage of justice launched in 2021 and is ongoing.

Following a number of cases successfully quashing convictions, the government introduced the Post Office (Horizon System) Offences Act 2024 to overturn all convictions made using the Horizon system. There are four schemes to compensate victims of the scandal, one of the greatest miscarriages of justice in British history. The Horizon Shortfall Scheme is run by the Post Office.

The proposed subsidy is set to provide funding of up to £37.4 million in the 2026/27 financial year for the Post Office to continue to compensate victims and take part in the Post Office Horizon IT Inquiry.

Separately, DBT has requested a Post Office subsidy of £104.4 million to cover tax liabilities under IR35, a tax ruling for freelancers with which government departments have struggled to comply.

IR35 was introduced to reduce off-payroll workers who avoid paying regular employment taxes, but critics argue it penalizes those who are employed on a casual basis and do not enjoy employment rights, including pensions, sick pay, and holidays. The move hit many Reg readers who work as tech contractors or use their services.

What is IR35?

IR35 is a reform unveiled in 1999 by the UK tax authorities. An April 2021 regulation change forced medium and large businesses in the UK to set the tax status of their contractors and freelancers. Prior to this, it was set by the contractors themselves.

Contractors found to be within the scope of the legislation – i.e. inside IR35 – will have to pay more tax than they might expect.

The reforms are part of the government's crackdown on so-called disguised employment, where workers behave as employees and are able to slash their tax bills by billing for their services through personal service companies (PSCs), which are taxed at lower corporate rates.

The measures first came into effect in the UK public sector in 2017. The British government hoped the reforms would recoup £440 million ($486 million) by bringing 20,000 contractors in line.

HMRC reckons that only one in 10 contractors in the private sector who should be paying tax under the current rules are doing so correctly. It estimated the reforms would recoup £1.2 billion ($1.33 billion) a year by 2023. Both public and private sector reforms had been set to be repealed before a U-turn in December 2022. Now both are back on the books.

Seb Maley, CEO of tax advisory firm Qdos, said of the IR35 portion:

"This is an astonishing amount – figures that you associate with football transfers, not necessarily IR35. It could easily be the biggest liability issued to any organization as a result of mismanaging IR35 and the off-payroll rules. It raises an important question: how have so many public sector bodies got IR35 so wrong? The legislation itself is known for its complexity, but to engage huge numbers of contractors under the wrong employment status is a sign of systematic failure. You are left to wonder if IR35 assessments were carried out. If so, how detailed were they? Was HMRC's Check Employment Status for Tax – CEST – tool used? And if that's the case, should businesses rely on it to determine IR35 status? The answer to the final question, in my opinion, is no.

"While in many respects, government-owned bodies have a get-out-of-jail-free card when it comes to IR35, private sector firms don't. The sheer sums involved here are a timely reminder of exactly why complying with these rules is so important." ®