UK Watchdog to Rule on £246M Post Office Subsidy Over Horizon Scandal and IR35

The UK's Subsidy Advice Unit (SAU), part of the Competition and Markets Authority (CMA), is set to rule on a £246 million subsidy request from the Department for Business and Trade (DBT) to support the publicly owned Post Office through two major financial challenges: compensation for the Horizon IT scandal and tax liabilities under IR35 regulations.

The Two-Part Subsidy Request

The proposed funding breaks down into two distinct components:

• £141.8 million for continued Horizon scandal response and compensation efforts
• £104.4 million to settle IR35 tax liabilities

The total represents approximately 28% of the Post Office's annual revenue for fiscal 2025, highlighting the scale of both the scandal's financial impact and the tax compliance issues.

Horizon Scandal Background

The Horizon scandal represents one of the UK's most significant miscarriages of justice. The Horizon system, an EPOS and back-end finance platform first implemented by ICL (later fully acquired by Fujitsu) in the 1990s, contained software errors that led to wrongful prosecutions of subpostmasters.

From 1999 to 2015, approximately 736 subpostmasters were wrongfully convicted based on Horizon errors, with devastating personal and financial consequences. The government launched a statutory inquiry in 2021, which remains ongoing. In response to successful conviction quashing cases, Parliament passed the Post Office (Horizon System) Offences Act 2024 to overturn all convictions linked to the system.

Four compensation schemes now exist for victims, with the Horizon Shortfall Scheme administered directly by the Post Office. The proposed subsidy would provide up to £37.4 million in the 2026/27 financial year specifically for victim compensation and participation in the ongoing inquiry.

IR35 Tax Liability Explained

IR35 represents a separate but equally complex challenge. Introduced in 1999 by UK tax authorities, IR35 targets "disguised employment" where workers operate through personal service companies (PSCs) to reduce their tax burden while functioning as de facto employees.

Key IR35 developments include:

• 2017: Implementation in the public sector
• 2021: Extension to medium and large private businesses
• December 2022: U-turn reversing planned repeal

The legislation requires businesses to determine contractor tax status rather than leaving it to contractors themselves. Those deemed "inside IR35" face higher tax obligations without corresponding employment benefits like pensions, sick pay, or holiday entitlements.

The Scale of the IR35 Problem

The £104.4 million IR35 liability represents what tax advisory firm Qdos CEO Seb Maley described as "an astonishing amount" that could be "the biggest liability issued to any organization as a result of mismanaging IR35."

Maley raised critical questions about the Post Office's compliance failures:

"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."

He specifically questioned whether proper IR35 assessments were conducted and whether HMRC's Check Employment Status for Tax (CEST) tool was utilized, noting his view that businesses should not rely on CEST for status determinations.

Government Funding History

The Post Office has received government funding since 2023 to support its Remediation Unit and Inquiry response team. The Remediation Unit handles redress delivery to subpostmasters affected by both the Horizon scandal and other operational failures.

The SAU has 30 days from the DBT's request to provide its subsidy assessment, which will determine whether the Post Office receives this substantial financial support to address both historical injustices and ongoing tax compliance challenges.

The case highlights the complex intersection of technology failures, legal accountability, and tax policy that continues to challenge UK public sector organizations, with implications extending far beyond the Post Office to the broader contractor ecosystem and public service delivery.