It recently came to light that the Cabinet Office is set to pay an IR35 liability of £38.5 million, including interest, following a long-running investigation by HMRC. Another year, another government department falling foul of the off-payroll working rules, it seems.
And now, the tax authority has concluded that the Cabinet Office had inadequate processes in place for determining the IR35 status of its contractors and failed to take ‘reasonable care’ when applying the off-payroll working rules across a number of engagements – some dating back as far as 2017.
The latest development follows a £15m payment made to HMRC in February this year – part of an “expedited settlement”. A further £23.5m has been provided for in the Cabinet Office’s 2025/26 accounts to cover the remaining liability.
On top of this, the department may also be on the hook for a penalty – potentially one as high as £8.9m. This is in line with HMRC’s penalty rates of between 15% and 30% of the net tax due in cases where there has been a failure to take reasonable care in status determinations.
So, what does this eye-watering tax liability mean? Let’s take a look…
First, the finer details.
HMRC’s investigation into the Cabinet Office began in 2019 and covered contractors engaged since April 2017 – when responsibility for determining IR35 status moved from contractors to the public sector organisations engaging them.
The tax office reached its initial conclusion in October 2025. And despite the Cabinet Office initially claiming that its IR35 determinations had been made “with care”, it has since come to light that the department had been “careless” in its approach.
This oversight has proven costly – resulting in a huge tax liability and potentially leaving the Cabinet Office facing an additional £8.9m penalty. This is a key takeaway in itself for businesses engaging contractors.
On that note, the case is just the latest high-profile example of a public body facing a significant tax liability linked to the off-payroll working rules – demonstrating just how complex they can be to manage.
Most importantly, it reinforces what we already know: that it is crucial to make accurate, evidence-based IR35 status determinations and demonstrate that ‘reasonable care’ has been taken in reaching a decision.
Added to this, documentation and processes remain key areas of focus for HMRC during compliance investigations and should be subject to just as much scrutiny by organisations engaging contractors.
This means that, for businesses engaging these workers, compliance needs to extend beyond simply issuing a Status Determination Statement. But how?
Namely, by maintaining an audit trail.
The Cabinet Office case highlights an important distinction where ‘reasonable care’ is concerned: simply stating that it has been taken during an assessment is not the same as being able to evidence it during a compliance review.
As such, maintaining an audit trail for each determination is key. The how. The why. The when. Alongside this, ensuring that relevant stakeholders within the business understand their responsibilities – including reassessing engagements as and when contracts or working practices change – is equally important.
As always, compliance is crucial, as our CEO, Seb Maley, explains:
“This serves as a stark reminder – to private sector businesses as much as public sector bodies – that IR35 compliance is non-negotiable, and the cost of getting it wrong can be staggering. A £38.5m tax bill – not to mention a potential £8.9m penalty – is a brutal reminder that inadequate processes can come at a huge price.
“The key takeaway is that these rules are absolutely manageable, but only when the right processes are put in place. Compliance is not a box-ticking exercise, and businesses simply cannot afford to take their eye off the ball when it comes to IR35.”
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