The Cabinet Office faces a gross IR35 liability of £38.5 million, including interest, after HMRC concluded that the department’s historic processes were inadequate and that it had failed to take reasonable care when applying the off-payroll working rules.
The department has already paid £15 million to HMRC following approval of an “expedited settlement” in February 2026. A further £23.5 million has been provided for in its 2025–26 accounts to cover the remaining liability.
HMRC's finding also leaves the department exposed to a potential penalty of up to £8.9 million, as a failure to take reasonable care can attract penalties of between 15% and 30% of the net tax due. However, the additional charge is not expected to crystallise, the department’s annual report indicating the penalty is considered remote and no provision has been made for it in the Cabinet Office's accounts.
HMRC began reviewing the Cabinet Office’s employment status determinations in 2019. The review covered contractors engaged since April 2017, when responsibility for determining IR35 status moved to public-sector organisations engaging workers through intermediaries.
HMRC reached its conclusion in October 2025. Earlier Cabinet Office accounts had stated that the off-payroll rules were applied “with care”. The 2021–22 and 2022–23 accounts also said that HMRC’s audit had found “no fault” at that stage. The “no fault” wording was removed from the 2023–24 accounts, although the department continued to state that it had applied the rules with care.
The case is the latest high-profile example of a public body facing a significant liability linked to the off-payroll working rules. It reinforces the importance of making accurate, evidence-based status determinations and being able to demonstrate that reasonable care has been taken.
For organisations affected by the off-payroll rules, compliance should extend beyond issuing a Status Determination Statement. Processes should be reviewed regularly, the information used in each assessment should be accurate, and decisions should reflect how an engagement operates in practice.
The Cabinet Office case makes an important distinction: stating that reasonable care has been taken is not the same as being able to evidence it during an HMRC review.
Organisations should retain a clear audit trail for each determination, ensure that the relevant people understand their responsibilities, and review an assessment when the contract or working practices change. Historic decisions may still be examined in detail, so consistent governance and accurate records are essential.
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