The Cabinet Office has become the latest government department to fall foul of the IR35 off-payroll working rules. Its 2025-26 annual report and accounts confirm an estimated gross liability of £38.5 million for unpaid tax, National Insurance and interest on off-payroll engagements going back to April 2017. HMRC has also concluded that the department failed to take reasonable care, which opens the door to a penalty of up to £8.9 million on top.
What happened at the Cabinet Office?
HMRC began reviewing the department’s status determinations in 2019, covering engagements from when the off-payroll rules were extended to the public sector in April 2017. For several years the Cabinet Office reported the matter only as a contingent liability, because HMRC had not issued formal opinions and the department disputed HMRC’s developing views.
That changed in October 2025, when HMRC concluded that the department’s historic processes were inadequate and reasonable care had not been taken. It is not publicly known how the Cabinet Office made its determinations, or if it made them for every contractor engagement. In February 2026 management approved an expedited settlement, paying HMRC £15 million on account and leaving a provision of £23.5 million at 31st March 2026. The accounts note that the department is still challenging aspects of HMRC’s status opinions and methodology while the final figure is negotiated.
The Cabinet Office treats the potential £8.9 million penalty as a remote contingent liability, as it expects HMRC to suspend it subject to conditions. That mirrors Natural Resources Wales, whose £2.9 million penalty was suspended for 12 months in 2025 on condition that it fixed its processes.
How was the £38m liability calculated?
HMRC did not review every engagement. The provision is based on four sampled groups of off-payroll workers: review team leaders, commercial assessors, content designers and digital developers. A 39% weighted average liability from those samples was then extrapolated across the department’s estimated £89.2 million of off-payroll spend.
There is an irony here. HMRC rightly criticises engagers who make blanket determinations by role instead of looking at each engagement, yet this liability has been calculated by applying an average from four roles to everyone else. We understand why. An extrapolated settlement is quicker, and the Cabinet Office chose a pragmatic route to close a review that had been running since 2019. But it shows what can happen when an engager cannot evidence its determinations engagement by engagement.
The same applies to the offset. Since April 2024, HMRC can set off tax already paid by the contractor and their limited company against the deemed employer’s liability. The Cabinet Office’s estimate only applies a 28% offset where the underlying worker details have been obtained. Where they have not, there is no reduction.
Is swinging to inside IR35 the answer?
In 2019-20 the core department assessed 202 of its 222 new off-payroll engagements as outside IR35. In 2025-26 it engaged 65 off-payroll workers and determined 63 of them to be inside. Across the wider departmental group, 192 of 194 engagements were inside, indicating a highly risk-averse approach has been adopted.
The reasonable care requirement in Chapter 10 ITEPA 2003 applies to inside determinations just as much as outside ones, and blanket inside determinations are not reasonable care. If you are an engager worried about your compliance, you should ensure that all determinations (whether they’re inside or outside) have been made based upon the full facts of the engagement.
What should engagers learn from the Cabinet Office IR35 case?
Reasonable care is judged on evidence, not intention. The Cabinet Office believed for years that its position was defensible, but when HMRC looked closely, the process behind its determinations did not hold up. To avoid the same outcome engagers should:
- Assess each engagement on its own facts. Role-based or default determinations do not demonstrate reasonable care. Ensure you have a documented process that demonstrates you can carry out thorough, evidence-based assessments.
- Record your reasoning and keep the evidence. That means the SDS, the reasons behind it, the contract, and evidence of how the work is actually carried out. If you use CEST, ensure you fully understand all questions and check your answers against reality, as CEST has limitations when used in isolation.
- Keep contractor and limited company details on file. The offset for tax already paid depends on HMRC being able to trace the worker and their company. Without those details, you may not be able to use the set-off process.
- Review determinations when roles or working practices change. An SDS issued at the start of an engagement is not a permanent answer.
- Engage an expert. If you are unsure, use the services of a specialist to assist your organisation with its compliance.
Bauer & Cottrell has been helping engagers and contractors with IR35 for over 20 years. You can see our full range of services here.
Cabinet Office IR35: frequently asked questions
How much does the Cabinet Office owe HMRC for IR35?
Its 2025-26 accounts put the estimated gross liability at £38.467 million including interest, covering April 2017 to March 2026. It paid £15 million on account in February 2026, leaving a provision of £23.467 million. A penalty of up to £8.9 million may follow, although the department expects it to be suspended.
Why did HMRC find the Cabinet Office had not taken reasonable care?
HMRC concluded in October 2025 that the department’s historic processes for making status determinations were inadequate. The accounts do not explain where individual determinations went wrong.
Who pays if a public sector client gets IR35 wrong?
The deemed employer, usually the client or fee-payer, not the contractor’s limited company (unless fraudulent information was provided). HMRC can offset tax already paid by the contractor and their company, but only if it can trace them.
How can an engager avoid IR35 fines?
By taking reasonable care when making status determinations, and being able to demonstrate it. That means assessing each engagement on its own facts, recording the reasons and evidence behind every SDS, reviewing determinations when roles or working practices change, and keeping contractor and limited company details on file. The best defence is a well-documented off-payroll process that would stand up to an HMRC audit.
