The department’s 2025–26 annual report, published 13 October, reveals a settlement covering off-payroll working (IR35) non-compliance between April 2017 and March 2026. The gross liability, including interest, comes to around £38.5m. £15m of that was paid in February 2026 when the settlement was agreed, leaving roughly £23.5m still outstanding, and HMRC has reserved the right to impose a further penalty of up to £8.9m on top. The Cabinet Office attributes the failure to inadequate historic processes and a failure to take reasonable care when assessing whether contractors should have been taxed as employees. It says it’s still disputing elements of HMRC’s methodology.
IR35 rules exist to stop organisations using contractor arrangements to avoid employer National Insurance and other costs that come with employing someone directly, when the reality of the working relationship looks like employment in every way that matters. Since 2021, medium and large organisations in the private and public sector have carried the responsibility for assessing that status themselves, rather than leaving it to the contractor. Get that assessment wrong at scale, over several years, and the liability compounds quickly, which appears to be exactly what happened here.
What’s notable isn’t the mechanics of IR35, which have been covered at length since the 2021 reforms came in. It’s that one of the most resourced employers in the country, with its own legal, HR and finance functions, got it wrong for the best part of a decade. That should give pause to any organisation assuming its own contractor processes are solid simply because nobody has flagged a problem yet.
FM and property organisations are heavy users of contractors and consultants by the nature of the work: interim estates managers, specialist engineering subcontractors, project consultants brought in for a fit-out or a compliance audit. Many of those arrangements were set up years ago and haven’t been revisited since. The 2021 reforms shifted liability onto the engaging organisation, which means an outdated status determination isn’t a historic HR file sitting in a drawer. It’s a live financial exposure that grows every year it goes unchecked.
The questions worth asking internally are fairly specific. Has every current contractor engagement had a status determination carried out, rather than assumed from how the contract was originally set up? Is there a documented process for reassessing status when a contractor’s working pattern changes, for example moving from project-based work to something closer to a regular ongoing role? And does whoever signs off these engagements understand what actually distinguishes a genuine contractor relationship from one HMRC would read as disguised employment?
None of this requires a legal department the size of the Cabinet Office’s. It requires treating IR35 assessment as an ongoing control rather than a box ticked once when the 2021 reforms landed.
This sits alongside a broader theme running through the sector this year: the Employment Rights Act 2025’s provisions landing in stages, right to work checks tightening from 30 September, and now a near £40m compliance failure at the heart of government. These aren’t isolated stories. Together they point to a period where the cost of getting workforce compliance wrong, whether that’s contractor status, immigration checks or employment rights, has gone up sharply, and organisations with outsourced, flexible or multi-site workforces are the ones most exposed.
What is IR35? Shorthand for the off-payroll working rules, which determine whether someone working through a limited company or other intermediary should be taxed as an employee based on the reality of how they work, rather than how their contract is written.
Who is responsible for getting the assessment right? Since April 2021, medium and large organisations in the public and private sector are responsible for determining a contractor’s employment status themselves, rather than relying on the contractor’s own assessment.
What’s the penalty for getting it wrong? Liability can include unpaid tax, National Insurance, interest and additional penalties, as the Cabinet Office’s settlement shows, and it can accumulate over several years before it’s identified.
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