The Cabinet Office has set aside £38.5 million to cover unpaid IR35 tax on its contractors. HMRC ruled that the department failed to take reasonable care when it applied the off-payroll working rules. It now faces a penalty of up to £8.9 million.
If you engage contractors, or work through your own limited company, this case shows what happens when HMRC decides a client’s status decisions were careless. The department sits at the centre of government and still got its IR35 process wrong for years.
What did HMRC find at the Cabinet Office?
In October 2025, HMRC concluded that the department’s historic IR35 processes were inadequate. The Cabinet Office’s 2025-26 annual report and accounts include that finding.
HMRC started checking the department’s status determinations in 2019. Its review covered every contractor engaged since April 2017, when public bodies took over responsibility for deciding IR35 status.
For five years, the accounts told Parliament a different story:
- 2020-21: the department said it applied the rules “with care”
- 2021-22 and 2022-23: HMRC’s audit had found “no fault” so far
- 2023-24: the “no fault” line quietly disappeared
- 2024-25: HMRC said many workers classed as outside IR35 belonged inside
The department disputed parts of HMRC’s argument in 2024-25. The latest accounts show that dispute is over.
How much will the Cabinet Office pay HMRC?
The gross liability, including interest, stands at £38.467 million. Management approved an “expedited settlement” in February 2026 and paid HMRC £15 million on account. A £23.467 million provision covers the rest.
Penalties come on top of the tax. A careless finding lets HMRC charge between 15% and 30% of the net tax due, which here means up to £8.9 million.
The Cabinet Office expects HMRC to suspend that penalty. It has made no provision for it in the accounts.
Did the Cabinet Office use HMRC’s CEST tool?
The accounts don’t say. None of the seven annual reports from 2019-20 to 2025-26 mentions CEST, HMRC’s Check Employment Status for Tax tool. They also give no detail on how the department made its determinations.
The figures show a dramatic change of approach. In 2019-20 the core department placed 202 of 222 new engagements outside IR35, or 91%. By 2025-26 only 2 of 65 sat outside. That’s 3%.
Dave Chaplin, CEO of IR35 Shield, said: “For five years the Cabinet Office told Parliament it had applied the rules with care. HMRC has now said the opposite.”
He added that if the department used CEST, HMRC has found its own tool’s users careless. If it didn’t, the public should know what it relied on instead.
What does the Cabinet Office IR35 penalty mean for you?
If you hire contractors, HMRC expects you to prove reasonable care in every status determination. Writing “with care” in your annual report won’t protect you once HMRC examines the evidence behind your decisions.