Poor IR35 assessments cost Cabinet Office £38.5m

HMRC have concluded that the Cabinet Office failed to take reasonable care when applying the Off-Payroll Working (IR35) rules. The Cabinet Office has set aside £38.5 million for unpaid Income Tax, National Insurance and interest. A penalty of up to £8.9m could follow.

The Off-Payroll Working (IR35) rules apply when an individual worker provides services to a client through their own limited company. They are essentially anti-avoidance provisions aiming to ensure that where a worker performs the same kind of work as an employee of the end-client, any fees paid in respect of the worker's services via the worker's PSC or paid directly to the worker are subject to Income Tax and National Insurance.

In this case, it was the responsibility of the Cabinet Office to assess whether IR35 applied to workers.

HMRC began reviewing the Cabinet Office’s status determinations in 2019, covering every engagement since the rules were extended to the public sector in April 2017. In October 2025, HMRC concluded that the department’s historic processes were inadequate and that it had failed to take reasonable care.

The Cabinet Office paid £15 million on account in February 2026 and made provisions for the remaining £23.5 million as part of an expedited settlement approach to bring the matter to a conclusion.

The final settlement is reported to be still under negotiation and a penalty of up to £8.9m may be charged for the failure to take reasonable care.

HMRC’s finding that reasonable care was not taken can attract a penalty of 15% to 30% of the net tax liability before interest.

The accounts do not say how the Cabinet Office made its determinations or exactly where it went wrong.

Commentators have pointed to HMRC’s Check Employment Status for Tax (CEST) tool, which they say returns an outside IR35 result where a right of substitution is indicated, whatever the other answers.

HMRC have previously asked the Ministry of Justice to revisit every determination made using the CEST tool, where managers said a substitute could be sent. The penalties for carelessness were suspended on the condition that they checked every outside determination.

Practical points

Penalties for careless inaccuracies are charged where there has been a failure to take ‘reasonable care’. 'Reasonable care' is not defined in legislation, but case law has established that it is generally what a prudent and reasonable taxpayer in the same position would have done. 

Therefore, if you are making employment status decisions it is advisable to keep a record of how each determination was reached, based on the contract and the actual working practices that are taking place.

If you use HMRC’s CEST tool, check that the answer given is what you expect. Where there could be doubt about a situation, it may be worth seeking and documenting professional advice.

If you need help with Off-Payroll Working or have any PAYE or National Insurance questions, please contact us. We would be happy to help you.