Full Breakdown
Cabinet Office Hit with £38.5 million IR35 Tax Bill
By Drooid · · How we work
Core Event
HM Revenue and Customs (HMRC) concluded in October 2025 that the Cabinet Office’s historic application of the off-payroll working rules (IR35) was “inadequate” and that reasonable care had not been taken. The department’s 2025-26 annual report records a gross liability of £38.467 million for unpaid tax and National Insurance, an advance settlement of £15 million paid in February 2026, and a remaining net provision of £23.467 million. HMRC may also impose a penalty of up to £8.9 million, representing 15-30 % of the net tax due.
Timeline of Findings and Settlement
- April 2017: Public bodies assume responsibility for IR35 status decisions.
- 2019-2025: HMRC conducts compliance checks covering every contractor engaged by the Cabinet Office.
- October 2025: HMRC issues its final conclusion on the department’s processes.
- February 2026: Management approves an “expedited settlement” and pays £15 million to HMRC.
Financial Impact and Provisions
The accounts list the gross liability, including simple interest, at £38.467 million. After the advance payment, a provision of £23.467 million remains on the reporting date. The potential penalty, calculated at up to £8.9 million, is not provisioned in the accounts. The department also reported a reduction in contingent-labour spending from £39 million to £32 million over the year, reflecting a broader effort to curb reliance on external contractors.
Official Statements & Responses
The department’s annual report states that the historic processes were inadequate and that the penalty is “deemed remote,” indicating an expectation that HMRC may suspend it.