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 £38.5m 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.
- IR35 seeks to charge Income Tax and National Insurance as if the individual were an employee, if they would have been had they worked for the client directly.
- If the client is in the public sector, it is the responsibility of the public sector organisation to assess whether IR35 applies.
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 £15m on account in February 2026 and made provisions for the remaining £23.5m, as part of an expedited settlement approach to bring the matter to a conclusion.
- The final settlement is reported to still be under negotiation.
A Penalty of up to £8.9m may be charged for the failure to take reasonable care.
- The Cabinet Office 2025-26 annual report and accounts describe the penalty as a remote contingent liability, as the Cabinet Office expects HMRC to suspend it subject to conditions.
- 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.
- HMRC’s guidance gives examples of reasonable care, such as accurately completing CEST and applying HMRC’s status guidance. Blanket determinations that ignore individual working arrangements, and a lack of proper support or training for those making determinations, are examples of what falls short.
- Clients making determinations regarding IR35 should keep a record of how each determination was reached, based on the contract and actual working practices, ensuring that decisions are only made by competent professionals. A CEST printout on file may not be enough on its own.
Useful guides on this topic
IR35
What is IR35? How does it work? How is the deemed payment calculated? What expenses are deductible?
Off-Payroll Working: PSCs & Public Sector Engagers
What is Off-Payroll Working? Who does it apply to? What are the rules?
Failure to take reasonable care
What is meant by taking reasonable care in relation to your tax affairs? What is a failure to take reasonable care? Tax schemes and lack of reasonable care. What can HMRC do if you do not take reasonable care of your tax affairs?
External link