A £38.5m IR35 bill and why it lands on you

A government department has just set aside £38.5m to settle an IR35 bill.

Not a contractor. Not an agency. The Cabinet Office.

HMRC started looking at how the department decided the employment status of its contractors back in 2019, and the review reached back over every engagement since April 2017. In October 2025 HMRC concluded the processes weren’t good enough.

What’s happened

The department agreed an expedited settlement in February 2026, paid £15m on account and provided for the remaining £23.5m. Behind that there’s a careless penalty of up to £8.9m, which the department expects HMRC to suspend.

I know a Whitehall department feels a long way from a building firm in Gravesend. Stay with me, because the finding underneath it is the bit that matters.

HMRC didn’t simply say the answers were wrong. HMRC said the department failed to take reasonable care in reaching them.

The number I keep coming back to

In 2019-20 the core department put 202 of its 222 new engagements outside IR35. That’s 91 per cent.

By 2025-26 it was 2 out of 65. Three per cent.

Same department, broadly the same kind of work, the same rules. What changed was that somebody was checking.

I’m not telling you every outside determination is wrong, because it isn’t. Plenty of our clients are genuinely in business on their own account and the law says so. What that drop tells you is how much ground there is between a decision made properly and a decision made because it’s the convenient one.

Why this is your problem, not your customer’s

Here’s the part most people have back to front.

Since April 2021, medium and large private sector businesses have had to decide the status of anyone working for them through their own limited company, and they carry the tax if they get it wrong. Public bodies have had that job since April 2017. That’s the regime that caught the Cabinet Office.

Small businesses don’t have that job. And most of the people our clients invoice are small.

When the end client is small, the older IR35 rules apply instead. Your own company decides whether each contract is inside or outside, and your own company pays over the income tax and National Insurance if it’s inside.

So nobody is doing this for you. No status determination statement arrives in your inbox. No larger business is absorbing the risk on your behalf. It sits with you, and HMRC can look back years.

How to tell whether your customer is small

For 2026-27, a client is medium or large if it meets two or more of these: turnover over £10.2m, balance sheet total over £5.1m, or more than 50 employees.

Those thresholds are rising to £15m and £7.5m for financial years beginning on or after 6 April 2025. Because the test looks back at the last set of accounts filed before the tax year started, the earliest that can move anyone is 2027-28. For this year, work on the old figures.

If you aren’t sure where a customer sits, ask them. A small client has to confirm its size if you ask it to.

What reasonable care actually looks like

Reasonable care isn’t getting the right answer. It’s being able to show how you got to your answer.

The test the tribunals use is whether a sensible person taking reasonable trouble would have done something differently. A wrong conclusion reached through a sound process isn’t automatically careless. A right conclusion reached by guessing still is.

In practice that means three things.

Look at the contract, and then look at what actually happens on site or in the office. Where the two disagree, HMRC goes with what actually happens. Substitution clauses nobody could ever use are the classic example.

Do it per engagement, not once for the company. Two contracts with the same customer can land differently.

Write down the reasons at the time and keep them. If you rely on an adviser or a tool, you have to have given them the full and accurate picture and engaged with what came back. A CEST printout on its own, with no record of the facts you fed it, is thin evidence that you took care.

Running a status review costs very little next to the tax on three or four years of contracts.

If you’re in construction

Two things worth separating out, because they get muddled constantly.

CIS and IR35 are different schemes doing different jobs. CIS deals with deductions from payments for construction work, at 20 per cent for registered subcontractors, 30 per cent if you’re not registered and nil with gross payment status. It says nothing at all about employment status.

Having CIS deducted does not mean your contract is outside IR35, and gross payment status certainly doesn’t. I’ve had that conversation more times than I can count.

If you work through your own limited company for a main contractor, the question is who that contractor is. A national housebuilder will be issuing determinations and will usually take the cautious line. A local firm of twenty people is small, so it’s on you.

And if you take on labour yourself, you’ve got the separate question of whether those people are genuinely self-employed. That one has been catching contractors out long before IR35 existed.

If your customer is medium or large

Then they decide, and they owe you a status determination statement with their conclusion and their reasons on it. Not a one-line email.

If you think they’ve got it wrong you can dispute it, right up until the last payment on the contract. They have 45 days to reply. If they don’t reply in time, the tax becomes their problem rather than yours, which is worth knowing.

Keep every determination you’re given. They’re the evidence that the risk wasn’t yours.

What I’d do this month

Pull out your current contracts and list who each one is with.

Mark each customer small or not small. For the ones you can’t call, send the email and ask.

For the small ones, write half a page per contract on why you think it falls outside, in terms of control, substitution and financial risk, and what happens in practice rather than what the contract says. Date it and file it.

For the large ones, make sure you’ve actually been given the determination statement and that it has reasons on it.

If any of that makes you uneasy, that uneasiness is the useful bit. Better to look at it now than after a letter arrives asking about April 2017.