£14.8 million.
That is the provision FCDO Services, an arm's-length body of the Foreign Office, has recognised in its 2025-26 accounts for unpaid taxes arising from historical IR35 compliance issues. The Foreign Office itself has set aside a further, undisclosed sum. Neither final bill has yet been agreed with HMRC.
Seven months after the Post Office disclosed a £104m IR35 liability, another public body is paying for the same problem. The numbers are smaller. The lesson is the same.
The facts
The detail is set out in the Foreign Office's Annual Report and Accounts 2025-26:
- The department made a voluntary disclosure to HMRC in 2024-25, advising of changes to its IR35 assessments.
- Through 2025-26 it continued extensive reviews of all its off-payroll status determinations.
- Of 50 engagements reassessed during the year, 42 changed IR35 status.
- Of 500 engagements in the core department subject to the rules, 438 are now assessed as inside IR35. That is 88%.
- The Foreign Office has recognised an accrual for backdated tax covering 2021-22 to 2025-26. The final liability will be disclosed once HMRC's review is complete.
The FCDO Services accounts add an important detail. Its own review was undertaken "following recent HMRC investigations into other central government bodies". It found a high number of engagements previously assessed as outside IR35 should have been inside.
Both reviews are still with HMRC, and we will not speculate on the outcome. The published figures are enough to draw lessons from.
Another name on a growing list
The Foreign Office is not an outlier. It joins a list of public bodies that have settled, or set aside money for, IR35 liabilities since the public sector reforms took effect in April 2017.
That list includes the Post Office, DEFRA, the Department for Work and Pensions, the Department for Business and Trade, the NHS and the Ministry of Justice. We covered the scale of these cases in The £104m IR35 Lesson.
These are large, well-resourced organisations. They have legal teams, finance functions and compliance obligations. The problem is rarely a lack of intent. It is a lack of systematic, ongoing control over who is working for them and on what terms.
Our take: 88% inside is not the same as getting it right
The headline number is striking. After its review, 88% of the Foreign Office's in-scope engagements are assessed as inside IR35. It is tempting to read that as the fix.
It is not. It is a reaction.
When an organisation moves most of its contractors inside IR35 at once, it is usually managing uncertainty, not resolving it. Blanket or near-blanket decisions carry their own costs. Genuine specialists may walk away. Day rates may rise to cover the tax. Projects may lose the expertise they were built around. We explored a similar risk in 24 Months and Counting.
The goal is not "inside" or "outside". The goal is the right answer for each engagement, backed by evidence you can stand behind.
Three things stand out from this case.
- The liability built up over five years. Backdated tax reaches back to 2021-22. Incorrect decisions do not announce themselves. They compound quietly until someone asks to see the reasoning.
- The fix came after the fact. FCDO Services reviewed its contractors after HMRC investigated other government bodies, not as part of a routine cycle. By then, the exposure already existed.
- Classification was only part of the problem. Knowing who is engaged, how they came in and whether their role has changed since day one matters as much as the first decision. That is the hidden headcount problem in action.
What about calls to abolish IR35?
The story has also become political. In the same week, the shadow chancellor pledged to replace IR35 entirely.
Whatever happens to that pledge, it changes nothing today. The off-payroll rules are law now. HMRC is enforcing them now. Any liability built up under the current regime stays a liability, whatever future policy looks like.
For medium and large private sector clients, and all public sector bodies, HMRC's guidance is clear. The client decides the worker's status and must issue a status determination statement setting out its reasons. If you engage contractors at scale, that responsibility is yours. There is no bailout coming for the private sector. The difference between a public body and your organisation in the same position is simply who pays.
Five questions worth asking this quarter
Every organisation's position is different, and none of this replaces specialist advice on your own arrangements. But the organisations that avoid surprises tend to be able to answer these questions with confidence.
- Do we know our number? Could HR, procurement and finance each report how many contractors are engaged, and would the figures match?
- Is every decision individual? Is each determination based on the actual working practices of that role, or carried over from a similar-looking engagement?
- Would our reasoning survive scrutiny? If HMRC asked for the evidence behind a decision made three years ago, could we produce it?
- When did we last do a review? Roles drift. A decision that was right at the start may not be right eighteen months later.
- Who owns this? Not who processes the paperwork, but who is accountable for the outcome at leadership level.
If any answer is "not sure", that is where your exposure is most likely to sit. Our misclassification risk calculator is a quick way to size what is at stake. If you engage suppliers through Statements of Work, Does IR35 Apply to a Statement of Work? is worth a read too.
The £15m question
The Foreign Office case is not really about the Foreign Office. It is about what happens when contractor status is treated as a one-off admin task rather than an ongoing governance responsibility.
If you engage contractors, you have IR35 exposure. The question is whether you can see where it sits, and whether you have the evidence to defend your position when asked.
CoComply helps HR, procurement and finance teams classify work correctly, route every engagement through the right process, and control the risk that travels with it. See how the platform works or book a demo.
Be Certain.
This article is for general information only and does not constitute legal, tax or professional advice. It reflects publicly available information at the time of writing and may not reflect later developments. Every organisation's circumstances are different, so you should seek specialist advice on your own arrangements before acting on anything raised here.
