The Home Office has disclosed £80.7 million in provisions and accruals linked to the off-payroll working (OPW) rules, known as IR35, in its 2025-26 accounts: a £74.5 million provision for employment taxes and interest, and a £6.2 million VAT accrual. The issue goes beyond individual contractor status determinations. Supplier contracts originally classified as contracted-out services were subsequently determined to be supplies of workers.
Last updated 4th November 2026.
What did the Home Office disclose?
The Home Office's Annual Report and Accounts 2025-26 confirm that potential historical non-compliance with the off-payroll working rules was identified during the year.
| What the accounts show | What they do not show |
|---|---|
| A £74.5m provision for estimated employment tax liabilities and interest | Which suppliers were involved |
| A further £6.2m VAT accrual | How many contracts or workers are affected |
| The cause: contracts originally classified as contracted-out services were later determined to be supplies of resource | Whether any penalty will follow |
| The issue was identified in 2025-26 | How this provision relates to earlier Home Office disclosures on managed service contracts |
The disclosure is on page 186, with more detail in Note 13 on page 300. A provision is an estimate, not a final settlement or a penalty.
The explanation matters more than the number. This is a classification problem at the level of the commercial contract, and it is one many large organisations share.
Why does it matter whether a contract is outsourced services or labour supply?
Because it decides who is responsible for applying the off-payroll rules. Most discussion of the OPW rules focuses on whether an individual contractor is inside or outside. But before that question comes another one: is the organisation buying a genuinely outsourced service, or is it buying people?
Under HMRC guidance, where a service is genuinely contracted out, the service provider becomes responsible for the off-payroll rules. Where the arrangement is in substance a supply of labour, the organisation receiving the services may be the client itself. It then has to make and communicate status determinations.
HMRC's guidance warns that care should be taken to ensure a labour supply contract "has not simply been re-labelled as a managed service". The test is the commercial reality of the arrangement, not what the contract calls it. That can be hard to establish where organisations engage consultancies, professional services firms and technology suppliers under complex commercial terms. As the Home Office disclosure shows, getting it wrong is expensive.
We explain the full test in Understanding contracted out services and IR35 compliance, and who holds which duties in Who is responsible for IR35?
Does a statement of work make a contract compliant?
No. A statement of work (SoW) can help establish a genuinely outsourced arrangement, but it does not prove one. The signs that a SoW engagement is closer to labour supply include:
- Individuals working under the day-to-day direction of the customer's managers
- Individuals integrated into the customer's own teams and processes
- Time-and-materials charging rather than payment for supplier-managed outcomes
- The customer, rather than the supplier, taking responsibility for delivery
No single factor decides it. Taken together, they may point to labour supply. That does not mean every worker falls inside the OPW rules. It means the right organisation has to apply the off-payroll rules and assess each worker where needed.
We look at the warning signs in more depth in Who is responsible for IR35 when your agency calls itself a consultancy? and Statement of Work or pseudo-employment?
Why do large organisations miss this?
Because no single team sees the whole engagement. Procurement approves a professional services contract. Finance pays the invoices. The business manages the people doing the work. Tax and HR may never see it at all.
Each team can do its own job without anyone understanding how the engagement really operates. If an arrangement is classified as outsourced services at the start, it may never enter the normal contractor classification process.
Arrangements also change. A supplier engaged to deliver a defined outcome can gradually become an ongoing supply of people working under the customer's direction. Unless someone keeps track, the original classification stops reflecting how the work is done.
The challenge is not only assessing known contractors. It is finding which engagements need assessing in the first place. We explain how in How to find every contractor in your organisation.
What should organisations do now?
Set up the right controls before external work begins, and keep them running for the life of the engagement.
- Map your external workforce, including people supplied through service providers, particularly where the arrangement is a supply of labour
- Establish what you are buying and how it will be delivered before the contract is signed
- Confirm who will manage the individuals doing the work
- For genuinely outsourced services, check the contract and day-to-day operation both support that classification
- For labour supply, apply the OPW rules and make worker-level assessments where required
- Establish whether other relevant checks, such as right to work, have been completed, and keep the evidence
- For mixed arrangements, assess each part separately
- Keep the evidence behind each decision, and review it when the engagement is extended or changes scope
Where should IR35 compliance start?
At CoComply, we believe the biggest opportunity is to ask these questions earlier, at the point work is requested rather than after a contractor has started. That means a structured approach across the whole engagement:
- Triage every request at intake. Establish the nature of the work and the intended delivery model before anything is signed.
- Categorise engagements and suppliers correctly. Is it labour supply, a genuinely outsourced service, a mix of both, or is more information needed?
- Identify the workers where appropriate. Where the arrangement involves labour supply, know who is doing the work, including people supplied through service providers.
- Take a risk-based approach. Focus assessment effort where the risk is highest, and make worker-level determinations where the OPW rules require them.
- Monitor throughout the engagement. Re-check when scope, duration or working practices change, so the original classification still reflects reality.
Getting the first categorisation right lets the correct compliance process follow, with a clear record of the evidence and decisions at each step. This matters most for organisations with large, complex supplier bases, where the line between external workers and outsourced services is not always obvious.
Off-payroll compliance does not begin with an employment status questionnaire. It begins with understanding what an organisation is actually buying.
CoComply is an external workforce compliance platform. It helps large organisations classify work correctly, route each engagement through the right process and control the risk across their supply chain.
Next step: Not sure whether your statements of work are genuinely contracted out? Request a free SOW and MSA analysis and we'll show you where the labour supply risk sits.
Frequently asked questions
What off-payroll working liability has the Home Office disclosed? It has disclosed £80.7 million in its 2025-26 accounts: a £74.5 million provision for estimated employment tax liabilities and interest, and a £6.2 million VAT accrual. Neither is a final settlement or a penalty.
Why did the Home Office’s liability arise? Supplier contracts first classified as contracted-out services were later determined to be supplies of resource. This potentially brought the arrangements within the Home Office’s own off-payroll working responsibilities, rather than those of the service providers.
What is a contracted-out service under the off-payroll rules? A service where the provider delivers an outcome, manages its own people and carries the delivery risk. If it is genuine and the provider is medium or large, the provider takes on the client role for the OPW rules.
Does having a Statement of Work mean a service is genuinely contracted out? No. HMRC looks at the commercial reality of the arrangement, not the contract label. A SoW can support a genuine outsourced service but does not prove one.
