Home Office Sets Aside £80.7m Over IR35 Contract Failings

The Home Office has set aside £80.7 million to cover potential historic breaches of IR35, according to analysis of the department's latest accounts by compliance firm CoComply. The figure combines a £74.5 million provision for employment taxes and interest with a £6.2 million VAT accrual, both disclosed in the Annual Report and Accounts 2025-26.

The liability stems from supplier contracts the department initially treated as "contracted-out" services but later identified as supplies of workers. That reclassification matters because the Home Office, not its suppliers, may have carried responsibility for assessing those workers' tax status under IR35 rules.

Is the £74.5m a final bill?

Not yet. The £74.5 million remains a provision rather than a settled payment to HMRC. The accounts name no suppliers and give no headcount for the affected workers, leaving open how many engagements are in scope and how the final settlement will land.

The disclosure is the latest in a run of large IR35 bills across the UK public sector. In February, the Post Office received a £104 million HMRC bill, which the Department for Business and Trade is funding. Last month, the Cabinet Office disclosed a £38.5 million liability, plus a possible further £8.9 million penalty.

What went wrong at the contracting stage?

Michael Cleavely, founder and CEO of CoComply, said the cause matters more than the size of the number. "What makes the Home Office case so significant isn't just the size of the figure but the cause," he said. "Most IR35 failures come down to getting individual contractor assessments wrong. Here, the problem started much earlier. Contracts were labelled as outsourced services when the department was, in effect, buying people."

The distinction turns on substance over label, Cleavely argued. "Engaging a consultancy under a Statement of Work doesn't make it a genuinely outsourced service," he said. "What matters is how the work is delivered, who manages the people and who is responsible for the outcome. The contract's title counts for far less than how the arrangement works in practice."

Why did the misclassification go unnoticed?

Fragmented ownership across functions played a role, according to CoComply. "Large organisations often have hundreds or thousands of people working through suppliers, and no single team sees the whole picture," Cleavely said. "Procurement signs the contract, finance pays the invoice and the business manages the work. If an engagement is wrongly classed as outsourced at the start, it can skip IR35 checks entirely. That's why classification has to happen at the outset and be reviewed as arrangements change."

The warning extends well beyond Whitehall. CoComply says private sector organisations face the same exposure, particularly when they engage consultancies, professional services firms and technology suppliers. For HR and procurement leaders, the case is a prompt to audit how Statement of Work arrangements are classified before HMRC does it for them. With three major public bodies disclosing eight-figure IR35 liabilities since February, expect scrutiny of outsourced-service contracts to intensify in the months ahead.