Even with that limitation, the shift is substantial. It illustrates why contractor status cannot safely be treated as a procurement checkbox, why organisations need a defensible record of each decision, and why a later review can create liabilities reaching back over several financial years.
What changed in the FCDO figures
For the year ending 31 March 2026, the FCDO reported 504 highly paid temporary off-payroll workers in its disclosure. Of those, 441 engagements were determined to be in scope of IR35, 62 were out of scope, and one was not subject to off-payroll legislation. Those classifications account for the full reported total.
The previous year’s disclosure recorded 455 such workers: 243 inside IR35 and 211 outside. The near-doubling of the reported inside-IR35 count, alongside a dramatic fall in outside determinations, is the headline change.
But it needs accurate framing. These are not figures for every FCDO contractor, every outsourced supplier, or all technology contractors across government. Nor do they demonstrate that hundreds of IT professionals were individually reclassified. They cover the accounts’ defined reporting category of highly paid temporary off-payroll workers.
The FCDO’s own explanation gives the numbers greater significance than a routine year-to-year change. In its 2024–25 accounts, the department said a full review had moved a high number of engagements previously assessed as outside IR35 into the inside category. It subsequently made a voluntary disclosure to HM Revenue & Customs.
The 2025–26 accounts say HMRC’s review of that disclosure and the associated liability remains in progress. The FCDO has recognised an accrual for estimated backdated tax spanning 2021–22 through 2025–26, but the cited material does not disclose the amount. That leaves an essential financial question unanswered: the scale of the department’s expected final bill.
This is therefore not a completed enforcement case or a final judgment on the department’s historic processes. It is an ongoing compliance matter in which the eventual liability had not been agreed at the time of the latest accounts.
Why IR35 decisions carry financial weight
The off-payroll working rules, commonly called IR35, were introduced in April 2000. They aim to ensure that a worker supplying services through an intermediary pays broadly similar Income Tax and National Insurance contributions to an employee where, absent that intermediary, the relationship would resemble employment.
The administrative burden shifted considerably in later reforms. From 2017, public-sector clients generally became responsible for operating the rules. In April 2021, that responsibility extended to medium and large private- and voluntary-sector clients, with an exception for small clients.
In most relevant engagements, the client determines the worker’s tax status. Where an engagement is inside IR35, the deemed employer is responsible for deducting Income Tax and employee National Insurance contributions, as well as paying employer National Insurance and, where applicable, the Apprenticeship Levy.
That allocation of responsibility explains the stakes for departments and large organisations. A poor or unsupported determination does not simply create friction with a contractor. It can leave the client facing a back-tax exposure, interest and potentially penalties. HMRC guidance says organisations should correct submissions where possible and make a voluntary disclosure explaining errors and calculating tax and National Insurance due. Interest applies, and penalties can apply.
For an organisation dependent on scarce technical skills, the challenge is compounded. It must correctly assess an engagement while maintaining access to specialists who may have alternative work available. A blanket inside-IR35 approach might appear administratively safer, but it can disregard real differences in working arrangements. Conversely, treating a role as outside without evidence that matches the reality on the ground exposes the client to later reassessment.
Status is about the engagement, not the job title
A frequent source of confusion is the belief that a job title settles IR35. It does not. A cybersecurity architect, Microsoft 365 migration lead, software engineer or programme manager may work through a company, yet their status turns on the particular contractual and working relationship rather than the label placed on the role.
The relevant question is broadly whether the worker would look like an employee if the intermediary were removed. That requires a careful examination of the actual arrangement. A status decision that merely repeats the wording of a statement of work is vulnerable if the day-to-day reality points elsewhere.
That makes governance more important than one initial assessment. Managers need to understand the boundaries of an engagement. Procurement teams need contracts that describe a genuine service arrangement accurately. Finance and tax teams need a clear audit trail. And changes in working practice should trigger a reassessment rather than being allowed to drift for years.
For Windows and enterprise IT projects, this is particularly practical. Long-running work inside a client’s teams, use of client-managed equipment and systems, fixed patterns of supervision, or a role gradually expanding beyond a discrete deliverable can all make it harder to defend an outside determination. None of those factors alone resolves status, and the available evidence does not establish an FCDO-specific fact pattern. Still, they show why a decision at project onboarding cannot necessarily be treated as permanent.
The FCDO experience indicates the cost of retrospective correction. Its accrual reaches from 2021–22 to 2025–26, showing that a review today can concern practices across several years.
Inside IR35 does not itself create employee rights
The language around being “inside” often leads to another misleading simplification: that tax treatment automatically gives a contractor employee benefits, or that it necessarily leaves them with none.
HMRC is explicit that off-payroll rules concern employment status for tax purposes, not employment-rights status. An inside-IR35 determination means the tax rules apply to that engagement; it is not, by itself, an award or denial of holiday pay, sick pay, redundancy protection, pension rights or other employment rights.
Those rights depend on the underlying legal arrangement and facts. The distinction matters to workers deciding whether to accept an engagement and to hiring organisations trying to communicate status accurately. “Inside IR35” describes a tax conclusion, not a complete description of the worker’s legal position or value proposition.
For contractors, the immediate consequence of an inside determination may be a different take-home calculation and a need to examine which party will make deductions. For clients, it means ensuring that payment chains, agencies and payroll processes align with the status determination. Both sides should also ensure that the agreed written terms and actual work model do not contradict each other.
A familiar public-sector implementation problem
The FCDO’s ongoing case belongs in a wider public-sector history rather than being treated as an isolated departmental anomaly. The House of Commons Public Accounts Committee found that government departments and agencies owed, or expected to owe, HMRC a combined £263 million in 2020–21 because the reforms had not been administered correctly.
The National Audit Office and parliamentary scrutiny identified difficult guidance, a rushed rollout and usability problems around the Check Employment Status for Tax tool, known as CEST, as contributing factors in the earlier implementation period. HMRC had also estimated in 2016 that only 10% of personal service companies were applying the rules correctly.
Those findings help explain why a department may later need to revisit a large number of determinations. They do not establish that every decision was wrong, that every public body has the same exposure, or that the FCDO used CEST in its reassessment process. The available material does not independently verify the latter claim.
The broader lesson is that a policy can be straightforward in its objective while difficult to operationalise at scale. Thousands of distinct engagements must be classified consistently; records need to survive staff turnover; delivery managers have to follow arrangements they may not see as tax matters; and a central compliance function must test whether the written decision reflects reality.
CEST’s falling use has more than one explanation
Recent reporting based on freedom-of-information data found that CEST determinations fell from 458,894 to 135,178 across a reported two-year comparison. A separate set of figures reported use by intermediary-based contractors declining from 512,025 in 2021–22 to 138,758 in 2023–24.
It would be tempting to read that decline as a definitive verdict on the tool. The evidence does not support that certainty. IR35 Shield, a provider of compliance services that has an obvious commercial interest in the issue, argued that organisations were moving away from CEST. HMRC’s response was that a reduction was expected as employers became more familiar with the post-2021 rules, and that it stands by outcomes where accurate information is entered.
Both interpretations are plausible possibilities, but the usage data alone cannot distinguish them. A fall might reflect growing familiarity, fewer new engagements requiring a fresh decision, a shift to alternative processes, or reduced confidence in the tool. The public record cited here cannot establish the mixture of causes.
For IT leaders, that uncertainty should lead to a practical conclusion: no assessment mechanism substitutes for reliable input and disciplined governance. Whether an organisation uses CEST or another process, the quality of the result depends on an accurate account of how work is actually performed. A reusable questionnaire completed without input from the person managing the engagement is unlikely to be enough in a complicated case.
Revenue gains do not settle the fairness debate
HMRC estimates that the April 2021 extension of the rules to medium and large private- and voluntary-sector clients generated around £4.2 billion in additional tax, National Insurance and Apprenticeship Levy through March 2023. That number shows why government views the reform as financially consequential.
It should not be converted into a simplistic declaration of success, failure or an “overshoot” against a separate forecast. The estimate is cumulative through a specified date, covers several revenue categories, and is explicitly described by HMRC as an indicator. HMRC says it cannot completely isolate the reform’s effects from COVID-19 and other labour-market developments.
There is a real policy tension here. Governments want to prevent workers who are effectively employees from gaining a tax advantage through an intermediary. Businesses want confidence that they can procure genuinely independent, specialist services without inheriting indefinite tax risk. Contractors want a system that does not assume employment-like tax treatment simply because a client is cautious.
The FCDO figures demonstrate the operational consequences of that tension, not a final answer to it.
The Post Office case shows the scale of legacy exposure
Another public-sector-related matter illustrates how historic IR35 errors can reach nine figures. The Department for Business and Trade proposed funding of up to £104,441,881 for Post Office Limited’s historic IR35 liability linked to contractor misclassification between 2017 and 2022, including associated corporation tax.
Post Office’s own 2025 accounts recorded a £101 million provision while HMRC’s review was continuing. It said the provision covered lost tax and associated interest, and that no penalty provision had been recognised because HMRC had indicated penalties would be suspended.
The two sums should not be treated as contradictory. The proposed government funding envelope includes associated corporation tax, whereas the company’s stated provision describes lost tax and interest. Nor should the proposal be described as approved simply because it was examined by the Competition and Markets Authority’s Subsidy Advice Unit.
The unit’s March 2026 report was non-binding advice. It did not decide whether the subsidy should be awarded and did not directly determine legal compliance with subsidy-control requirements. The reviewed material also does not establish that the funding was ultimately granted or that the tax matter was settled.
What organisations and contractors should do now
The FCDO disclosure is a warning against both complacency and panic. It does not prove that all technology contracting is being pushed inside IR35, but it does show that status decisions can be revisited at scale and with retrospective financial consequences.
For organisations, the priority is a living control process: document the initial rationale; involve the business manager who understands the real work; preserve contracts, statements of work and relevant correspondence; check that practice still matches the arrangement; and investigate patterns of identical determinations. A review should be especially prompt when a project is extended repeatedly or a contractor’s duties change materially.
For contractors, the priority is clarity. Understand the client’s determination before accepting work, establish who is responsible for deductions, retain the contract and evidence of the operating arrangement, and do not assume that an inside tax decision answers questions about rights or benefits. Where the arrangement changes, raise it rather than relying on an old assessment.
For public bodies, the message is still more direct. Transparency in annual accounts is valuable, but it is a last line of visibility rather than a substitute for sound administration. The latest FCDO figures show how quickly a departmental portfolio can look different after a full review—and why getting the evidence, processes and oversight right at the start is cheaper than correcting years of decisions later.