The Home Office has set aside £74.5mn to cover potential unpaid employment taxes after identifying historical non-compliance with off-payroll working rules, raising fresh questions about how government departments classify and procure consultancy services.
The provision, disclosed in the department’s annual report and accounts for 2025–26, relates to supplier contracts initially treated as outsourced services but subsequently reclassified as supplies of labour, potentially bringing them within IR35 tax rules.
The disclosure comes against a dramatic increase in Home Office consultancy expenditure, which rose from £11.9mn in 2016–17 to a peak of £233.7mn in 2023–24, before falling to approximately £113mn annually.
Although the accounts do not identify the contracts involved, the £74.5mn provision is equivalent to around a tenth of the department’s cumulative consultancy spending over the decade.
However, IR35 compliance specialist IR35 Shield has warned that the figure remains an early estimate and could overstate the eventual liability if genuine consultancy arrangements have been incorrectly classified as labour supply.
Dave Chaplin, chief executive of IR35 Shield, said: “At this early stage, the £74.5m provision is an estimate. We are aware that many genuine consultancies have been, in our view, misclassified by HMRC as providing labour rather than services, and that HMRC has struggled with this issue. If genuine services have been swept up as labour, the true liability could be considerably lower than the figure in the accounts.
“Consultancies that provide contracted out services to their customers should always conduct tax due diligence before contracts are signed, to ensure the paperwork clearly demonstrates the intended arrangements. Side agreements that specifically cover off-payroll (IR35) can also be helpful and avoid later confusion during HMRC compliance checks.”
The distinction between outsourced services and the supply of individual workers is central to IR35, which seeks to ensure contractors working like employees pay broadly equivalent employment taxes.
The Home Office provision highlights the potential financial exposure when historic contractual arrangements are reassessed. However, the final liability remains uncertain, and the department’s accounts do not establish that all the contracts involved were incorrectly classified.
Leave a Comment