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The Foreign, Commonwealth and Development Office still cannot say how much tax it owes HM Revenue and Customs over its use of contractors, a year after admitting that hundreds of its IR35 assessments were wrong.
The department’s latest annual report and accounts show a sharp change in how it treats contractors. In 2024-25, 241 engagements were determined inside IR35 and 211 outside, a near 50:50 split. In 2025-26, 438 were determined inside and 62 outside, putting the proportion inside at almost 88 per cent.
The FCDO has already told HMRC that a review of its previous determinations moved a “high number” of engagements previously assessed as outside IR35 inside, and acknowledged that it would be liable for backdated tax and potential penalties.
Last year’s accounts said the final agreed liability would be disclosed in the 2025-26 accounts. The latest report says the HMRC review is still ongoing, and that the final liability will now be disclosed in the next set of accounts.
Questions in Parliament
Earlier this month Mike Wood, Conservative MP for Kingswinford and South Staffordshire, put two written questions to the Treasury and the FCDO about the department’s accounts and its IR35 tax bill.
The responses came from James Murray, Financial Secretary to the Treasury, and Uma Kumaran, Labour MP for Stratford and Bow. Neither set out how the errors occurred, where responsibility for the resulting liability sits, or when the final tax bill will be known, citing the ongoing investigation.
Dave Chaplin, chief executive of IR35 compliance firm IR35 Shield, said: “The Foreign Office’s IR35 problems are becoming increasingly difficult to explain away. A year ago, roughly half its contractors were considered outside IR35. Now that figure has collapsed to just 12%.
“That is a big difference and raises a very simple question: how did the Foreign Office get so many assessments so wrong in the first place? Did they fail to exercise reasonable care?”
Chaplin said an earlier freedom of information response showed the department’s process used HMRC’s Check Employment Status for Tax tool, known as CEST, and involved the recruiter Public Service Resourcing, with the FCDO providing status determination statements to both PSR and the workers.
“If PSR became the ‘deemed employer’ then the Government needs to explain where liability ultimately sat when those determinations proved wrong, with FCDO or PSR,” he said.
“Businesses are expected to get IR35 right and face potentially significant tax bills when they don’t. The Government should expect no lower standard from its own departments.”
Contractor spending rises
The FCDO’s spending on temporary staff rose from £40.36m in 2024-25 to £48.48m in 2025-26.
Other public bodies have disclosed off-payroll liabilities. Business Matters has reported that the Department for Business and Trade would provide £104.4m to cover the Post Office’s outstanding IR35 liability, and that Natural Resources Wales paid £14.6m to HMRC, including a £2.9m penalty suspended for 12 months, after errors in its contractor determinations.
The rules have also changed for private sector hirers. In April 2026 the turnover threshold at which a company counts as small rose from £10.2m to £15m and the balance sheet threshold from £5.1m to £7.5m, moving status decisions back to contractors’ own companies at firms that fall below the new limits.
