Outside IR35: What the Cabinet Office’s 91% to 3% shift reveals

November 11, 2026

A department's outside IR35 rate fell from 91 to 3 per cent in six years. Could your records explain a swing like that?

News · End-hirers and recruitment agencies · OPRaaS Platform

When outside IR35 classifications fall from 91 per cent of new engagements to just 3 per cent, the important question is not whether one percentage is right. It is whether the organisation can explain and evidence the decisions behind both.

That question arises from FCSA’s analysis published on 11 November 2026 of the Cabinet Office’s 2025-26 annual report and accounts.

According to FCSA, the Cabinet Office core department classified 202 of 222 new engagements outside IR35 in 2019-20, approximately 91 per cent. In 2025-26, it classified 2 of 65 outside IR35, approximately 3 per cent. These are different annual populations, so the movement does not by itself establish that earlier decisions were wrong.

The accounts recognise an estimated gross IR35 liability of £38.467 million and disclose a possible additional penalty of up to £8.9 million. Neither amount should be mistaken for a final concluded HMRC assessment. In a parliamentary answer on 30 October 2026, the Cabinet Office confirmed that HMRC’s audit remained ongoing, the final liability had not been determined, and the possible penalty was a separate remote contingent liability.

For public sector organisations, end-hirers and recruitment agencies, the lesson is about the quality of the underlying evidence. A change in the proportion of outside IR35 determinations may be entirely justified. The challenge is demonstrating why.

What a sharp fall in outside IR35 determinations means

Under Chapter 10 of Part 2 ITEPA 2003, public authorities and medium or large private sector clients generally determine the tax status of relevant workers providing services through intermediaries. The client must take reasonable care in deciding whether the worker would be regarded as an employee for tax purposes if engaged directly.

Different roles, contracts, working practices and procurement arrangements can legitimately produce different outcomes. A change in the outside IR35 rate is therefore a reason to investigate, not proof of a breach.

An outside IR35 determination is only as defensible as the facts and reasoning recorded behind it.

FCSA reports that the Cabinet Office estimate involved extrapolation across four groups of roles rather than an individual review of every engagement. This illustrates the potential financial scale of uncertainty across a large contractor population, although it does not mean that a particular method of extrapolation would automatically apply to another organisation.

What HMRC expects when assessing reasonable care

HMRC’s Employment Status Manual ESM10014 says clients should act as a prudent and reasonable person would in their position. Expectations depend on the organisation’s resources, experience and circumstances. HMRC expects clients to preserve sufficient records showing how decisions were reached.

Four practical checks

Review existing engagements. Check that determinations remain accurate and that mistakes are identified rather than repeated.
Reassess material changes. Make a fresh determination when relevant contractual terms or actual working practices materially change.
Improve the process. Review and amend assessment procedures where weaknesses emerge.
Oversee outsourced assessments. Check the processes used by external providers. Outsourcing an assessment does not remove the client’s reasonable-care responsibility.

A valid status determination statement (SDS) must state the conclusion, explain the reasons and be reached with reasonable care. A simple inside or outside label is not enough. HMRC explains these requirements in ESM10013.

Disagreements have a 45-day deadline

Under the client-led disagreement process, a client must consider representations from a worker or deemed employer and respond within 45 calendar days of receipt. Failure to comply can transfer responsibility for relevant further PAYE payments to the client. The original determination continues to apply while the disagreement is considered.

Records should therefore show when a disagreement arrived, what was considered, the response given and when it was communicated.

Penalties depend on the circumstances

HMRC factsheet CC/FS7a gives a 15 to 30 per cent range for careless inaccuracies following prompted disclosure, where that penalty regime applies. Certain careless penalties may be suspended for up to two years if HMRC can set suitable conditions. These general penalty rules should not be read as confirmation of the outcome of the Cabinet Office case.

Why recruitment agencies should scrutinise status determination statements

Where an agency is the deemed employer under the off-payroll rules, it must operate the relevant PAYE and National Insurance arrangements for engagements determined inside IR35. The client’s duty to take reasonable care in the status decision is distinct from the agency’s fee-payer obligations.

An agency is not automatically required to repeat every client’s assessment. It should, however, identify missing or contradictory documentation, pass the SDS through the contractual chain where required, and understand its own obligations. HMRC’s guidance for deemed employers explains those responsibilities and the right of a deemed employer to challenge a determination.

A one-line classification without supporting reasons should prompt clarification, not be treated as a complete SDS.

Umbrella arrangements create a separate PAYE risk

Genuine umbrella employment is different from an engagement through a worker’s personal service company. However, it does not remove labour supply chain risk.

Section 24 of Finance Act 2026 inserted Chapter 11 into Part 2 ITEPA 2003. For relevant payments from 6 April 2026, the rules can make the agency contracting with the end-client jointly and severally liable for umbrella PAYE, or the end-client in specified circumstances, including where there is no agency. HMRC’s labour supply chain guidance explains the scope.

This is a distinct regime from IR35. Both underline the need to know who engages the worker, who pays them and which organisations sit in the contractual chain.

Why workforce classification records matter

Module 3 of the OPRaaS Labour Supply Chain Assurance (LSCA) Self-Certification Course addresses contingent workforce tracking, including worker classification, the legal employer or paying entity, and the evidence supporting each classification.

Its practical questions include whether an organisation can produce a compliant workforce headcount report within 24 hours and reconcile worker records against timesheets, invoices and Real Time Information reporting. These are useful governance tests, although they are not themselves statutory IR35 deadlines.

For each relevant engagement, organisations should be able to retrieve the SDS, the underlying contractual and working-practice evidence, the reasoning, the communication record and any later review or disagreement.

How the OPRaaS Virtual Compliance Director supports assurance

OPRaaS combines labour supply chain training, supplier auditing and evidence management through its OPRaaS Virtual Compliance Director (OPRaaS VCD) approach. It helps organisations develop a more consistent and auditable view of their contingent workforce and the suppliers involved.

An effective IR35 evidence process should retain the determination and its reasons, the facts considered, any CEST assessment used, the issue and delivery dates, and subsequent reviews. Organisations should also monitor trends in determinations by role or department and investigate unexplained changes.

Wider supplier assurance may include Companies House information and Creditsafe credit-risk intelligence where these form part of the organisation’s agreed checks. Such monitoring complements, but does not replace, individual employment status assessments.

OPRaaS is named as a supplier on the UK Government Commercial Agency (formerly Crown Commercial Service) Audit and Assurance Services Two framework (RM6310), Lot 2: External Audit and Lot 4: Other Independent Assurance, and is registered on the RM6219 Learning and Training Services and RM6237 Low Value Purchase System dynamic purchasing systems. The OPRaaS LSCA platform is available on G-Cloud 15 (RM1557.15), Lot 2b: Software as a Service.

What end-hirers and recruitment agencies should check now

The government’s employment status consultation published on 14 October 2026 concerns employment rights rather than a replacement for the current off-payroll tax rules. Organisations should continue to follow the legislation and HMRC guidance currently in force.

A useful exercise this quarter is to chart the proportion of outside IR35 engagements over several years, identify material movements and examine whether the engagement-level evidence explains them. Check whether roles or working practices changed, whether the SDS included reasons, whether it reached the right parties and whether any disagreements were handled on time.

The central question is not whether an organisation has a high or low proportion of outside IR35 engagements. It is whether each determination can be justified by the relevant facts and evidence.

Compliance is your asset. Evidenced daily.

Sources and further reading

Talk to OPRaaS about your labour supply chain.

For organisations reviewing IR35 determinations, recruitment supply chains or wider contingent workforce assurance, email info@opraas.co.uk or use the contact form alongside this article.

This article is editorial commentary by OPRaaS Limited (On-Pay-Roll-as-a-Service), drawing on published research, legislation and government guidance. It provides general information and does not constitute legal, tax, employment or compliance advice. Obligations vary according to organisation, contractual arrangements and individual engagements. Appropriate professional advice should be obtained before acting on a specific position.

Acronym	Full Term	Definition
CFA 2017	Criminal Finances Act 2017	UK legislation introducing Corporate Criminal Offence (sections 45/46): failure to prevent the facilitation of tax evasion. Requires businesses to implement 'reasonable prevention procedures' (RPP). The only defence is having adequate RPP or showing it was not reasonable to expect such procedures.
MSA 2015	Modern Slavery Act 2015	UK legislation mandating supply chain transparency and worker safeguarding. Section 54 requires commercial organisations with ≥£36m turnover to publish annual modern slavery statements (board-approved, signed by director, published on website with prominent homepage link).
IR35	Off-Payroll Working Rules	Tax legislation determining whether a contractor should be treated as employed or self-employed for tax purposes. Since April 2021, medium and large private sector clients must determine contractor status and deduct employment taxes if inside IR35. Requires Status Determination Statement (SDS).
JSL	Joint & Several Liability	2026 legislation imposing strict liability on agencies and end-hirers for umbrella company tax debts, even where due diligence checks have been undertaken. Makes supply chain participants jointly responsible for unpaid PAYE taxes.
AWR	Agency Workers Regulations 2010	UK regulations giving agency workers the right to the same basic working and employment conditions as permanent employees after 12 weeks in a qualifying assignment (12-week parity rule).
Good Work Plan	Good Work Plan 2020	UK employment law reforms requiring written 'section 1 statement' of employment particulars to be given to employees and workers on or before day 1 of engagement (effective 6 April 2020). Sets out key terms but is not itself the contract.
Construction Act	Housing Grants, Construction and Regeneration Act 1996	UK legislation governing payment practices in construction contracts. Section 113 renders "pay when paid" clauses ineffective (except where upstream payer is insolvent). Requires clear due dates, final dates for payment, and compliant payment/pay less notices.
Pensions Act 2008	Pensions Act 2008	UK legislation establishing workplace pension auto-enrolment requirements. Employers must automatically enrol eligible workers into qualifying pension schemes and make minimum contributions.

Acronym	Full Term	Definition
HMRC	HM Revenue & Customs	UK government department responsible for tax collection, payment of tax credits and benefits, and enforcement of tax law. Operates PAYE, CIS, RTI systems and conducts compliance audits. Business Tax Account provides reconciliation data.
GLAA	Gangmasters and Labour Abuse Authority	UK government body regulating labour providers in certain sectors (agriculture, horticulture, shellfish gathering, food processing/packaging) and investigating worker exploitation. Operates licensing regime and has criminal investigation powers. Hotline: 0800 432 0804 (03000 718234 out of hours).
ICO	Information Commissioner's Office	UK independent authority upholding information rights. Enforces UK GDPR and Data Protection Act 2018. Personal data breaches must be reported to ICO within 72 hours where there's risk to individuals' rights. Provides guidance on lawful bases, DSARs, and data-sharing.
CITB	Construction Industry Training Board	Industry body that collects levy from construction employers (payroll ≥£80k in PAYE in last tax year, or ≥£80k net CIS payments) and provides training grants. CITB levy compliance is audited in construction-focused compliance audits.

Acronym	Full Term	Definition
PAYE	Pay As You Earn	HMRC's system for collecting Income Tax and National Insurance Contributions from employees' wages. Employers deduct tax before paying employees, then remit to HMRC. Operates under Real Time Information (RTI) reporting requirements.
CIS	Construction Industry Scheme	Tax deduction scheme for payments to subcontractors in construction industry. Contractors must verify subcontractors with HMRC before first payment and make deductions (20% for verified, 30% for unverified) on labour element only (excluding VAT and allowable materials). CIS300 returns due by 19th following tax month.
GPS	Gross Payment Status	CIS status allowing subcontractors to be paid without deductions. Must apply to HMRC and meet compliance tests (business test, turnover test, compliance test). Contractors must verify GPS and keep evidence; continue to file CIS300 but make no deduction.
CIS300	CIS Monthly Return	HMRC return submitted by contractors detailing total payments made to each subcontractor and CIS tax deductions applied. Must be filed by the 19th following the tax month (6th–5th). Should reconcile to subcontractor statements and bank payments.
CIS340	CIS340 Guidance	HMRC's official guidance document defining what constitutes 'construction operations' for CIS purposes. Only work qualifying under CIS340 can legitimately be paid through the Construction Industry Scheme. Includes site preparation, construction, alteration, repairs, demolition.
RTI	Real Time Information	HMRC system requiring employers to report PAYE information at or before each pay run. Consists of Full Payment Submission (FPS) for regular pay data and Employer Payment Summary (EPS) for adjustments/recoveries. Must reconcile to payslips and Business Tax Account.
FPS	Full Payment Submission	RTI submission reporting gross taxable pay, Income Tax, and NICs for each employee on each payday. FPS values must match payslips. Should not be used to mask under-deductions.
EPS	Employer Payment Summary	RTI submission used only for adjustments, such as recoveries, statutory payments, employment allowance claims, or apprenticeship levy. Should not be used to mask PAYE under-deductions.
Bacs	Bankers' Automated Clearing Services	UK electronic payment system used for direct debits and credits, including salary payments. Net pay on payslip must match Bacs transfer to worker's bank account. Never use "BACS" (incorrect).
UTR	Unique Taxpayer Reference	10-digit number issued by HMRC to identify individuals and businesses for tax purposes. Required for CIS verification and self-assessment tax returns. Note: UTR alone isn't proof of CIS verification; contractor must verify with HMRC before first payment.
NIC / NICs	National Insurance Contributions	UK social security tax paid by employees (via PAYE), employers (as on-costs), and the self-employed (Class 2/4 via self-assessment). Funds state benefits including state pension, statutory sick pay, and maternity allowance. CIS deductions are payments on account of Income Tax and Class 4 NICs.
NMW	National Minimum Wage	Legal minimum hourly rate employers must pay workers in the UK. Rates vary by age band. Post-deduction pay (after deductions for employer's own use/benefit) must not fall below NMW. Records must be kept for 6 years.
NLW	National Living Wage	Higher rate of National Minimum Wage for workers aged 21 and over. Often referred to together as "NMW/NLW". Different from voluntary Real Living Wage calculated by Living Wage Foundation.
AE	Auto-Enrolment (Pensions)	Workplace pension scheme where employers must automatically enrol eligible workers (aged 22+ to state pension age, earning ≥£10k annually) into a qualifying pension. Minimum contributions, opt-out rights, and re-enrolment (every 3 years) required.
P45	P45 (Leaving Employment)	HMRC form given to employees when they leave employment, showing pay and tax details for the year to date. New employer uses P45 to operate correct tax code. Emergency codes (e.g., 1257L W1/M1) apply without P45/P6.

Acronym	Full Term	Definition
DRC	Domestic Reverse Charge (VAT)	VAT mechanism for construction services where the customer accounts for VAT instead of the supplier. Applies to most construction services under CIS340. Designed to combat missing trader fraud in construction supply chains.
Kittel	Kittel Principle	EU/UK legal principle that a taxpayer who knew or should have known their transaction was connected to VAT fraud may be denied the right to deduct input VAT. Creates due diligence obligations for supply chain participants.
DR	Disguised Remuneration	Tax avoidance arrangements designed to pay individuals while avoiding income tax and NICs, often involving loans, offshore entities, or trusts. HMRC actively targets such schemes. Loan charge applies to outstanding loans.

Acronym	Full Term	Definition
SDC	Supervision, Direction or Control	Key factor in determining employment status under agency rules (ITEPA 2003 s44). If a worker is under supervision, direction or control by any person (client, agency, end-hirer) over how they work, PAYE must be operated. SDC alone is not the general CIS status test—apply usual status tests (control, substitution, mutuality).
MOO	Mutuality of Obligation	Employment status indicator examining whether the employer is obliged to provide work and the worker is obliged to accept it. Absence of MOO suggests self-employment; presence suggests employment.
SDS	Status Determination Statement	Document required under IR35 reforms (April 2021) where medium/large clients must provide written reasons for their determination of a contractor's employment status for tax purposes. Must be given before contract starts or worker begins work.
CEST	Check Employment Status for Tax	HMRC's online tool for determining whether a worker should be classified as employed or self-employed for tax purposes. Results are binding on HMRC if information provided is accurate and not relating to highly complex arrangements.
PSC	Personal Service Company	Limited company through which a contractor provides their services. Often used by contractors working outside IR35, but subject to IR35 rules if the underlying relationship is one of employment. Requires SDS from medium/large clients.
KID	Key Information Document	Plain-English factsheet (not a contract) that agencies must give to workers before they agree to an assignment (Conduct of Employment Agencies and Employment Businesses Regulations 2003). Includes worked pay illustration, deductions, who pays the worker, benefits. Must be updated within 5 working days of any change.
ITEPA 2003	Income Tax (Earnings and Pensions) Act 2003	UK tax legislation governing employment income. Section 44 contains agency rules requiring PAYE where worker is under SDC. Section 61N–61R cover off-payroll working (IR35) for public sector and (from 2021) medium/large private sector.
DBS	Disclosure and Barring Service	UK government service providing criminal record checks for employment purposes (particularly roles working with children or vulnerable adults). Processing DBS data requires DPA 2018 Schedule 1 condition and appropriate policy document.