Gov.uk still struggling with IT contractor tax rules

UK government departments are still struggling to implement the tax laws governing IT contractors years after the controversial rules were introduced.

IR35 has become hated by freelance tech workers who feel it removes the tax benefits of contracting, without offering the employee benefits of in-house roles in its stead.

The latest accounts from the Foreign, Commonwealth and Development Office (FCDO) show that the UK tax collector is reviewing its implementation of IR35 for a second year after the department decided to place hundreds of workers inside the reach of the rules.

In its 2024 -25 annual report, the FCDO said a total of 243 were found to be in scope of IR35 following “a full review of all IR35 off-payroll status determinations.” “This resulted in a high number of engagements that had previously been assessed as out-of-scope being reassessed as in-scope.

A voluntary disclosure advising His Majesty’s Revenue & Customs (HMRC) of these changes in assessment has now been made, and the FCDO have accrued an estimate of the potential backdated tax owed within our 2024-25 accounts,” the report said.

However, the most recent set of figures for 2025 -26 said workers determined as in-scope of IR35 has now leapt to 441.

The continuing review “resulted in a significant reduction of out-of-scope engagements in the Department.” It said HMRC was also continuing to review its interpretation of the rules.

Dave Chaplin, CEO of tax advisory company 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.” Chaplin said Freedom of Information requests had revealed the FCDO’s process used HMRC’s Status Tool (CEST), which organizations have had problems implementing.

Use of the tool has dropped around 70 percent in two years, research revealed.

“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,” Chaplin said.

Government departments have long struggled to implement IR35.