Gov.uk still struggling with IT contractor tax rules

UK government departments are grappling with the implementation of tax laws for IT contractors, even years after the contentious IR35 rules were introduced. The Foreign, Commonwealth and Development Office (FCDO) is currently reviewing its IR35 implementation for the second year in a row. Following a comprehensive review, 243 workers were found to be within the scope of IR35.

This led to a significant increase in the number of engagements reassessed as in-scope, from 243 in the previous year to 441 in the latest figures for 2025-26. The FCDO has acknowledged a potential backdated tax liability and has voluntarily disclosed their findings to HMRC. Dave Chaplin, CEO of tax advisory company IR35 Shield, expressed frustration with the FCDO's IR35 issues, noting that the number of contractors considered outside IR35 has plummeted from half a year ago to just 12.

He also highlighted that the FCDO's use of HMRC's Status Tool (CEST) has diminished by around 70 percent, causing implementation problems. The government has struggled to properly apply IR35, incurring significant tax shortfalls for individuals incorrectly classified as self-employed. Central government is expected to pay £263 million in 2020-21 due to improper administration of IR35 rules, according to a report from Parliament's spending watchdog.