The number of contractors deemed subject to IR35 tax rules at the UK's Foreign, Commonwealth and Development Office has jumped from 243 to 441 in a single year, according to the department's 2025-26 annual accounts. The figures reveal ongoing challenges for British government agencies trying to enforce the controversial tax legislation, which has faced criticism from freelance tech workers who say it strips away the tax advantages of contracting without providing the workplace protections of permanent employment. Years after the regulations took effect, departments across Whitehall continue to struggle with proper implementation.
The Foreign Office's latest annual report shows 441 workers are now classified as within IR35's scope, up from 243 the previous year following what the department called "a full review of all IR35 off-payroll status determinations." That earlier review had already reclassified a substantial number of contractors who'd previously been assessed as outside the rules' reach. The department filed a voluntary disclosure with His Majesty's Revenue & Customs regarding these assessment changes and set aside an estimated amount for potential backdated tax obligations in its 2024-25 accounts. The continuing HMRC review "resulted in a significant reduction of out-of-scope engagements in the Department," the report noted, with the tax authority still examining how the regulations should be interpreted.
Dave Chaplin, chief executive of tax advisory firm IR35 Shield, said the Foreign Office's difficulties are "becoming increasingly difficult to explain away," noting that roughly half its contractors were considered outside IR35 a year ago while "now that figure has collapsed to just 12." Freedom of Information requests revealed the FCDO relies on HMRC's Check Employment Status for Tax (CEST) tool, which organizations have found problematic to use—research shows adoption of the tool has dropped around 70 percent over two years. Chaplin added that businesses face potentially significant tax bills when they misapply IR35, and "the Government should expect no lower standard from its own departments."
The IR35 reforms originated in 1999 but underwent major changes in April 2021, when medium and large UK businesses became responsible for determining the tax status of their contractors and freelancers—a duty previously handled by contractors themselves. The regulations target what authorities call disguised employment, where workers function as employees but dodge regular income tax and national insurance contributions by invoicing through personal service companies taxed at lower corporate rates. The measures first applied to the public sector in 2017, with the British government projecting it would recover £440 million by bringing 20,000 contractors into compliance. HMRC estimated at the time that only one in 10 private-sector contractors who should have been paying tax under existing rules were doing so correctly, and forecast the reforms would generate £1.2 billion annually by 2023. An official impact report published in early 2025 found the reforms actually produced £4.2 billion in additional tax revenue, far exceeding projections.
Government departments have consistently struggled to apply IR35 correctly, according to Parliament's spending watchdog. A 2022 Public Accounts Committee report found that central government's difficulties meeting the rules stem from poor implementation by HMRC and other government bodies, with departments and agencies owing or expecting to owe HMRC £263 million in 2020-21 due to incorrect administration of the regulations. Earlier in 2026, the UK's competition regulator conditionally approved an extra £104.4 million in government funding to the Post Office—a publicly owned company—to settle an IR35 tax liability. The pattern suggests compliance challenges will persist across the public sector until departments develop more reliable assessment processes and HMRC provides clearer guidance on how to interpret the complex rules. For organizations weighing centralized tax compliance against contractor flexibility, the hidden costs of getting classification wrong may ultimately outweigh any administrative savings from simplified workforce models.