5 steps before your client ‘does a Foreign Office’ and puts 90% of contractors inside IR35

Limited company contractors who want to be prepared in the event that their public sector client pulls a ‘Foreign, Commonwealth & Development Office’ (FCDO) and places 90% of its contractors inside IR35 under Chapter 10 ITEPA can take five steps now, writes off-payroll working rules expert Charlie Hemsworth, director of status specialists Bauer & Cottrell.

1. Don’t accept your SDS at face value: conduct Status Determination Statement ‘due diligence’ and potentially push back.
2. Check Employment Status for Tax is no substitute for getting the facts right: the FCDO used HMRC’s IR35 tool, but CEST usage isn’t a “reasonable care” guarantor.
3. Keep your own evidence: having three key components to hand is vital when you hear ‘inside IR35’ could be incoming.
4. Understand where the HMRC liability sits and beware of indemnities in your contracts: Fee-payers may look to deflect any HMRC liability if you signed a clause claiming they can.
5. Challenge ‘inside IR35’ if you don’t agree: the client-led status disagreement process is your legal right, but if umbrella is decided upon as mandatory, request the basis for that decision.

Those five steps, which I’ll expand on later, matter for public sector contractors because of what’s just happened at the Foreign, Commonwealth & Development Office, or ‘Foreign Office’ for short.

The FCDO’s latest accounts show almost 90% of its contractors are now inside IR35, following a fairly even inside-outside IR35 split previously. How the FCDO got here is, unfortunately for the public purse, another IR35 tale that adds to the upwards of £400m transferring out of government departments and into HMRC because those departments got IR35 wrong.

How much has the Foreign Office set aside for its IR35 bill?

A reported £14.8million has now been set aside by the FCDO to pay HMRC, with the widely acknowledged caveat that even this almost £15m probably won’t be enough to cover the Foreign Office’s total cost of non-compliance with the off-payroll working rules.

Officially, the central government department says the “associated liability is still in progress.” (Foreign, Commonwealth & Development Office Annual Report & Accounts 2025/26, p124)

What happened with IR35 at the Foreign Office

In its 2024-25 Annual Report & Accounts, the FCDO admitted a “high number” of engagements previously assessed as outside IR35 should have been inside IR35. The department made a voluntary disclosure to HMRC as a result. It set aside an estimate for the backdated tax and accepted that HMRC penalties might follow. The final figure, it said at the time, would be reported the following year.

The Foreign Office’s 2025-26 Annual Report & Accounts do not contain that figure. Published on July 16th 2026, the accounts state that HMRC’s review is still ongoing and the liability for IR35 misclassifications has been pushed back another year.

The accounts do show the scale of the correction, however. In 2024-25, the FCDO determined 241 engagements inside IR35 and 211 outside; in 2025-26 it was 438 inside and 62 outside. Therefore, inside IR35 contractors have risen from around half to nearly 90%.

There’s still very little detail on how the historic IR35 errors arose. What’s known is that the FCDO made its IR35 status determinations using HMRC’s CEST tool and issued Status Determination Statements (SDSs) through Crown Commercial’s Public Sector Resourcing framework, meaning the FCDO itself wasn’t the ‘fee-payer.’

FCDO is the latest in a long line of public sector IR35 wrongdoers

Alongside the Post Office, Natural Resources Wales, DWP, DEFRA, the Home Office, the Ministry of Justice, HS2 and UKRI, the Foreign Office has fouled up on IR35, with the result, collectively, of enriching HMRC by hundreds of millions.

In fact, upwards of £400m has now gone to HMRC due to taxpayer bodies getting IR35 wrong since the off-payroll working rules were introduced in the public sector on April 6th 2017.

Cue this week Andrew Griffith MP — who is behind the Tories’ pledge to outright replace IR35 — saying in relation to the Foreign Office off-payroll rules foul-up that “IR35 has failed.”

Griffith added in a post on the FCDO’s IR35 debacle: “Labour are happy for businesses to be wrapped up in endless red tape — but don’t follow the rules themselves.”

What do public sector IR35 mistake-makers have in common?

What at least seven government bodies and departments that failed on IR35 compliance have in common is that they’re all heavily process-driven organisations.

Most of them also used HMRC’s tool, CEST. Yet they all still failed to make accurate IR35 determinations and correctly apply the OPW rules.

Are almost 90% of FCDO contractors really inside IR35?

We find it hard to believe that 438 of 500 contractor roles (88%) are genuinely inside IR35, as the FCDO accounts state. Our conclusion is based on the countless IR35 status reviews we’ve conducted in both the private and public sector since we opened our doors in 2006.

The more plausible explanation is that the FCDO has retreated to the risk-averse end of the scale.

Chapter 10 requires “reasonable care” to be taken in reaching an IR35 status determination.

But blanket or over-cautious inside IR35 determinations don’t meet that bar.

The suspicion about Foreign Office contractors

We suspect many of these Foreign Office contractors have been forced into umbrella companies, a pattern our status advisory has seen elsewhere in the public sector.

Effectively mandatory umbrella company use raises a fairness problem for the contractor: no limited company (i.e. no personal service company) means no assessment, and therefore no meaningful route to challenge.

Five steps for contractors on engagements subject to Chapter 10

Limited company contractors on ‘Chapter 10’ engagements can take five steps now, before their public sector end-client makes a near-90%-inside-IR35 call of their own. If the SDS is ever questioned by HMRC, these are the key steps you’ll be glad you took:

1. Don’t accept your SDS at face value

If your client is in the public sector, or a medium-sized or large company in the private sector, you must be given an SDS with the reasons for the determination before your first payment.

Contractors should ask themselves:

• Do the reasons reflect your contract and how you actually work?
• Do you believe the IR35 status determination has been made with reasonable care?

If anything looks untoward, ensure discrepancies are resolved to prevent questions arising later. The same applies if your working arrangements change mid-engagement from what the SDS confirmed.

2. Check Employment Status for Tax is no substitute for getting the facts right

CEST is easy to get wrong if used in isolation. Its outcome is only as reliable as the information fed into it.

If your client uses CEST:

• Find out who’s answering the questions
• Check they understand your actual working arrangements and contractual terms
• Ensure you have an opportunity to provide input into the process yourself.

Crucially, a client using CEST does not automatically mean “reasonable care” has been taken.

3. Keep your own evidence

Make sure you have three things to hand: your SDS, evidence of your working practices and your written contract. Those three constitute your defence if you’re told mid-contract that your IR35 status is changing.

4. Understand where the liability sits and look out for indemnities in your contracts:

No SDS can be guaranteed as reliable for the duration of your engagement. However, if the determination is wrong, the associated liabilities rest with the engager or fee-payer. Check your contract doesn’t contain an indemnity clause attempting to pass that tax risk to you in the event that the fee-payer becomes HMRC-liable at some point in the future.

5. Challenge ‘inside IR35’ if you don’t agree.

If you receive an inside IR35 SDS, you have a legal right to challenge it through the client’s internal disagreement process. If there’s no SDS and the client is mandating umbrella or payroll status, ask for the basis of that decision. If the client won’t budge, your options are rate negotiation to reflect the added cost, or deciding whether the contract’s still worth it.

How can public sector engagers avoid becoming the next FCDO?

Finally, our best practice IR35 advice to government departments and other public sector engagers who don’t want to become the next FCDO is to make sure you are making robust, evidenced determinations from the start.

The Foreign Office off-payroll blunder is another cautionary IR35 case alongside too many others that shows the costs of getting OPW wrong — a cost that in the department’s case is yet to be finalised. But the cost of IR35 non-compliance is multilayered: backdated tax, penalties, and years of uncertainty. IR35 status determinations should be made individually, on a case-by-case basis, by the correct people using fit-for-purpose processes, and with the reasoning fully evidenced and defensible.