Multiple public bodies have received IR35 tax bills totalling at least £525m, and most of them used HMRC's Check Employment Status for Tax (CEST) tool. The Ministry of Justice and the Home Office were also penalised £19m between them for carelessness, Natural Resources Wales received a £2.9m penalty, and the Cabinet Office faces a further penalty of up to £8.9m.
These are large organisations with access to HMRC guidance and have relied on HMRC's own status tool. A tool provided by HMRC is a natural starting point for many businesses. HMRC's guidance claims it will stand by CEST results as long as the information given remains accurate and is in accordance with its guidance. But how do these CEST claims play out in practice?
What is CEST?
CEST is HMRC's free online questionnaire. You answer questions about how a contractor works, and it tells you whether it thinks the off-payroll rules (IR35) apply.
CEST's questions and decision logic have not changed since November 2019. Since then, around 30 IR35 tribunal hearings and other status decisions have been handed down. These include Atholl House in the Court of Appeal (April 2022) and Professional Game Match Officials (PGMOL) in the Supreme Court (September 2024), where HMRC's submissions on control and mutuality of obligation failed.
Despite these clarifications, HMRC has not updated CEST or changed its decision logic, so CEST still relies on HMRC's historic position rather than the principles set out by the Supreme Court.
A CEST result is not a Status Determination Statement
If your business engages contractors who work through their own companies, the law says you should give each of them a Status Determination Statement (SDS) setting out your decision and the reasons for it. You also need to take reasonable care when reaching the conclusion in an SDS; otherwise, the purported SDS isn't one.
CEST provides a result and a record of the answers given. It does not set out the full reasoning behind the result, so a business using CEST would still need to record its reasons for each decision separately and create an SDS.
Public bodies with IR35 tax bills
Multiple public bodies have disclosed off-payroll IR35 tax bills totalling at least £525m in their annual accounts. In each case HMRC concluded that contractors' IR35 status was misclassified and they should have been inside IR35. Most used CEST and HMRC guidance to reach their status decisions, which turned out to be wrong, and which incurred additional penalties.
HMRC has found the Ministry of Justice, the Home Office and the Cabinet Office careless and has given them penalties of up to 30% on top of the tax bill owed.
|
Public body |
Tax bill |
Penalty for carelessness |
|---|---|---|
|
Ministry of Justice |
£72.1m, including £4.5m interest |
Yes - £15m, suspended subject to conditions |
|
Cabinet Office |
£38.5m, including interest |
Yes - Found careless in October 2025; penalty of up to £8.9m |
|
Home Office |
£29.5m plus interest |
Yes - £4m, suspended subject to conditions |
|
Defra |
£86.5m (final, up from a £48m provisional estimate) |
Expected |
|
Defra |
£26.3m - further amount listed in the 2025-26 accounts |
Not disclosed |
|
Post Office |
£99m, settled by the Department for Business and Trade by 31 March 2026 |
Not disclosed |
|
Natural Resources Wales |
£14.6m, settled October 2025 (after a £19.1m payment on account) |
Yes - £2.9m, suspended subject to conditions |
|
FCDO Services |
£14.8m (provision, not yet agreed with HMRC) |
Not disclosed |
|
Foreign, Commonwealth & Development Office |
Accrued but not disclosed; HMRC review ongoing (not counted in the total) |
Not disclosed |
|
Nuclear Decommissioning Authority |
£9.8m, disclosed to HMRC from June 2024; not yet settled |
None provided for |
|
UK Research and Innovation |
£36m (estimated) |
Not disclosed |
|
HS2 Ltd |
£6.2m (final, after a £9.5m provision) |
Not disclosed |
|
NHS Digital |
£4.3m |
Not disclosed |
|
Department for Work and Pensions |
£87.9m (tax, NICs and interest), plus £6.9m for arm's-length bodies |
None |
|
HM Courts and Tribunals Service |
£12.5m (included in the Ministry of Justice figure, so not counted in the total) |
None |
|
Total |
£525.5m |
How CEST reaches its Outside IR35 results
HMRC's position is that you can rely on a CEST result where the answers are accurate and align with its guidance. However, some questions, such as whether the worker can send a substitute, require judgement, and an HMRC officer may view the answers differently during an enquiry.
For example, ticking yes to the right of substitution produces an outside IR35 result, regardless of the other answers, which runs contrary to the spectrum-based approach laid down by the Supreme Court in Pimlico Plumbers. At the MoJ, HMRC asked that every determination be revisited where managers said a substitute could be sent.
Control is treated in a similar way. If the answers indicate the client has no right of control over the worker, CEST returns an outside IR35 result at that point and ignores all of the other answers. In PGMOL, the Supreme Court indicated that the first test for control (whether there is a sufficient framework) is a low bar, which can be met due to incidental or collateral matters. It will be unusual for an engagement to involve no control at all. The court treated the control precondition as a starting point, then decided status by considering all the facts of the engagement together with the nature and degree of control. CEST instead takes a basic view of control at the precondition stage, and can give users a false sense of security that a determination is outside IR35.
In addition to the above issues, HMRC's figures show about 20% of CEST results are "unable to determine", rising to around 24% to 25% for sole trader engagements. In those cases, the business still has to reach a decision and will need an alternative.
HMRC data released under Freedom of Information requests shows CEST determinations fell from 806,432 in 2021-22 to 227,382 in 2024-25, a 72% drop, with a further 43% fall in 2025-26.
What getting it wrong could cost
If HMRC decides you reached the wrong conclusion without taking reasonable care (e.g. your business was careless), you could face the unpaid income tax and National Insurance, plus interest and penalties of up to 30% of the tax, going back several years.
Since April 2024, HMRC can offset some of the tax the contractor's company has already paid, which could reduce the net tax owed to around 10% of the contract value.
However, crucially, the penalties apply to the pre-net amount, likely around 50% of the contract value, meaning the penalty itself is larger than the final tax owed, more than doubling the overall exposure.
Therefore, it is important to ensure that processes, including any tools and services used, meet the criteria for exercising reasonable care.
The test for reasonable care comes from Collis v HMRC [2011] UKFTT 588 (TC): what would a prudent and reasonable taxpayer, in their position and exercising reasonable diligence, have done? Reliance on others is covered by Hanson v HMRC [2012] UKFTT 314 (TC). Reliance is reasonable where the source is evidently competent, was given full and accurate facts, and the taxpayer engaged with the output as far as their own knowledge allowed.
So, if you engage professional advisors with demonstrable expertise and follow their advice to implement a reasonably diligent process, you will be exercising reasonable care.
Questions for senior management
- Does each contractor and party below in the supply chain receive a statement that satisfies the statutory criteria to be an actual Status Determination Statement?
- Is each decision based on the contract and the working practices, assessed against case law, with documented reasons?
- Is there a record of how each decision was reached?
- Are you using a CEST tool that gives you Outside IR35 determinations, based on single-factor decisions about substitution or control?
- Are you being advised by competent professionals who have proven experience in IR35 matters, including HMRC enquiries and tax tribunals?
If you'd like to see how IR35 Shield helps clients implement robust IR35 assessments and processes that pass HMRC compliance checks, book a free consultation with IR35 Shield.
