What is IR35, and How Will the New Changes Affect You?

While IR35 is not a new piece of legislation, the UK government recently announced important reforms that change how many of us will interact with it.

Considering we at KDC have built our business around connecting experts with companies, we feel it is important to highlight the changes to this legislation, as it may significantly impact the way business is carried out.

What is IR35?

IR35 was first introduced back in 1999 as part of the Chancellor of the Exchequer’s budget statement and was designed to counter perceived tax avoidance by small businesses.

The regulation has undergone some reforms over the years. It now typically refers to PSC staff working as temporary labour (or off-payroll): effectively contractors who supply services to companies but are not recognised as employees.

This led to something of a grey area in which a PSC could function as pseudo-employees (work in the office, use equipment, etc.) but pay their tax differently to pay-rolled workers. Recent changes were designed to combat this issue.

What has changed with IR35?

IR35 tackles an issue known as deemed employment, usually through a third-party, which means the employers avoid paying NICs and do not need to offer rights or benefits. This led to something known as the Monday to Friday phenomenon: contract staff would work Monday to Friday and return the following week to perform the same role while not technically being employed there.

Until now, for the private sector, off-payroll workers have their employment status determined by the intermediary or the contractor themselves. The contractor’s employment status is determined for each contract separately.

After 6th April 2021, this is due to change. From this date the responsibility will shift to the main organisation (or end-user) to determine whether contractors should be taxed in the same way as pay-rolled employees.

Here is an example. You are an engineer providing consultancy services on a long-term contract with a private client. The client sourced you through a third-party company designed for this specific purpose. You work 40 hours a week, Monday to Friday, at the same desk using company equipment.

For all intents and purposes, you function as a permanent employee of the private company. They have provided you with a desk, a computer, and other tools to do your job for them. You contribute knowledge and services to the company’s project, and they pay you for this.

Under current legislation, you could be engaged as a contractor, take your pay in bulk, and avoid NICs. However, moving forwards, the employer would have to declare you as a contracted worker, and you would make PAYE contributions instead.

The announcement has already caused waves in some large organisations, where the tax liability risk is high. For example, Zurich Insurance has issued a blanket ban on all contractors to avoid any possible tax issues.

The government’s is being pragmatic and recognising this is a significant change, promising to waive fines in the first financial year where genuine errors are made. It clearly shows that it is a complex issue, and it will take time for companies to adjust to these new regulations, but after April 2022, the government will likely issue fines robustly to ensure compliance.


This legislation affects everyone in the private sector, whether large ‘end-user’ organisations, supply chain companies or individual PSCs. The new rules are looming and KDC is collaborating very closely with all parties to ensure a smooth transition to the brave new world. There will be compromise, and only through understanding the impact on all stakeholders and some give and take across the delivery chain will a successful outcome be achieved.

We will discuss journey and how we have supported the employer and contractor community in future blogs.

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