The government has taken steps to bring the private sector under the IR35 rules. The proposal is now in the consulting department and if it gets implemented, the businesses that are engaging the individuals to offer their services through, the company would
be responsible in deciding on whether the IR35 rule applies or not. Right now, as per the current law, the private sector business that hires an
individual through a UK intermediary does not have to pay any pay-as-you-earn (PAYE) or National Insurance Contribution (NIC) liabilities if there is a contract signed between the parties.
Introduction to IR35
The individuals will always look to offer their services via a personal services company. This way the individual will save tax by paying just the dividends and not salary. This is what prompted Her Majesty's Revenue and Customs (HMRC) to introduce the IR35
rules. The IR35 rule comes into force when an individual offers personally provided services through an intermediary and:
- Does not have any concerns for the intermediary and that the individual would be an officeholder or employee of the client.
- The services that the company offers through their intermediate employee are in the office or if the individual is an officeholder.
If the IR35 rules apply, then the business will be responsible for the pay-as-you-earn (PAYE) tax and national insurance contributions (NICs) of the individual’s fees.
What will happen when Private Sector IR35 rules are brought into force?
If the IR35 rules are brought into effect in the private sector, then both the public and the private sectors will be on a level playing field. There will be significant implications in the private sector and the companies need to make more investments on
time and the cost. The public-sector companies can be taken as a guideline to learn how to make use of
Umbrella Company IR35 correctly.
The issues that were faced by the public-sector companies are:
- Finding out the employment status of an individual is a very tough task. This is why the HMRC brought out an employment status service online tool to help the public-sector clients to know if the IR35 applies or not. These rules are put to good use by the
public authority clients. They seek answers to a number of questions on the relationship between the public-sector clients, the intermediary, and the individual. The right of substitution is what the main focus is on and this implies that the IR35 applies.
- The public authority clients have taken a very cautious approach about the IR35 and have been trying hard to find out if the IR35 rules will imply in all cases. This has resulted in friction between the fee payers and the individuals. The individuals had
also taken a stand of not offering their services to the public sector until their rates have been increased.
- The fee payers have also created problems and wanted a renegotiation of their contracts and their rates so that they can easily deal with the employer NIC costs that they need to bear.
- The fee payers had a tough time to make certain that the PAYE and NICs intermediary fees can be handled by the system. They also needed to be certain that the intermediary is given the correct amount along with the right VAT.
Preparation needed by the private sector
The private sector that involves individual labor through intermediary should be making certain preparations in order to ease the new IR35 rules into their system.
- They must set ready a process that will help their staff to find out whether IR35 rules apply.
- The private sector must be prepared to respond to the consultation so that their views also get a fair hearing.
- The payroll and the other office systems must be made ready to cope with the inclusion of the IR35 rules.
There needs to be a thought given to the changes that must be included in the contracts with the intermediary