Found across all industries, a Personal Service Company (PSC) is a company which provides personal services of a single contractor to end clients either directly or through an agency.
Typically, the personal service company will be a limited company that has a sole director – the contractor – who owns most or all of the shares. While there is no actual definition of what a Personal Service Company is, the term was devised by HMRC with the introduction of IR35 off-payroll legislation in April 2000. 1
HMRC began using the term to describe businesses they considered to be tax evaders and the subject of tax investigations.
Personal Service Companies are used by contractors, freelancers and consultants for many reasons.
These contractors work in a very similar way to traditional employees but rather than being a member of staff who pays employment taxes, they bill for their services through a limited company and gain advantage by paying corporate tax.
Working through a personal service company can be a tax efficient way for contractors to work. Contractors usually split their income between salary and dividends which can result in paying less income tax and National Insurance.
In some cases, clients and umbrella/recruitment agencies refuse to hire the self-employed who operate as sole traders.
This is due to the Income Tax (Earnings and Pensions) Act 2003 which would require the recruitment agency to treat the sole trader contractor as an employee and provide them with the employment rights that come with being an employee, as well as deducting their income tax and National Insurance Contributions.
This leaves opening a limited company as the only viable solution for contractors to follow. With the increasing flexibility in the workplace, using PSCs has become a popular option for employers.
To have a Personal Service Company, you need to set up a limited company, which can be done relatively quickly at GOV.UK.
There will be other options to consider such as setting up as a sole trader, a business partnership, a social enterprise, an overseas company or an unincorporated association.
If setting up a limited company is the best option for you, you will need to choose a name, verify directors, decide on shareholders and guarantors and prepare documents agreeing how to run your company. You can find the steps for setting up a personal service company here.
As well as the tax implications, many contractors use their own limited company because clients require it. Many end clients see hiring a limited company as less responsibility than hiring an employee. Hiring an employee, even on a fixed-term contract, is an extra expense, extra admin and a HR burden for clients.
If instead they hire a contractor through a personal services company, they don’t have the expense of sick pay, holiday pay, pension contributions and more.
IR35 was created to tackle the small percentage of contractors who the government believed to be taking advantage of the system and not paying the right amount of tax. As a consequence, the freelancer and contractor industry as a whole has been impacted.
The changes to IR35 directly impact limited companies and the way contractors work. The amendments to the private sector, set to go ahead from April 6th, will make end clients responsible for determining whether a contractor falls inside or outside of IR35.
If you are a contractor who is in some way being treated like an employee or have the responsibilities of an employee, the end client is likely to deem you as being inside IR35. For any contractors falling inside of IR35, the most common solution will be for the contractor to start working as a PAYE employee or alternatively, to consider working through a third party, such as an umbrella company.
If a contractor works through an umbrella company, they will become an employee of the umbrella company. The umbrella company will take care of national insurance contributions and income tax while the contractor is free to work on multiple shorter-term contracts or a long-term contract.
You can find out how an Umbrella company works in our Knowledge Centre.
As a sole trader, you are personally responsible for your business. You can take on staff however the business is owned and controlled by you only. As the business is owned by just one person, you are personally responsible for any losses or debts that the business incurs. This means that you would have to use your own money to pay any debts.
On the positive side of the scale, the main advantage of being a sole trader is that you can keep all of your business’ profits.
In comparison, by opting for a limited company, you are choosing to set up a private organisation to run your business which can have other shareholders. This means the business is separate to your personal assets. Directors of limited companies can pay themselves in a combination of salary and dividends. If you need to leave your company and start a fresh, this is easier to do with a limited company.
What’s considered to be one of the biggest benefits of having a personal service company, is the tax-efficient way of working which in the end means a bigger take home pay of salary and dividends.
When it comes to claiming business expenses, PSC directors can claim tax relief on a wider range of expenses, so long as they can prove that the cost is wholly for business purposes.
As well as tax, having your own registered company name often sounds more professional to prospective clients.
Whatever your position, you should act now to assess your exposure and consider any action where necessary. If you are subject of a tax enquiry it may cost you a lot of money, which is why it pays to take out a Tax Enquiry & Legal Expenses insurance policy. That way, you’ll have peace of mind knowing that any legal fees would be covered in the event of an investigation and tribunal.
Caunce O’Hara’s Tax Enquiry & Legal Expenses Insurance provides you with £100,000 of cover (in any one claim) for legal representation costs in the event of an investigation brought against you.
Call our award-winning Schemes Team today on 0333 321 1403 to find out more about Tax Enquiry & Legal Expenses cover.
Caunce O’Hara & Co Ltd have been awarded the Feefo Gold customer service award in 2018 and 2019. In 2020 the company was awarded Feefo’s highest accolade, the Platinum customer service award.
The company was the winner of the General Broker of the Year award in 2009 and 2010 at the Manchester Insurance Awards.
Caunce O’Hara won the Most Effective Use of E-business in 2007 at the UK Broker Awards.