Personal Service Companies: Tightening the Regulations

Many individuals supply their services through the medium of a ‘personal service company’ (‘PSC’). The benefit to the individual is that he or she can pay himself or herself a salary and dividends from the company avoiding or minimising national insurance contributions and taking advantage of the lower corporation tax rates.

There is nothing wrong with this in principle if the individual is offering their services to a number of different organisations. However, where there is only one end user the arrangement may be deemed a sham as the individual is, in reality, an employee of the end user and not an independent contractor.

Her Majesty’s Revenue & Customs introduced guidance, known as IR35, the effect of which, where it applies, is to require the company to which the service is supplied to treat the individual as if it directly employed him or her and to deduct tax and national insurance before paying the PSC.

At present, IR35 applies to individuals who supply their services through their PSC to public sector bodies and agencies, the BBC being the most high profile example. Where IR35 bites, the effect is to negate the tax benefits of the PSC arrangement.

The Chancellor announced in his October 2018 Budget Statement an intention to extend the rules to the private sector from April 2020.

The rules will apply where the PSC offers services to ‘medium’ and ‘large’ organisations but these terms were not defined. Hopefully, a lot of small organisations will, therefore, be exempt, minimising administrative burdens but the devil will be in the detail so if you operate through a PSC you should review your arrangements to see if you are likely to be caught by the new rules.

If you require more information regarding PSC’s or in relation to commercial property generally please contact the Property & Commercial Team at PowellsLaw.

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