Geoffrey Caesar, Solicitor

A personal service company (PSC) is a term that is often used in the context of tax and employment law in the UK. However, it is not a legal term with a clear definition or a specific status under the law. Instead, it describes a type of company that provides services through an intermediary, usually an individual who owns and controls the company.

Why are PSCs relevant?

PSCs are relevant because they can affect how income tax and national insurance contributions (NICs) are paid by the individual who provides the services and the end-user who receives them. Depending on the nature of the contractual arrangements and the actual working practices, the individual may be treated as an end-user employee for tax purposes, even if they do not legally employ them. This means that they would have to pay income tax and NICs as if they were on the payroll of the end-user rather than as a self-employed person or a company director. This also means that the end-user would have to deduct tax and NICs from the payments made to the individual or their company and pay the employer’s NICs.

The rules that determine whether an individual is an employee or not for tax purposes are IR35 or the intermediaries legislation. IR35 is the number of the press release introducing the new rules on 9th March 1999.

The new rules became law with the Finance Act 2000, designed to prevent the avoidance of tax and NICs by individuals who use PSCs or other intermediaries to disguise their employment status. The IR35 rules apply a hypothetical test to establish whether there is an employment relationship between the individual and the end-user based on factors such as control, substitution, mutuality of obligation, financial risk, and integration. If the IR35 rules apply, the income received by the individual or their company is deemed employment income and taxed accordingly.

How are PSCs regulated?

As mentioned above, PSCs are not a distinct legal category of companies but rather a label applied to companies that provide services through intermediaries. Therefore, PSCs are regulated in the same way as any other limited liability company in the UK. They must register with Companies House, file annual accounts and returns, pay corporation tax on their profits, and comply with other legal obligations such as health and safety, data protection, and consumer rights.

However, PSCs must also comply with specific rules and regulations relating to their tax status and use of intermediaries. These include:

• The IR35 rules determine whether the individual who provides the services is an employee or not for tax purposes and whether tax and NICs must be deducted from their income.
• The off-payroll working rules shift the responsibility for applying the IR35 rules from the individual or their company to the end-user or an agency that pays them if they work for a public sector body or a large or medium-sized private sector organisation.
• The managed service company (MSC) legislation targets companies that provide services through intermediaries controlled and influenced by third parties, such as accountants or umbrella companies. These companies are treated as employers of those who provide the services and must pay tax and NICs accordingly.
• The disguised remuneration rules prevent schemes that seek to avoid or defer tax and NICs by paying individuals in non-cash forms, such as loans, shares, or benefits in kind.

What are the advantages and disadvantages of using PSCs?

Using PSCs can have advantages and disadvantages for the individuals who provide the services and the end-users who receive them. Some of these are:

Advantages:

• For individuals: PSCs can offer more flexibility, autonomy, and control over their work and finances. They can also benefit from lower tax rates on dividends and capital gains and claim more expenses as deductions from their income.
• For end-users: PSCs can offer more access to specialised skills and expertise without incurring the costs and responsibilities of hiring employees. They can also benefit from more contract duration, termination, and variation flexibility.

Disadvantages:

• For individuals: PSCs can entail more administrative burdens, such as accounting, invoicing, and record-keeping. They can also expose them to financial risks, such as late payments, bad debts, and liability claims. They may also need more certainty and complexity regarding their tax status and obligations under IR35 and other rules.
• For end-users: PSCs can entail more compliance costs and risks, such as checking the tax status of individuals, applying IR35 rules correctly, and reporting payments to HMRC. They may also face reputational risks if they are seen as exploiting PSCs to avoid their employment duties or tax liabilities.

If you plan to operate through a PSC, you must contract with your clients using terms and conditions which reflect your status as an independent contractor. I can draw up any contracts you require to ensure you remain truly independent and to help keep you outside IR35 if that is your preferred way of working.