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Is this the end of Personal Service Companies?
31 July 15 | By: Jas Jhooty
The Government recently issued a consultation document outlining their plans to level the playing field between employees and workers providing their services through their own Personal Service Companies (PSC).
Advantages of incorporation
There are obvious tax and NIC advantages for a worker to be paid via their own PSC. Instead of drawings being taken as salary (and therefore be liable to PAYE), directors of Personal Service Companies who are also major shareholders, can withdraw money from the company as dividends. The major advantage here is that dividend income does not suffer any NIC as it is classified as investment income. This veil of incorporation has also served well to protect engagers from any threat by HMRC.
Previous Governments have tried to tackle this problem. In 2000, intermediaries legislation (commonly known as IR35) was introduced. This applied the same rules to determine employment status to individuals working through their own PSC as they would of if they were self-employed. If it was deemed that the engagement was leaning toward an employed status that worker would have to subject the majority of their income from that contract through PAYE.
Unfortunately this legislation has been heavily criticised and little used. HMRC have also not had the resource to adequately police it. Out of the approximate 265,000 PSCs currently in existence who would probably fall foul of IR35, only 450 can be investigated by HMRC in any given year. This has resulted in a loss to the exchequer of around £½ billion annually.
The Government’s favoured option appears to be to make engagers take on more of a role in ensuring that the right amount of employment taxes are paid. The objective would be to ensure that where a worker would have been an employee if engaged directly, then tax consequences would follow.
Under such an arrangement, those who engage a worker through a PSC would need to consider whether or not IR35 applies (in the same way as they would need to consider whether a worker should be self-employed or actually be an employee), and, if so, deduct the correct amounts of income tax and NICs as they would for direct employees.
The Government have admitted that such a course of action will add to the already considerable burden of being an employer, however such a course of action will solve the IR35 issue once and for all.
The death of Personal Service Companies?
If this consultation ends up becoming law, (they invariably do!) then there would remain little point in individuals setting up their own PSC as there would remain no tax advantage in doing so. Such a measure will also considerably boost the Chancellor’s coffers and will at last level the playing field between employees and workers engaged through their own PSC.
How emTax can help
We recommend that employers start examining the actual terms and conditions of their engagements with workers supplied through their own PSC. Unfortunately what is written into the contract for services is not as important as what happens in practice when it comes to determining a worker’s employment status. In the very near future the PSC’s veil of incorporation will not protect engagers from HMRC scrutiny.
Our employment tax consultants have devised a two stage process that will aid employers immensely in this matter. This comprises of: -
- A review of written self-employed and direct hire PSC contracts – It is essential to ensure that contracts are robust so that they clarify the basis of the engagement.
- A standard ‘Due Diligence’ approach for use when taking on suppliers – We would recommend a standard checklist is introduced as evidence that the company does undertake a thorough ‘due diligence’ approach before contracting with a new supplier.
Having an auditable process to decide whether or not someone should be on the payroll will safeguard employers when HMRC Employer Compliance Officers next visit.
Please do not hesitate to contact us for help on this or any other employment tax matter.