What is a Personal Service Company (PSC)?
A Personal Service Company (PSC) usually means a limited company, typically with only one shareholding director, through which they as an individual provide services to clients.
The term ‘PSC’ is not defined in law – rather it is an informal term coined by HMRC in response to the IR35 legislation, which I demystified for Free-Work readers last week, writes Charlie Hemsworth, senior tax consultant at status advisory Bauer & Cottrell.
Why should I set up a PSC, a limited company?
If you are thinking of going in to IT contracting, a limited company is a legitimate vehicle in which to do so, and it is very quick and easy to set up.
Moreover, when operated correctly, a PSC allows the advantage of corporate tax benefits. This includes the freedom to pay your own salary and draw profit from the company via dividends, which are subject to lesser tax rates than PAYE.
Another benefit of a personal service company is that the company acts as its own legal entity, and so limits the personal liability the contractor would have if they were working as a sole trader.
When do Personal Service Companies tend to be formed?
In a lot of cases, the incorporation of a limited company will come about as a result of a contractual requirement of a client who is wishing to engage with a contractor.
In the current tax landscape, many organisations will not engage in a contract for services with an individual (including a sole trader), and by engaging on a business-to-business basis, the client will, theoretically and potentially, relieve itself of the responsibility for the worker’s employment status and other associated legal and tax implications.
What do Personal Service Companies need to consider?
If you are thinking to incorporate and contract through your own PSC/limited company, or are being asked to by a prospective client, there is a lot to consider, because you are effectively starting your own new business.
Don’t take this lightly and let it sink in because you’ll require a totally different mindset if you were previously someone else’s employee with a conventional 9-to-5. To reiterate, by setting up a company via Companies House (or a company formation agent) you are making the conscious decision to ‘go it alone’ into business.
As a director of your own company, you will have “fiducial duties” and are responsible for acting in the best interests of your company -- including making good its running costs. You will very likely need a reputable and reliable accountant to look after your business and advise you on your company’s tax affairs, as well as your own tax affairs as an individual.
The IR35 rules, the bugbear of PSCs
One of the most important and complex matters to think about when contracting through a personal service company is IR35 of 2000, and the Off-Payroll Working rules of April 6th 2017 (if your PSC will supply organisations in the public sector), and of April 6th 2021 (if your PSC will supply organisations in the private sector). A bugbear of PSCs, the IR35 /OPW rules need to be considered for each and every contract you undertake.
The Intermediaries legislation, shortened to ‘IR35’ due to the press release number which the-then Inland Revenue issued it on, was introduced in 2000 with the aim of tackling “disguised employment” by individuals working as PSCs.
Disguised employment: explained
In a nutshell, “disguised employment” occurs where individuals receive potentially tax-efficient payments from a client/engager through an “intermediary” such as a PSC, but -- in practice -- have a working relationship with that client similar to that of an employee. In other words, they should really be the engager’s employee, if it wasn’t for their own PSC.
The IR35 rules are enforced so as to ensure such ‘disguised employee’ pay broadly the same amount of tax as an employee would. In HMRC terminology, this means being “inside IR35.” At the other end of the spectrum, if the working relationship via your PSC with a client amounts to genuine self-employment, the contract will be “outside IR35.” The decision of inside/outside IR35 must be made based upon the written terms and also the reality of the working practices between the PSC worker and the PSC’s client.
What is IR35 reform?
Due to the reforms to IR35 in 2017 and 2021, currently and in most cases where PSCs operate, the client will be the party responsible and liable for making the IR35 decision. As a PSC, you will need to ensure you are in receipt of the client’s “Status Determination Statement” outlining the decision as either inside or outside IR35 – and you ideally want the SDS before you start work or sign any contracts.
Be aware, your earnings will be subject to tax and NIC deductions at source by whichever party in your contractual chain is the ‘fee payer,’ if the SDS states you are deemed “inside IR35.”
There are exemptions. The first is for PSCs engaging with “small” companies in the private sector, or companies that are “wholly overseas” (meaning they have no UK connection – neither a UK office nor a UK permanent establishment). In these two cases, the ‘old’ IR35 rules of 2000 apply, under which the contractor / PSC worker themselves is lawfully responsible for deciding their IR35 status and taking “reasonable care” in arriving at the decision.
My final top tip -- go it alone (potentially), but not totally alone!
If you decide to take the plunge into contracting and freelancing in IT (or any other sector), the Personal Service Company is traditionally regarded as the best way to go – it’s the most lucrative; the most professional and the most tax-efficient, but it’s also the most admin and compliance-heavy.
As a minimum, you’ll need to be well-advised and invest in compliance which invariably means having a good accountant. And ideally, you also want an IR35 specialist who can professionally review your contracts and working practices, as ensuring you understand your position and risks in each engagement tends to equate to considerably fewer sleepless nights!
Very finally, though, strongly consider if a PSC really is the best route for you and your individual circumstances. Should a lot of the roles and engagements you fancy be labelled by recruitment agencies or clients as “inside IR35”, the majorly attractive benefits of contracting through a PSC start to dwindle away. In this situation, you may find it less hassle to go down another route, such as using an umbrella company. But again, enlist some professional advice if you’re uncertain, as wading into these HMRC-patrolled waters alone is for the fool-hardy.
Tax Consultant at Bauer and Cottrell
Charlie Hemsworth has been a tax consultant at leading IR35 and employment status specialists Bauer and Cottrell since 2015, and has over 20 years of experience in the contractor industry. She currently advises contractors, engagers and agencies in all things IR35 / Off-Payroll, ranging from IR35 reviews and assessments, to representing clients in HMRC enquiries.