A Guide To Personal Service Companies
As soon as you look at HMRC guidelines for contractors operating their own limited companies, you will start to encounter the term ‘Personal Service Company’, or PSC. What will not be so easy to find, however, will be a definition of exactly what this term – which appears to be central to the determination of tax liability, most particularly to IR35 – means.
Some clues are available. For example, HMRC indicate that a PSC is an example of an intermediary – the sort of business structure, such as a limited company, that a majority of contractors rely on to create the necessary professional image and to manage their finances in the most tax-efficient fashion available.
More detail can be gleaned from looking at the titles of HMRC documents where PSCs are referenced. Almost without exception they refer to IR35 and the majority relate to countering avoidance.
Probably the most relevant guidance – and an important clue as to why the term is significant – is found in the IR35 FAQs. HMRC explicitly avoid defining ‘service companies’ because of their potential variety, stating only that any intermediary that does not meet the definition of a Managed Service Company “may” qualify as a service company under IR35. It appears that there is a desire to leave some open-endedness in the interpretation of a term that is central to HMRC’s strategy for enforcing IR35 compliance.
Notionally, a PSC in its current sense (which has its origins in the Government’s efforts to define and justify the intermediaries legislation) means a company that sells the work of an individual or group of individuals, and which is owned and operated by that individual or group of individuals (thus being distinguished from a Managed Service Company, which is not normally owned or operated by the person(s) whose work is being sold). Contractor limited companies are necessarily of this type. In reality, however, PSCs are objects of suspicion to the Revenue, who view them as the most likely choice of organisational structure for those seeking to avoid tax and National Insurance by disguising what is essentially employment as a client/contractor relationship.
What is the practical upshot of this? Operating within what the Revenue would define as a PSC means that your every contract must be considered as a candidate for IR35 compliance. Any that cannot demonstrate, if investigated, that they do not represent an employment relationship according to HMRC standards will incur tax and National Insurance liability as if the worker had been employed directly, rather than through the intermediary PSC. Overall, the message is that if you believe that your company is one that the taxman would likely label a PSC (most contractor limited companies will be) then it is more than ever a priority that contractors consider their contracts in the light of IR35 and take appropriate advice to ensure that their status as self-employed professionals rather than tax evaders is clear and unarguable.