A Personal Service Company (PSC): all you need to know

Jason Piper, a senior manager in tax and business law at the ACCA gave evidence to a Lords enquiry into Personal Service Companies. Here, exclusively for ContractorUK, he explains what a PSC is; where the term PSC is used and why it matters for the future.

What is a PSC, and why does it matter?

PSC is the abbreviation used for Personal Service Company. It crops up a lot in HMRC’s manuals, and wider discussions around flexible service provision. The use of PSCs to avoid tax is one of the prime targets of the IR35 legislation, which seeks to ensure that employment taxes are paid on employment-type relationships. As a concept it’s been central to much of the thinking and conversations around IR35 since 1999. However, remarkably for such an important aspect of the whole field, it’s not a term which has ever been legally defined in the UK, and cannot be found anywhere in the legislation itself.

Where is the term used?

Although there’s no statutory definition of PSC, HMRC use it extensively in their (non-binding) guidance and consultations. Most of the explanations of the abbreviation highlight the legal form (‘limited liability company’) and the ownership structure (owned by one individual, or with close family members or civil partner). However, they all include the word “typically”, which is fine for non-binding guidance or to illustrate a general point but no use at all to a lawyer who is trying to establish definitive liability.

The HMRC Employment Status manual has a section on “Meaning of Specified Employment Intermediary – Personal Service Companies (PSCs).” But even then,  the term PSC is used without being properly defined, and crucially the guidance notes that the PSC might supply one worker, many workers or the services of another PSC. What matters is not the legal forms in use, but the actual activities undertaken.

Does the term PSC have any legal weight?

The shortcomings of the attempts at definition become particularly apparent when we try to match the term up to the actual application of tax law. The IR35 rules, more properly known as the Intermediaries legislation, don’t  just apply to companies; there are provisions which extend it to partnerships and even individuals which stand between the end-users and the individual whose services are supplied. What really matters under IR35 is not the names or legal structures employed, it’s what actually happens, however you facilitate it. HMRC have more than once used “PSC” as a substitute for the term “intermediary” in their consultation documents, despite the fact that in their own terms they acknowledge that they’re addressing more than just companies.

So PSC is a term which isn’t legally defined, and with the legislation framed the way it is at the moment, it wouldn’t matter even if it was, since 1) PSCs could theoretically operate without triggering IR35 and 2) IR35 could be triggered by arrangements not using PSCs. The broad range of possible outcomes is a function of the flexibility of UK company law, which allows the limited company form to be used for businesses of any size or character.

Why does it matter for the future?

We’ve had suggestions for alternatives which might bridge the gap, but the company law authorities are wary of creating additional legal business forms simply to solve something perceived as a tax problem. Legal forms tend to hang around for a very long time (the models we’re used to in the UK mostly date back to the end of the C19th and early C20th), and once they’re embedded into the economy, it’s almost impossible to remove one. Tax rules however are notorious for changing regularly, so the reticence to create an enduring response to what may be a temporary problem is understandable, if frustrating.

A significant proportion of the tax lost through disguised self-employment is attributed to (company) PSC structures. Historically, the emphasis on creating rules which are able to catch such structures (even if they can also capture other common legal setups), has made sense, as the compliance burden has been subject to the filter of HMRC only targeting its compliance efforts on businesses which both carry all the hallmarks of a PSC -- and appear to be engaged in providing services that could mimic employment. It’s part of the nature of an anti-avoidance rule that it needs flexibility to expand to cover whatever new practices emerge in response to the initial clampdown.

However, where the risk of tax failure falls upon a third party, they will have good commercial reason to minimise that risk, either by addressing it or avoiding it. The rules (since April 2017) for public sector engagements fundamentally change the character of the compliance administrative burden, placing a risk on end-users if they fail to apply IR35 when due. That in turn means that there’s a need for clear, effective and unambiguous legislation, based on legally certain concepts. Useful though ‘PSC’ is as shorthand in general discussions, it’s not so helpful in real world compliance processes.