What is a personal service company?

How could opening a PSC benefit you and what are the tax implications of doing so?

A Personal Service Company (PSC) is a limited company which predominantly provides the services of an individual, or small group of individuals. The individual providing the services is also an owner/director of the limited company.

In the vast majority of cases, the worker providing the services tends to be both the sole fee-earner and director of the company, commonly referred to as a contractor.

There is no statutory definition for a PSC, which HMRC often use to their advantage.

What is the difference between a Contractor and Sole Trader?

The main difference between a contractor and a sole trader is seen in the connection between the worker and the business.

When considering PSCs, the business is considered an entirely separate legal entity from the worker themselves. As such, the owner/director of a PSC has a limited liability meaning that contractors are not personally liable for the company’s debts.

A sole trader doesn’t have a company on Companies House but simply trades as themselves, often under a trading name of choice. For sole traders, the business and the worker are seen and treated as one legal entity. Because of this lack of separation, a sole trader is entirely responsible for their business and its finances.

Tax efficiency is another notable difference between contractors using a PSC and sole traders. Whilst a PSC contractor must pay Corporation Tax and tax on dividends, PSC contractors can generally pay themselves more tax efficiently by drawing the majority of income as dividends which is subject to less tax than PAYE.  In contrast to this, a sole trader must pay full income tax and NICs on all profits exceeding their personal tax allowance.

Why should I set up a PSC?

In some cases, your end client could require you to set up a PSC in order to continue or begin the engagement with them. This has been prevalent in certain industries such as finance, where working with a company is preferred. In order to get the contracts you wish to work on, you may have to set up a PSC out of necessity, however you should assess your options and never be forced into such an arrangement.

If you are unsure about what is the best business model for you to provide your services, you should consider some of the benefits that come with opening up a Personal Service Company.

So, what are the benefits of setting up a PSC?

• Owning a business is never predictable. It is best to account for unexpected growth where possible. Opening your company at the outset secures your company name and gives you scope to scale.
  
  
• Running a limited company separates your company finances from your personal liability, giving you additional protection when running your business.
  
  
• As mentioned briefly above, many clients will prefer to work with those who provide their services through a PSC rather than sole traders. Not only does a Personal Service Company appear more professional and therefore a more attractive prospect to clients, but a PSC also tends to garner more respect from clients due to this more formal offering.
  
  
• Personal Service Companies are seen as providing a highly skilled and flexible yet professional worker. Clients tend to prefer this approach when searching for a worker when it comes to either shorter or very specific and nuanced contracts. In truth, it saves clients the time and expense of hiring a permanent employee.
  
  
• When opening a PSC, you should also consider the impact this could have on the amount of tax you pay. PSCs are seen to be more tax efficient. This is due to the fact that by working through a PSC you have the ability to receive money from your company as a mix of salary and dividends.

What are the tax implications of setting up a PSC?

The IR35 legislation was introduced in 2000 by HMRC to clamp down on individuals opening limited companies with the intention of paying less tax whilst still working in a manner that is akin to employment.

As of 6th April 2021, IR35 reform means that in many cases it is no longer the contractor’s responsibility to determine their own IR35 status. Now it is the client (if they are a medium or large company) for each engagement that is responsible for assessing employment status, and the fee-payer for deducting the relevant tax and NICs on behalf of the worker, prior to paying the PSC’s fee.

You should consider your general working patterns to determine if working via a PSC is best fit for you. Some roles such as officer holders will operate “inside IR35” and therefore not have access to the same tax efficiencies. A search on roles available and their indicative status will give you an idea of what you can expect. For more information on IR35 reform and the new rules as they stand, see here.

Here at Qdos Contractor we have handled well over 1,600 IR35 enquiries on behalf of UK contractors, saving them over £35m in tax. Get in contact with a member of our team to discuss your options.