Personal service company rules

By Tolley
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The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Personal service company rules
  • Scope of the rules
  • Company as intermediary
  • The notional contract
  • Office-holder
  • The calculation
  • Payment to the individual

Many people supply their services to clients, not directly as a self-employed person, but via a company. The tax and NICs advantages of this way of working are significant. See the Introduction to personal service companies guidance note.

Since April 2000, anti-avoidance legislation, known as ‘IR35’, catches individuals who would be employees of their clients if they didn’t use a service company. See the Employed or self-employed guidance note.

Separate legislation exists for tax and NICs. In most cases both sets of legislation produce the same outcome, but not invariably. See the Other points on personal service companies guidance note for more information.

ITEPA 2003, ss 48–61; SSCBA 1992, s 4A; SI 2000/727 (subscription sensitive)
Scope of the rules

To be within IR35:

  • there must be an engagement for personal services where the services are provided to another person (‘the client’)
  • the client must not be a public sector body (in which case the special rules for intermediaries and the public sector may apply instead)
  • the circumstances are such that the worker would be regarded as an employee of the client but for the interposition of at least one intermediary (usually a company) between the worker and the client, or the worker is an office-holder of the client
  • the intermediary must meet certain defined conditions (see below), and
  • the worker must either receive, or have the right to receive, a payment or benefit from the intermediary which is not employment income

ITEPA 2003, s 49

Contracts which fall within IR35 are called ‘relevant engagements’ in the legislation.

Engagements for the provision of goods, rather than services, are completely outside IR35. Sole traders are also excluded, because there is no intermediary. Services provided via a