Introduction to personal service companies

By Tolley

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

  • Introduction to personal service companies
  • The structure
  • The rationale
  • IR35
  • Managed service companies
  • Intermediaries working for public sector bodies
  • Off-payroll working and the private sector
  • Tax and NIC advantages
  • Agencies

Many businesses require a large number of workers on a regular basis. Others need to expand and contract their workforce on a flexible basis. Accordingly, there are different arrangements by which a client may contract and remunerate a worker.

The most common arrangement is employment. This may be on a permanent, fixed term or temporary basis, but it is essentially a “contract of service”. This contrasts with a “contract for services” which arises between a client and service provider. The service provider is essentially conducting a trade, profession or vocation. See the Badges of trade guidance note.

The service provider has the freedom to structure their business as they choose, and it is common to use a limited company in many industries. One of the advantages of the use of a company is the lower effective rate of tax on earnings.

The term ‘personal service company’ (PSC) is typically used to refer to a company which provides the service of one individual, usually the sole director and shareholder. Compared with employment, it delivers a significantly reduced rate of tax and NIC for both the client and the worker.

Accordingly, there have been a number of tax anti-avoidance measures introduced to prevent the use of such arrangements instead of employment.

The structure

Employees contract directly with their employers, and self-employed individuals and partnerships contract directly with their clients. In a PSC structure, the relationship with clients is indirect:

  • the PSC contracts with the client to supply services, which are provided by the individual
  • the PSC invoices the client for the services supplied
  • the money received by the PSC is used

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