Introduction to personal service companies

Produced by Tolley
Introduction to personal service companies

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

  • Introduction to personal service companies
  • The structure
  • The rationale
  • IR35 or the intermediaries rules
  • Managed service companies
  • Off payroll working and the public sector
  • 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:

  1. the PSC contracts with the client to supply services, which are provided by the individual

  2. the PSC invoices the client for the services supplied

  3. the money received by the PSC is used to meet its expenses, including salary to the individual

  4. the profit after allowable expenses is subject to corporation tax, and

  5. the after-tax profit is paid out to the individual as a dividend

The client is often referr

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