Personal service companies overview

By Tolley

The following Employment Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Personal service companies overview
  • The structure
  • The rationale
  • IR35
  • Managed service companies
  • Tax and NIC advantages
  • Agencies
  • Public sector bodies
  • The current position

There are a number of different ways in which a worker can provide his services to his clients. The most common arrangement is an employment, which means that the employer has to operate PAYE on the amounts paid to the employee and has to pay secondary National Insurance contributions (NICs), as well as complying with numerous employment law requirements. The employee receives his earnings net of tax and NIC.

A significant minority work as self-employed individuals, either on their own or in partnership, supplying their services to clients and taking care of their own tax payments and reporting.

There are a number of tax and other advantages for both the worker and the client if their relationship is something other than an employment but, as explained in the Establishing employment status guidance note, it is a question of fact whether a worker is self-employed or not.

One kind of arrangement often used is for the worker to provide his services through a ‘personal service company’ (PSC). This is typically where the worker acquires an off-the-shelf company and becomes its only, or main, shareholder and director. The client contracts with that company for the services of the worker, rather than engaging him directly. In some cases, such a structure may be used because the client insists on dealing only with limited companies or for other commercial reasons, but in other cases the main reason is to achieve the tax advantages associated with self-employment. The tax rules on PSCs apply regardless of the reason why the structure has been adopted.

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

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