Employment Tax

Personal service companies ― overview

Produced by Tolley
  • 19 Oct 2021 23:15

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

  • Personal service companies ― overview
  • The structure
  • The rationale
  • Off-payroll rules
  • Managed service companies
  • Tax and NIC advantages
  • Agencies
  • Public sector bodies and large and medium-sized private sector clients
  • The current position

Personal service companies ― overview

There are a number of different ways in which a worker can provide services to their 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 NIC, as well as complying with numerous employment law requirements. The employee receives 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 arrangement is often used for the worker to provide his services through a personal service company (PSC). This is typically where the worker sets up a company and becomes its only, or main, shareholder and director. The client contracts with that company (the PSC) for the services of the worker, rather than engaging them directly. In some cases, such a structure may be used because the client works 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:

  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 any salary and benefits to the individual

  4. the profit after

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