30 July 2019
We have seen a number of high profile cases in recent months relating to the taxation affairs of many public sectors workers including well-known TV presenters. The evolution of HMRC powers relating to intermediaries has led us to question whether the personal service company, is now a thing of the past.
Since the early 1990s, one of the most effective forms of tax planning for contractors, was to set up a one director/shareholder Personal Service Company (PSC) to provide the services of the said contractor, to an end-user.
The planning was useful to the end-user as it negated the requirement to have an employee on their books, thus providing a cash saving as well as removing the ‘Employed vs Self Employed’ status test which would be necessary if they were to contract directly with an individual.
From the contractor’s point of view, being the sole director/shareholder, drawings could be taken efficiently by way of a small salary and dividends. In addition, by introducing a spouse into the arrangement, the benefits could be significantly enhanced as witnessed by the infamous Arctic Systems case.
Naturally, HMRC didn’t approve and so from 6 April 2000, Intermediaries legislation was introduced (commonly known as IR35). The purpose of IR35 was to test the relationship between the end-user and the contractor and if a true employment position could be shown; the beneficial arrangements were unravelled and a deemed employment income position arose on the PSC.
Despite the introduction of IR35, very few tax advisers ever have to deal with a HMRC challenge. Indeed, following a Freedom of Information request in May 2009, it was discovered that only £9.2 million had been raised from IR35 investigations, less than 1% of the expected total.
More recently, we have seen a much harder crackdown on the PSC, firstly in the public sector via the introduction of ‘off payroll working through an intermediary’ in April 2017. This new set of rules challenges the engager to assess the working relationship and determine whether tax and class 1 NIC should be deducted on the payments to the intermediary.
The complexity and risk involved in assessing the intermediaries incorrectly, led to the majority of public sector workers being reclassified as employees as a blanket measure which has, of course, resulted in a far greater amount of Class 1 NIC and tax being collected from workers despite having been encouraged in a lot of cases to set up a PSC in the first place by the companies engaging their services.
Following this success, HMRC has launched a public consultation (due to conclude at the end of this month) which seeks to roll out the same set of rules for “medium and large” private sector employers from April 2020 and which we expect will follow a similar trend.
If the proposals go ahead, this will once again put the responsibility to determine the correct status of the worker firmly in the hands of the engager. This we feel could lead to many medium and large fee payers implementing the same blanket PAYE deductions policy for all workers as to get it wrong could be massively costly.
So, is the one-man-band company (PSC) dead? Strictly no, but many of the tax benefits of operating as a PSC in the public sector, or on behalf of any medium or large private sector company are being swiftly eroded thus leading to many PSC’s having run their course and are heading for the scrapheap.
If you would like to discuss this further, please contact a member of our team today.