Last edited 09 Oct 2015

Personal service company


[edit] Introduction

There is no single definition of the term Personal Services Company (PSC), which was coined by HMRC to describe companies which are set up so that individuals can offer their services via the medium of a company, rather than in a personal capacity.

The design and construction industries are sectors where the use of PSCs is widespread and for this reason attract significant attention form HMRC.

There are a number of reasons why an individual may choose to offer his or her services in this manner but the context in which this term is often seen is that of IR35 and HMRC’s suspicion that many such companies are created for the purpose of tax avoidance.

[edit] Reasons for setting up a company to offer professional or personal services

[edit] Creating a clear ownership structure

The share structure of a company creates a clear and unambiguous ownership arrangement that is publicly visible at Companies House. Where an individual wishes to share ownership with a spouse or business partner, the company’s Memorandum and Articles of Association sets out rules which govern share ownership in a way which is more clear than in an unincorporated arrangement.

[edit] Planning for the future

Passing on ownership of a business can be simpler when it is a matter of transferring shares. In family-owned enterprises this can assist issues of succession as well as enabling the value of the business to be spread as appropriate amongst family members. This is undoubtedly beneficial from an Inheritance Tax point of view.

[edit] Facilitating the sale of the business

It can also be the case that a sale to a new owner may be easier to effect if the business ownership is clearly defined via a simple shareholding structure.

[edit] Minimising risk to personal assets

The risk of being sued for providing negligent advice or workmanship is ever-present. Providing services through a limited liability company protects personal assets from the risk of being lost in a court case. Insurance can be taken out to provide protection in such circumstances but many people see a limited liability company as a the logical way of addressing this risk.

[edit] Efficient remuneration planning

All companies, including PSCs, may pay dividends to their shareholders in addition to or instead of a salary. Paying dividends can result in less tax and national insurance being paid to HMRC. Using a company can also enable an owner to spread personal remuneration over a longer period of time and this can be a very effective and perfectly legal way of minimising tax payable over a period of years. This is done by holding earnings within the company and paying salary and/or dividends over a period of years.

[edit] To obtain work

It is a fact that many clients – typically the largest companies – will only award work to individuals or contractors who offer their services through a company. There is a general perception, often misguided, that this minimises risk to the client. It is often a case of “No company, no work”.

[edit] Advantages for clients

Increasingly clients wish to distance themselves from any potential arguments as to whether or not an individual could be deemed to be an employee rather than an independent provider of services. Using a PSC reduces such risk although it does not necessarily eliminate all IR35-related considerations. See IR35 for more information.

[edit] Summary

PSCs undoubtedly serve a valuable purpose for those who wish to offer their services with the benefit of limited liability. Other options such as Limited Liability Partnerships could be considered, but for simplicity PSCs have many advantages. They are inexpensive to set up and annual costs for accounting, HMRC and Companies House requirements should be modest. Small companies are exempt from complex reporting requirements so the administrative burden should be relatively light.

The main potential pitfall of using a PSC is embodied in IR35 and it is absolutely the case that, in structuring one’s business affairs, an individual must be fully cognisant of the provisions of IR35 and must ensure as far as possible that its provisions do not apply.

With the trend to self-employment increasing the use of PSCs is likely to grow in the future and, with sensible planning at the outset, there is no reason why their use cannot confer advantages to those who own them.

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