Finance contractors, freelancers, interim managers, and consultants might have heard the term Personal Service Company (PSC).
Generally, it has been used to describe them.
The term ‘Personal Service Company’ also features in the context of the government’s rules that determine employment status – also known as IR35.
These rules ensure that the workers are classified correctly as employed or self-employed and pay the correct amount of employment tax and national contributions.
For individuals who are new to contracting, this could be a little confusing, and could leave you asking yourself “what personal service is my company providing?”
To make things a bit clearer, we look at what a PSC is in more details.
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What is a Personal Service Company?
The PSC can be used to describe a common type of company established by consultants, contractors, and other types of self-employed individuals.
In short, a PSC is owned by an individual or small group of persons and sells their work as a limited liability company.
The original term PSC was used by HMRC in relation to the introduction of the IR35 legislation back in 2000.
There are many other reasons why an individual will work on contracts via a limited company, which includes limited liability and the potential to reduce the amount of tax due.
How does a PSC differ from a MSC?
The crucial factor when it comes to distinguishing a PSC from a Managed Services Company(MSC) is that the individuals or group in the PSC own and organize the company.
By contrast, a MSC has a separate set of organizers and owners managing a group of contractors.
They are subject to different regulations by the HMRC.
Should you operate via a PSC?
So, in order to give clarification, a PSC can be comparable to a Limited Company.
As a finance contractor, there are many different options available to you.
You could decide to work with an agency, with an umbrella company, or with your own Limited Company.
Benefits of working through a PSC are:
- You can claim business expenses
- You can have access to the Flat Rate VAT Scheme (FRS)
- PSC could give you access to a greater choice of contracts
- Operating via a Limited Company will reduce your own personal liability
- It will help you create a professional image for your business
Tax implications for PSC
You will be paying less tax by choosing to work through a PSC.
The reason behind this is that the PSC will be paid without any deductions for tax or national insurance.
Besides, PSC will only need to pay corporation tax on its profits.
You will be paying your tax efficiently as the company’s director by combining your salary and dividends.
Usually, this combination of salary and dividends can result in a low tax bill.
This is how; the company director can get a more significant take-home pay than direct employment or sole trade.
To get more ideas on tax reduction, read our blog – Tax-Saving Tips for Self-Employed In 2020.
How IR35 affects a PSC?
It seems that HMRC is not enthusiastic on such state of affairs, particularly since they consider the contract between the PSC and end-client as employment.
Because of this, HMRC launched a set of rules recognized as off-payroll working rules or IR53.
This set of rules is created to ensure that PSC’s workers are paying the same tax and national insurance contribution just as any other regular employees who were offering their services directly to clients.
If you have plans to work through a PSC, then there are several things that you must consider regarding IR35.
According to the rules as a PSC contractor if you fall inside IR35 status, then you’ll need to pay income tax and NIC on your earnings.
But if you fall outside IR35 status, then you are free to pay yourself in a most tax-efficient way and considered self-employed for tax purpose.
Currently, for the public sector PSC, the end client or agency who pays your PSC is responsible for determining your IR35 status.
And for private sector PSC, contractors are responsible for determining their own status. If they decide they are operating inside IR35, they must ensure the income tax and NIC is paid correctly.
In April 2021, the changes in this rule will take place, and the responsibility for setting the IR35 in the private sector will shift from contractors to the private sector agencies engaging them.
These changes will affect you if you work on a contract through a PSC in the private sector, or hire such contractors.
Does your PSC need an accountant?
The UK tax system is extremely complicated.
If you want to operate your limited company in the most tax-efficient way, then only an experienced and qualified accountant can advise you how to do this.
In addition, trying to navigate the maze of IR35 can be slippery if you decide to do on your own.
So, it would be easy and much clearer with the guidance of a knowledgeable accountant.
Choosing the perfect accountant for your company is confusing, right? Here’s a guide for you to help you choose the best accountant.
Hire Personal Accountants
Work with UK-based Experts for tax, audit, accounting, payroll, & EIS/ SEIS needs.
Final thought
Also, there are several things to be aware of if you have decided to set up your PSC.
You will need to spend some time initially to do paperwork, to open a business bank account, to register the company name to the Companies House and registering for VAT. Importantly, also check whether you will fall within IR35 rules or not.
However, if you don’t fancy doing all this yourself, then again an experienced accountant can do it for you.