Personal service companies (PSCs) have been getting a bad reputation of late, particularly when it comes to IR35 liability. In short, a PSC is a limited company that contractors offer their services through. The terminology was coined by HMRC back in 1999 when IR35 was first announced.
Over the last couple of decades, the landscape of employment has changed dramatically. The latest numbers from the Office of National Statistics (ONS) declare that there’s now 4.93 million self-employed people in the UK, making up 15.1% of the workforce – an increase of more than 180,000 on last year, despite the impact IR35 has had on public sector contracting since April 2017.
With such a huge proportion of contractors, freelancers and consultants in the British workforce, it’s concerning how misunderstood many of the tax laws surrounding self-employment are. PSCs, and how they fit into IR35, are arguably the muddiest of all, despite offering some significant, entirely legitimate benefits. Below, Hannah Robinson of Larsen Howie talks us through the pros and cons of limited company contracts, and the implications of IR35.
Pros of supplying services via a limited company
1. They keep the contractor and their company separate as legal entities
A limited company is a completely separate entity from its owner: everything from the company bank account, to ownership of assets and involvement in tenders and contracts is purely business. That allows the owner of the company a degree of personal distance from company dealings and means that should there ever be an insurance claim made, it would only be taken from company money.
2. Tax benefits
The main advantage of running your business as a PSC is that you are likely to pay less personal tax than a sole trader. If you are the director and shareholder of a limited company, you may choose to take a small salary and draw most of your income in the form of dividends. By doing this you can minimize the amount of National Insurance Contributions (NICs) you have to pay because limited company dividends are taxed separately, and are not subject to NICs.
In some businesses and industries, having a limited company can boost your image of professionalism. If you are doing business with larger companies, you may find that they prefer to deal only with limited companies rather than sole traders or partnerships, and the same goes if you try to find a placement via an agency.
4. Minimizing personal liability
Running your business as a limited company means you have the reassurance of limited liability. Assuming no fraud has taken place, your limited liability means you won’t be personally liable for any financial losses made by your business. A limited company can therefore give you added protection should things go wrong.
Cons of supplying services via a limited company
1. IR35 liability risk
The wide use of PSCs first came about because many clients and recruitment agencies avoid hiring contractors that operate as sole-traders. There’s no cut and dried definition of what a PSC is, and the line between illegal tax-avoidance tools and legitimate tax relief is often blurred – particularly in mainstream media. Whether or not a contractor uses a PSC could be examined as part of an IR35 investigation. There’s nothing to suggest in recent cases, however, that using a PSC is an automatic black mark against the contractor.
2. Corporation tax
Your business will be liable for corporation tax, which is a tax on the profits of the business. If the business is profitable enough, what you save in personal taxes could go to HMRC in the form of high corporation tax. This tax is calculated and paid annually based on your corporation tax accounting period, which is usually the same as your company's financial year.
3. Public accounts
The business is obliged to publish its accounts on Companies House, including the details of corporation tax and also give a business address. This means that all annual accounts and financial reports will be placed in the public domain. For sole traders who operate under a business name, you may not wish for this information to be public.
4. Administration responsibilities
As a limited company you’ll have a lot of admin to stay on top of. This includes tax returns, expense details and your business accounts. These usually need to be completed every month. Hiring an accountant is the best way to keep on top of all admin responsibilities as it can save you time and money so you can continue to focus on the core of your business.
How can I register as a limited company?
You’ll need at least three pieces of personal information about yourself and your shareholders or guarantors to register as a limited company. According to the HMRC website, you’ll need:
- town of birth
- mother’s maiden name
- father’s first name
- telephone number
- national insurance number
- passport number.
It costs £12 and can be paid by debit or credit card or PayPal account. Your company is usually registered within 24 hours.
About the Author
Hannah Robinson is the Digital Marketing Manager at Larsen Howie. Larsen Howie is a provider of specialist insurances and services, including Professional Indemnity cover and IR35 advice, to contractors, freelancers and consultants. The business also leads the way with their specialized IR35 services, with a dedicated in-house team of experts that boast vast, first-hand experience in dealing with all manner of IR35 queries.