Personal Service Company (PSC) or Sole Trader – The Pros and Cons Post IR35
24 June 2021
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24 June 2021
After a recent conversation with a sub-contractor who supplies his services through his own limited company – the classic personal service company arrangement that is at the centre of the current Gary Lineker vs HMRC IR35 case, it might be useful to consider the background to, the pros and cons of, and myths and misinformation that surround the issue.
So straight off the bat, there is no technical difference between a private limited company that is established by an individual, or a larger private limited company business with multiple shareholders, directors and employees. A limited liability company must have at least one shareholder and one director: The Director runs the company on behalf of the shareholders. One person can be both. There are, however quite stringent rules regarding the set-up and ongoing administration of the company, plus associated costs.
A personal service company (PSC) is no different from the above, but is, by definition owned and run personally by either an individual, or often by a married couple.
Traditionally there were advantages for both individuals and engagers from adopting these arrangements. It was, and still remains a more tax efficient way of receiving remuneration for a higher paid individual, and frequently allows for significant increases in earnings. The downside for the individual was the lack of employment rights, and job insecurity.
There are a number of advantages for the engager – and when we use the term “engager” we are referring to the company to whom the sub-contractors actually supply their services or labour. It’s very cost effective because the company engages another company and not an individual, so there are none of the costs associated with PAYE, pensions or Employment Rights.
It also gives the engager significant flexibility to manage its workforce, and historically provided larger contractors with blanket protection from a couple of pieces of tax legislation – including the original incarnation of IR35 – but more about that later.
There were no real downsides for companies to engage individuals through their own PSC, assuming they accept there is less control over the day to day working practices of the individual – the companies that engage PSC’s should nominally focus on results, not processes.
If you compare the PSC route to the traditional self-employed sole trader way of working which exists extensively to this day in the construction industry, there are only a few differences, but one of them is significant.
A sole trader simply registers as self-employed with HMRC and submits an annual tax return – that’s pretty much it as far as the admin goes. A sole trader can also employ others if they so choose. A sole trader also earns more because, under most circumstances they are paid on invoice (and in construction through CIS) not PAYE, therefore the engagers costs are no greater than for the PSC model.
The significant downside for the individual is that their business is not protected by the limited liability protection of the company model, so the individual is potentially personally liable for any business debts – including tax.
So now let’s remind ourselves of what IR35 is all about. So, if the terms of an engagement with an individual who supplies his services through the PSC model would have been an employment relationship with the engager if the PSC did not exist, HMRC were entitled to count all of the income as PAYE – and claim the difference between what tax has already been paid, and what would have been due under PAYE. Crucially however, that tax bill we levied against the individuals PSC, not to the engager!
So still happy days then for the engager – no risk and reduced costs. This is the fight that Gary Lineker is currently having with HMRC – although he supplied his services to the BBC and BT sport through a company that he and his (then) wife owned, HMRC are claiming that the relationship between Lineker and the companies for whom he worked was in reality an employment contract – and that’s what accounts for the alleged tax bill.
However, after considerable negative press coverage, IR35 has been through a couple of changes that now have a potentially significant impact on larger and public sector companies who engage PSC providers. These changes move the potential tax liability from the small guy to the large company – which is why numerous large companies have recently introduced blanket bans in their supply chains on PSC contractors, because now they must consider the risk of the potential tax liability themselves, not the individual!
So going back to our sub-contractor, the only benefit for him of running his own PSC would be that it still can be slightly more tax efficient to be paid this way, and it’s the safest structure to use if he planned to expand and take on his own workforce. The downside of the PSC model is the cost of admin – typically at least £750 a year for your accounting and admin costs, compared to those of a self-employed sole trader, whose admin costs are much less – for instance we do annual accounts at EEBS for tradesmen at £99.00 a year (plus vat).
The only downside to the sole trader model is that you don’t have the “protection” of working through a Ltd company, but this is mitigated because you still need business insurance and to submit the annual tax return – but that’s no different to running the PSC.
So the reality is it’s up to you to decide! If you would like a free consultation to discuss the options in more depth and some help in making the right decision for you and your business give us a call.
01245 493832 or email firstname.lastname@example.org or visit www.eebs.co.uk