It has become increasingly common for organisations to use personal service companies as a way of engaging contractors or consultants.
The idea behind a personal service company is that rather than directly offering services, an individual contractor or consultant sets up a separate company which provides those services. For instance, if you wanted Joe Bloggs to work for you as a senior sales consultant, you could employ him, engage him as a self-employed consultant or get him to set up Joe Bloggs Limited (a personal service company) which would then supply him to work for you.
There are many factors which would come into play in deciding which of those options was most appropriate in any individual case. However, the personal service company typically involves the lowest payment of tax and national insurance contributions as well as the lowest risk that Joe Bloggs would eventually be found to be your employee. That has made the use of personal service companies – either directly or via employment agencies - popular within some organisations.
The government thinks that personal service companies are being misused as a means of avoiding tax and national insurance payments for people who should be taxed as employees.
For many years, the so-called "IR35" rules have applied in an attempt to tax earnings through personal service companies in the same way that employees are taxed, but the government admits that "non-compliance with the IR35 anti-avoidance legislation ... [will cost] the Exchequer ... £430m in tax and NICs receipts this year."
As a result of this, the government has announced a consultation on changes to the IR35 rules.
One problem with the IR35 rules is that they rely on the personal service company properly accounting for tax. The government is now suggesting that responsibility for compliance should be shifted to the organisation that the individual is ultimately carrying out work for. This means that if you have people who work for you using personal service companies, you could end up being responsible for compliance with the IR35 rules and the payment of correct tax.
We are monitoring this consultation for our clients. If you do have individuals working for you using personal service companies, please contact us on [email protected] so that we can keep you up to date with developments.
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.