Personal Service Company: What It Is and Why You Might Want to Form One
When then-Chancellor Gordon Brown used the phrase “personal service company” to introduce the well-known legislation IR35 in 1999, it caught everyone’s attention in the world of business (and especially accounting)
There is no clear definition of a personal service company (PSC), though it is commonly used to refer to the limited company director who owns the majority, if not all, of the shares when discussing contracting. But here we are going to take a closer look at what a PSC is, why the exist and whether it’s right for you.
Why Work Under the Personal Service Company Umbrella?
Many recruitment agencies and private clients across all kinds of business niches will not hire self-employed individuals unless they own their own limited company, so personal service companies are most commonly used for contract jobs.
This is for a number of reasons, the most important of which is risk. When a client hires someone for contract work, they don’t want to sign a contract with them and, as a result, they don’t want to be in an employment relationship with them.
This isn’t meant as a criticism of the individual or their skills; they simply don’t want the added responsibilities of a full-time employee, such as holiday and sick pay. As a result, they use recruitment agencies, not only because they can quickly hire in skills, but also because they have another layer of “protection” between them and the contractors.
There are numerous benefits to contracting through a limited company, some of which are listed below:
Working via a limited company means that you may be able to increase your take-home pay. Limited liability companies (LLCs) or personal service corporations (PSCs) are widely regarded as the most tax-efficient way of doing business for individuals or small groups of contractors.
The process of forming a limited company is likely to be much faster and easier than you think, and can often be completed in a single working day. Pearl Lemon Accountants offers limited company formation as part of our accounting services and often when you tell us in the morning you need it done we can have it done by the end of business.
Because they have their own registered company name, limited companies are thought to appear more professional. Having the word “limited” in your company name will give you a more respectable air, which may give you an advantage when it comes to landing new contracting jobs.
Contractors who work for a limited company can claim a broader range of business expenses. You can claim a cost as a business expense if you can define it as solely and exclusively for business purposes. And with the right accountant to guide you, that can apply that to a lot.
Personal Service Companies and IR35
As previously stated, the term “personal service” was coined as a result of the implementation of IR35. IR35 was enacted in April 2000 to combat the practice of misrepresenting one’s employment status.
In a nutshell, IR35 prevented full-time employees from working as a limited company contractor on Fridays and returning to their desks on Mondays, reaping the tax benefits of running their own limited company without the risk.
If you consider your limited company to be a personal service company, you must be fully aware of IR35 and ensure that all contracts you enter into are reviewed for IR35 status. If your contract falls within IR35, you’ll have to pay more tax. However, there are still many benefits available for your company’s operating costs; but, beginning April 1, 2017, the government implemented changes affecting contractors working in the public sector that eliminated the 5% tax relief that used to be offered to personal services companies.
How Will Hiring a Personal Service Company Accountant Help?
Many contractors who work through limited companies or personal service companies hire an accountant who specializes in the contractor market to assist them with their tax and financial matters. A personal service company accountant will handle your business and personal tax needs, as well as provide ongoing tax advice and assist you in contracting in the most tax-efficient manner possible.
And we mean more than just helping you stay on the right side of HMRC. Working with Pearl Lemon Accountants will also give you access to expert financial planning advice to help grow your personal service company income, and who doesn’t aspire to that? Get in touch with us today to chat about just how we can help you.