A QUICK GUIDE TO PERSONAL SERVICE COMPANIES (PSC s)

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1 A QUICK GUIDE TO PERSONAL SERVICE COMPANIES (PSC s) Are you caught by the IR 35 PSC Rules or not? There are 5 key status tests: (a) (b) (c) No mutuality of obligation (MOO) Are you in business on your own account? Fundamental Status Tests: Substitution Significant financial risk assumed by you (and the ability for you to profit from sound management) Do you have the ability to hire others to do the work (intrinsic to the engagement - not just secretarial and admin support)? (d) Important Status Tests: Provision of significant equipment Who has control over what you do? The length and number of different assignments/engagements each year (e) Minor Status Tests: (iv) (v) Exclusivity Terms of payment Rights of Dismissal The intentions of you and the contractor for whom you work as to how the arrangement should operate Business structure.

2 What happens if you are caught by the anti-avoidance legislation? (A) All of the fees from any assignment that is caught are effectively subject to PAYE tax and National Insurance contributions (both employer and employee contributions) except that the following deductions can be made: 1. 5% of the gross income to cover admin and running costs. 2. Travel, accommodation and subsistence: Travel costs excluding: a) Private travel b) Ordinary commuting But including travel to temporary workplace. (Workplace is temporary if either: less than 40% of the duties of the employment carried out there at this workplace or engagement is expected to last for less than two years) Motor costs based on the Inland Revenue AMR scale rates, (effectively 40p per mile per business trip for the first 10,000 miles and 25p per mile thereafter), for business mileage, (but see for what is allowable). Accommodation and subsistence, if appropriate. 3. Professional indemnity insurance. 4. Capital allowances on equipment used for the business. 5. Employer s pension contributions. 6. Salary and PAYE and NIC already paid on payroll salaries.

3 (B) An example of how this deemed payment calculation would look is as follows: Mr Smith works for his own limited company (Smith Limited) and provides services to Client Plc under a contract which falls within the IR35 rules. Smith Limited receives 40,000 per annum for the service supplied to Client Plc. Smith Limited pays Mr Smith an annual salary of 10,000 and PAYE and National Insurance is operated thereon. Employer s National Insurance of 672 is paid annually by Smith Limited on that salary. The company also provides Mr Smith with a company car and the taxable benefit in kind value thereon is 2,000 and Class 1 A NIC thereon is 256. Smith Limited s other expenses are: Motor Running Expenses (MRE) 3,000 (50% use business) Pension Contributions 1,200 Training Costs 500 (Training not imposed by Client Plc) Professional Subscriptions 450 Professional Indemnity Insurance (PII) 500 Employer and Public Liability Insurance 400 Capital Allowances/ Depreciation 1,000 (Equipment) Capital Allowances/ Depreciation 500 (Car) Accountancy Fees 500 8,050 STEP 1 INCOME RECEIVED 40,000 LESS: 5% ALLOWANCE (2,000) STEP 3 STEP 4 ALLOWABLE EXPENSES MRE (50%) (1,500) Professional Subscriptions (450) PII (500) CAPITAL ALLOWANCES Equipment (1,000) STEP 5 PENSION CONTRIBUTIONS (1,200) STEP 6 EMPLOYERS NIC (CLASS 1 AND 1A) (928) STEP 7 SALARY AND BENEFITS (12,000) BALANCE 20,422 GROSS DEEMED PAYMENT (20,422 / 1.128) (18,104) EMPLOYER S NATIONAL INSURANCE PAYABLE 2,318 ====== PAYE and National Insurance deemed payment is due on or by 19 April each year after the tax year ends on 5 April. (C) Corporation Tax

4 Based on the same example above, the profit and loss account would be as follows: Turnover 40,000 Less: Overheads Salary 10,000 Deemed Payment 18,104 Employer s NI on Salary and Benefits 928 Employer s NI on Deemed Payment 2,318 Motor Running Expenses (MRE) 3,000 Pension Contributions 1,200 Training Costs 500 Professional Subscriptions 450 Professional Indemnity Insurance (PII) 500 Employer and Public Liability Insurance 400 Depreciation 1,500 Accountancy Fees 500 (39,400) - Net Profit 600 ====== And, assuming no dividend paid and no other associated companies, then the corporation tax payable is Nil as the net profit is within the nil rate band of 10,000. (D) Year end If you are caught by the IR35 PSC rules, you should ideally have a 5 April year end for your company accounts. This will facilitate the calculation of the deemed payment and of any PAYE and National Insurance thereon. Note that the items reflected in the deemed payment calculation are purely on a receipts and payments basis. Hence debtors and creditors should be excluded. (E) Protecting Yourself Have your contract vetted (and approved) first by HM Revenue & Customs. Have your contract vetted by specialist insurers who, if they confirm that your company is not an IR35 company, would be prepared to underwrite at a premium any subsequent tax and National Insurance charge.

5 What happens if you are caught by the anti-avoidance legislation? If your contract is approved by an IR35 specialist recognized by insurers such as Abbey Tax, take out insurance to cover extra tax and national insurance that may be payable if the Inland Revenue later deems your company to be covered by IR35 legislation. The premium costs around per annum. Take out insurance to cover the costs of an Inland Revenue enquiry. (This does not cover the cost of any extra tax or NIC that may be payable). This is a cheaper option to the one above. (F) Extracting funds from your PSC. The most tax effective means of extracting funds from your PSC would be to claim most expenses allowable under IR35 regulations and after allowing for the 5% allowance, to draw the balance of the company s income as salary. As a deemed payment will attract PAYE and National Insurance, it would be advisable for your company to pay you a gross bonus of an amount equivalent to the gross deemed payment before 19 April in order for to enjoy the cash. Another way to extract funds would be to vote a dividend equivalent to the deemed payment and, provided PAYE and National Insurance has been paid on the deemed payment, to obtain clearance from the Inland Revenue dealing with your company s tax affairs so that the dividend is not taxed twice. What happens if you are not caught by the anti-avoidance legislation? Carry on regardless - you are lucky!! Think what you will save in accountancy fees.