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In defence of personal service companies

Author

Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

In defence of personal service companies

Technology and economic circumstances mean that the British work place has continued to evolve over recent decades.

Only last month, Companies House released data showing that there were 182,742 new incorporations in the first quarter of the current calendar year.

Flexible working and a growth in the freelance economy means that many of those are SMEs, some of which have only a single employee.

Further recent official figures have detailed that Britain had 4.84 million self-employed at the start of this year, an increase of 65,000 over the course of the previous 12 months ().

Whilst working for oneself offers distinct advantages over the careers of office-bound contemporaries, it isn’t without its own challenges.

Chief among them is the process of navigating through the complications posed by HMRC’s rigorous if erratic policing of the rules on self-employment.

Known as IR35 (because they were announced in the 35th press release arising out of the then Chancellor of the Exchequer’s Budget in March 1999), they were intended to address what was described as “general concern” about the use of Personal Service Companies (PSCs) to gain a tax advantage over full-time employees

After many years of rumbling about how the rules were to be interpreted, the dispute broke into the open last year, when the former BBC Look North presenter Christa Ackroyd failed to overturn HMRC’s assertion that, even though the Corporation retained her services through a PSC, she was effectively an employee.

On a personal level, it meant that she was left with a tax bill of up to £420,000. However, it meant that many of her peers at the Beeb were left worrying about a similar debt.

Many had also been told that their continued employment depended on setting up their own PSCs, a determination which was subsequently severely criticised by MPs sitting on the House of Commons’ Public Accounts Committee and led to an apology by the BBC Director-General, Lord Tony Hall in January.

The Ackroyd ruling might have had the kind of deterrent effect desired by HMRC but it’s important to take into account the Revenue’s success in enforcing its position on IR35

That case was HMRC’s first IR35 win in seven years. Furthermore, it has suffered two more notable defeats on the issue since the turn of the year.

In March, ITV’s popular daytime presenter Lorraine Kelly avoided a potential tax bill three times the size of the sum demanded of Christa Akroyd by successfully arguing that she was a “self-employed….theatrical artist” .

That was followed by the triumph involving another well-known host on radio and television, Kaye Adams, whose status as a freelance was reinforced by First-Tier tax tribunal, meaning that she didn’t have to cough up £81,000 in Income Tax and £43,000 in National Insurance (NICs).

In fact, HMRC’s performance record in this area means it should be receiving a torrent of rotten tomatoes rather than a standing ovation.

The cases tell us two things:

  1. That a contractor can engage with a supplier through a personal service company and be outside IR35; and
  2. HMRC have little grasp of the law in this area

Sadly, it seems clear that these reverses don’t seem to have  blunted HMRC’s push to impose new rules regarding so-called ‘Off-Payroll working’ on the private sector.

A consultation on the move is due to conclude at the end of this month.

In short, they would broadly mirror the regulations for public sector engagement which were introduced in April 2017 and require bodies hiring contractors to determine if a freelance is self-employed or not (rather than leave it up to the contractor him or herself) and handle any tax payments which might be due.

It should be noted that, for the most part, there is change to how the law applies – merely who is charged with assessing it and who bears the risk of non-compliance. The above case law remains good.

Further intrigue is also generated by HMRC’s unwavering defence of a key online resource relied on by freelances and employers alike to establish whether IR35 rules should apply or not. This is known as the Check Employment Status for Tax (“CEST”) tool. It is generally accepted that this the performance of this tool can be described as somewhere between ‘not fit for purpose’ and downright ‘loaded’. HMRC’s ongoing defence is currently  being likened to “climate change denial!’

As such, developments in this area are likely to be interesting!

Personal Service Companies, in my opinion, do still serve a useful purpose – but it’s important for both companies and contractors to review the contracts they work under in order to ensure that they don’t fall into the tax trap.

 

If you need are an business who uses contractors through Personal Service Companies and you would like to review your position then please get in touch.

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