Personal Service Companies

New rules governing the taxation of Personal Service Companies were introduced in the 1999 Budget through a press release coded “IR35” and the code has become their name.

The purpose of the new rules is to remove opportunities for the avoidance of tax and national insurance contributions by the use of intermediaries, such as service companies or partnerships, in circumstances where an individual worker would otherwise be an employee of the client or the income would be income from an office held by the worker.

The tax advantages arise by the generally lower rates of tax enjoyed by limited companies and then extracting the net taxable profits by dividend which attract no national insurance contributions.

The rules tax the income of the company as if it were salary of the person doing the work.

The rules apply if, had the individual sold his her services directly rather than through a company, he she would have been classed by the Revenue as employed rather than self-employed. A one-man band supplying services to one client through a limited company is the target but others may be caught in the trawl. Services sold to an individual and not a business are not caught, nor are the services of a less than 5% shareholder.

In practice

On 5th April each year the income of the company from contracts identified as coming under the rule less some expenses (below) is calculated and compared to the salary, subject to PAYE and NICs, paid to the individual concerned. The difference is deemed to be a salary paid on 5th April and PAYE and NICs are due on the amount.

The allowable expenses are:

• normal Schedule E expenses (eg travel)
• certain capital allowances
• employer pension contributions
• employers’ NICs - both actually paid and due on any deemed salary
• 5% of the gross income to cover all other expenses.

The term salary here includes benefits-in-kind.

Payments made by the company into a personal pension plan will reduce the deemed payment. This can be attractive as the employer’s NICs will be saved in addition to PAYE and perhaps employees’ NICs.