A personal services provider can operate in either of the two ways: by providing services to the client as a one-on-one service or operating as a personal services company. However, you need to be clear about the legal implications of your services and operational structure. IR35 personal service company rules are designed to stop tax avoidance.
By having a clear idea about the rule and how it applies to the services you provide, you can decide how to operate to avoid violations and penalties, while gaining the highest benefit legally allowed. This article is aimed to give general information about the IR35 rule – for advice specific to your situation, be sure to consult a professional.
What is a Personal Services Company?
Current laws lack an exclusive definition of a Personal Services Company (PSC). Generally, a personal services company (PSC) is owned and operated by a sole individual. However, since it is treated as a company, it is liable to conduct business or provide services as per the rules of a company and within the limits all applicable.
Such an individual provides services based on contracts and may or may not employ workers. If so, the company owner is not treated as an employee of its clients, but as an organization that provides services. On the other hand, if someone provides personal services to a client by attending to the work directly by themselves, they will be treated as an employee instead of a company.
What is IR35 Regulation?
The IR35 rule was implemented in 2000 to limit tax avoidance by certain self-employed individuals who defined their operations as a company while they were not eligible to do so. When the benefits from a company are drawn as dividends, there can be an opportunity to avoid payment of dues such as NICs (National Insurance Contributions) and deduction of monthly income taxes.
On the other hand, when such benefits are drawn as remuneration by an employee, they are liable to pay such dues. The IR35 rule is applicable all over the UK, which means whether you provide personal services Cardiff residents require or offer a helping hand in London, you are under the obligation to apply to the rule.
The IR35 rule will not restrict anyone from running a personal services company or partnership. However, the service structure must satisfy certain conditions to be classified as a company. Under the rule, an individual strictly providing personal services to another as a one-on-one job cannot operate in the form of a company. Their income must be treated as remuneration or salary, meaning it becomes taxable as per income tax rules.
When service providers term their service as a company and declare their income as dividends, this can be tax avoidance. However, if they provide their services to many customers by employing other people, they could be treated as a company’s services, and the provider would be exempted from this rule. The major difference is based on whether your service could be treated as self-employment or a company’s contractual services.
Am I Eligible as Personal Services Company?
According to HMRC, if you provide services to a particular client regularly, serve no other client, and do not employ any other employee to provide services on your behalf, then you are not eligible to be treated as a personal services company. Your relationship with the client is that of an employee and their employer. The remuneration you receive is your wages and you will be eligible for the usual benefits an employee gets from their employers, such as holidays and sick leave.
On the other hand, if you provide some to multiple clients by employing one or more workers or staff under you, you may be eligible to operate as a personal services company. You work for various clients based on work contracts and will be eligible to draw remuneration in the form of dividends and the company will be an independent entity based on company regulations.
However, you will not be eligible for any employee benefit from your clients and you will have to pay applicable business taxes. As a company, you will be exempted from paying NICs (National Insurance Contributions).
Benefits of a Personal Service Company
One of the benefits of running a personal service company is that income taxes will not be deducted every month as in the case of a self-employed person. Instead, you can pay whichever business taxes apply at the end of the financial year. You are also eligible to claim a wider range of expenses against taxable profit.
Additionally, while a self-employed person must pay National Insurance Contributions (NICs), a company is exempted from such obligations. Clients also have certain advantages when dealing with a PSC. They don’t have to provide employee holidays and sick leave or incur employer NICs.
Key Takeaways
IR35 legislation regarding personal services can seem complicated, with many grey areas and a large degree of ambiguity. It’s important to consult with a professional accountant or tax advisor to assess your situation and ensure you meet your legal obligations.
