“There is no legal definition of what a Personal Service Company (PSC) actually is, and it is not possible to objectively define one,” ContractorCalculator’s CEO Dave Chaplin has told peers.
“All current definitions are subjective”, adds Chaplin in his written submission in response to the call for evidence by peers for the House of Lords Select Committee on Personal Service Companies (PSCs) inquiry.
PSC use in the UK
Chaplin began his evidence by highlighting that, although there is actually no such thing as a personal service company, and it is not possible to objectively or legally define one, there are some industry norms.
“The closest thing to a definition is the consensus that PSCs are single person single shareholder limited companies providing knowledge-based services to business customers. In a contracting context, a PSC typically services one client at a time on a project basis.”
Chaplin highlighted that the knowledge-based businesses often labelled as PSCs are also typically associated with consultants who supply their expertise in a time-based manner, charging clients an hourly or daily rate for services.
Knowledge-based PSCs unfairly targeted by HMRC
Chaplin also draws attention to the example provided by the Federation of Small Businesses’ (FSB) witness David Ramsden, who highlighted in an oral evidence session that knowledge-based one person limited companies are unfairly targeted by HMRC.
Ramsden challenged HMRC’s default position of assuming all knowledge-based one person companies incorporate purely for tax avoidance reasons. He said that the same is not true of one person product-based companies, even if the company spent time supplying products to only a single customer.
“HMRC incorrectly labels all knowledge-based workers who are not directly employed as disguised employees,” says Chaplin. “This is a nonsensical concept invented by HMRC to try and raise more taxes.”
Motivations for using PSCs: by choice or by force?
The use of limited companies in the professional level flexible workforce is widespread and standard business practice. That is because hirers, whether agencies or end-user clients, quite reasonably want to mitigate their risk against employment rights and tax liability transfer.
“Individuals are rarely forced into using limited companies, but most agencies and clients expect it,” notes Chaplin.
HMRC incorrectly labels all knowledge-based workers who are not directly employed as disguised employees
Dave Chaplin, ContractorCalculator
“There is also an alternative for knowledge workers who either do not wish to have the burden of managing a limited company or do not earn enough to justify running one, but which still offers client and agencies the same removal of tax and employment rights risk. They can join an umbrella company.”
Who should be responsible for policing IR35?
The House of Lords committee asked whether clients, if they insist on workers using PSCs, should become responsible for policing IR35.
Chaplin believes that this could be disastrous: “Placing the burden of proving IR35 on clients would cause end-user organisations to look to large consultancies or offshore suppliers for flexible knowledge-based services, and bring the UK’s economic recovery to a halt.
“The essence of the problem isn’t who should do the checks; it’s that the IR35 status check itself is cumbersome, subjective, and highly complex. It is the check itself that is the problem, not who does it,” asserts Chaplin.
He concludes: “In our view, it is not the business of HMRC to tell people whether they are employees or not. People should have the freedom to contract and arrange their contractual business relationships as they wish, without them being overridden retrospectively by the taxman at a later date.”