Further attack on personal service companies to come?
Governments have historically challenged tax avoidance through the use of “Personal Service Companies” (PSCs), but so far nothing substantial has been enacted to counter the use of PCSs. PSC’s typically pay a low salary to the owner/manager so that the national insurance limit is not breached. Any profits in the company are taxed at corporate tax rates (currently 19%) which is normally lower than income tax rates. The balance is then paid on to the owner (or owners) as a dividend. The removal of the 10% tax credit and subsequent introduction of the £5,000 dividend allowance was intended to increase taxation on dividend income. However, PSC arrangements typically save tax by avoiding the PAYE and Class 1 National Insurance Contributions that would apply if the worker was treated as an employee.
From April 2017 contractors working through their own limited companies for the public sector no longer decide whether an “employment relationship” exists, as the public sector employer (or the agency) will be required to put the payments to the company through the payroll and account for PAYE and NIC (employee contributions) on them. The agency will be liable for the employer rate of NIC on the payments. It seems possible therefore that this treatment will be extended to the private sector, such that the onus will be on the client to determine if an employment relationship exists, and therefore the client will need to account for PAYE and NIC correctly. As part of this, in light of this individuals operating through PSCs may wish to consider the implications for them if the rules do evolve as anticipated.