Incorporation and 'Personal Service Companies'

We are often approached by individuals who would like to set up a company to supply their services to a contractor (or contractors), particularly in industries such as Nuclear or Construction. HMRC refers to such arrangements as “Personal Service Companies” (PSCs). Whilst this is not a problem in most cases, care needs to be taken with respect to the intermediaries’ legislation that was introduced to eliminate avoidance of tax and national insurance through the use of such companies. The legislation is known as “IR35”.

 

The House of Lords recently set up a select committee to investigate the use of PSCs for tax collection and published it’s findings report on 7 April this year. The committee looked at the extent to which PSCs are in use, including the issue of whether some individuals are forced into the use of a PSC as a prerequisite for being considered for work. They also considered the effectiveness and efficiency of the intermediaries’ legislation which was first introduced in 2000. The investigation concluded that, if IR35 is to be maintained, the guidance which is currently made available to those affected must be improved. They recommend that HMRC undertake a full consultation on how the Business Entity Tests could work better to provide greater certainty to taxpayers. They also said HMRC's Contract Review Service needs to be improved and, in addition, they should provide greater clarity as to the questions asked concerning service company usage on annual tax returns. The committee also recommended that the membership of the IR35 Forum be reviewed.

 

The agency legislation has recently been amended to improve the fight against “disguised employment”. HMRC could see evidence of existing permanent employees being taken out of direct employment and being moved into false-employment arrangements involving intermediaries. However, the proposed agency legislation will not generally apply where a worker is engaged via a PSC because dividends paid to someone as a genuine consequence of their shareholding in a PSC does not constitute someone being remunerated as a direct consequence of providing a service. Also, a salary paid to a worker by a PSC is already employment income so the new agency legislation would not apply in that instance either.

 

Typically all this is more of an issue where you are only supplying your services to one company and evidence suggests it’s more of an employment relationship. That aside, even if you are happy with your contract, there are plenty of other things to consider when operating your business through a company.

 

Are you extracting profits in the most tax efficient manner? Typically owner managed businesses will take a small salary and the rest of available profits through dividends. This is usually the most efficient method but it needs to be considered in the context of your other income and personal circumstances.

 

If there are other shareholders in the company you will also need to consider the control and rights their shares give them. It is possible to vary and pay dividends to others independently to the dividends you pay yourself, but care needs to be taken to ensure this is done in accordance with the company’s articles of association. With careful planning significant tax savings can be made.

 

A lot of businesses will have income in excess of the VAT registration threshold (currently £79,000) and so will do a compulsory VAT registration. However, it is quite common for businesses to register for VAT voluntarily. For example, if you are a consultant under the VAT registration threshold, but your customers are mostly VAT registered, you could do a voluntary VAT registration under the Flat Rate Scheme. This means you charge an additional 20% on your invoices for the VAT, but the amount you pay to HMRC may only be 12% or 14% (the flat rate) on your VAT inclusive turnover. You therefore benefit from the net difference. You wont claim VAT back on your expenses (unless capital items over £2,000), but as a consultant you aren’t likely to have many standard rated costs. Businesses with turnover up to £150,000 can apply and can stay in until turnover reaches £230,000.

 

Richard Askew, Corporate Director, Workington

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