Contractor limited companies, or personal services companies (PSCs), cannot be distinguished from any other type of company, nor should they be treated differently from product-based businesses.
These are just some of the key points arising from the written evidence supplied by over 40 contributors to the House of Lords Select Committee on Personal Service Companies (PSCs) inquiry.
“Identifying a dividing line to separate PSCs from other companies is an impossible task,” explains the Institute of Interim Management (IIM) in its contribution.
And PCG highlights that, “It is impossible to find a definitive explanation of what unique characteristics make a PSC any different from any other limited company.”
Common themes in the responses to the inquiry’s questions relating to PSC use include:
- There is no definition of PSCs, nor is it possible to differentiate between PSCs and any other limited company
- Flexible working is becoming increasingly mainstream, and the government should be welcoming structures that facilitate this, not punishing those who use them
- Why are PSCs being singled out and small businesses selling services being treated any differently to small businesses selling goods?
The written evidence from forty contributors so far now spans 277 pages. A summary of the key contributions relating to PSC use, which are questions one, seven, eight and nine of the Lords’ call for evidence is as follows.
How widely used are PSCs?
Responses to a survey by the Association of Accounting Technicians (AAT) and the Chartered Institute of Payroll Professionals (CIPP) suggest that PSCs are “used far too frequently”.
Interestingly, AAT/CIPP respondents believe that “there are more PSCs in the public sector and IT sector than anywhere else”, with another respondent commenting that PSCs are “mainly used in the IT sector but now apparently used extensively in the Civil Service”.
Accountant Sam Corcoran also believes PSC use is significant because “most clients and agencies will insist on a limited company being used so that any risk of misclassification/PAYE is passed to the worker”.
He advocates “making the agencies and end clients responsible for employment rights and tax for all their workers”.
Changing flexible labour market conditions have increased PSC use
The Institute of Chartered Accountants in England and Wales (ICAEW) highlights that PSCs are not defined, but then adds: “While we do not have any statistical evidence, it is clear…that PSCs are used extensively throughout the UK.”
“The government needs to recognise the changing workforce and create a tax system that is supportive and not penalising of the increasing number of people choosing to work on a flexible or self-employed basis,” asserts the Interim Management Association (IMA).
And the Institute of Directors suggests that: “Most businesses consider themselves to have a less powerful position in relation to their customers but a more powerful position in relation to their suppliers and employees. Accordingly, we consider it is wholly unsurprising that there has been growth in the use of PSCs where their use is sustainable.”
The days of PSC use on an “industrial scale are over
Some contributors believe that PSC use, and potential abuse, may not be as widespread as the Lords may perceive. According to the Freelancer and Contractor Services Association: “The days of PSCs being used (on an industrial scale) by nurses, teachers, drivers and secretaries have largely gone.
It is impossible to find a definitive explanation of what unique characteristics make a PSC any different from any other limited company
PCG
“The lower paid, lower skilled potentially vulnerable ‘temps’ are not using PSCs – they are much more likely to be on agency payroll or employed in an umbrella company. The MSC legislation has addressed the issue of ‘industrial evasion’ in certain sectors.
“The more highly skilled, highly paid contractors/freelancers/self-employed professionals are the individuals using PSCs.”
Is more guidance and advice on business transaction status needed?
Numerous contributions to the written evidence suggest that IR35 guidance needs to be much more concise, although this ignores the inherent complexity of determining employment status.
The Association of Chartered Certified Accountants (ACCA) makes the point that the “provision of detailed guidance on complex areas can only ever be a second best to avoiding the creation of complex areas in the first place”.
The IIM notes that: “Freelancers, including interim managers which use PSCs, are in an unusual position in the UK tax system, in that they must constantly live with uncertainty as to their tax status. This can change from contract to contract, and can be altered retrospectively on investigation by HMRC.”
Are contractors forced into using PSCs?
“We see no evidence of end clients or recruitment businesses forcing large numbers of individuals to work through their own personal service company,” states the Freelancer and Contractor Services Association .
In contrast, umbrella solutions provider Giant, a member of the Freelancer and Contractor Services Association , says: “The evidence we have seen confirms that on many occasions the individual would not be given any choice other than to use a PSC in order to secure the assignment. Individuals are pushed into PSCs even when earning as low as £20,000 per annum.”
“We have anecdotal evidence that individuals are being forced into the use of PSC,” adds accountants body, the ICAEW. “The economic situation has possibly pushed businesses to offer work either via a PSC or umbrella employment businesses or on zero-hours contracts, just to give them the flexibility to pay for workers only when they are needed and not pay for downtime.”
Should clients bear the responsibility of determining IR35/employment status?
According to an AAT member speaking about one of its clients: “The business cannot know how every service company operates, nor whether it is a PSC.”
And in its contribution, client organisation Amey warns that: “Placing further responsibility (risk) onto the ‘employer’ will therefore likely lead to a significant increase in overall administrative burdens between company, PSC and HMRC, compounded by a material loss of labour market flexibility.”
Shifting responsibility for determining status to clients “would not solve the bigger problem,” continues the ICAEW, which is “HMRC seeking to re-categorise as many workers as possible as falling under PAYE and Class 1 National Insurance Contribution (NIC) rules, so as to collect more revenue. Whether the onus is on engager or worker to justify the status decision, the decision is equally difficult and time-consuming for all parties.”
The benefits of using contractor limited companies, aside from tax
According to one CIPP member, the benefits are extensive, including “the freedom to trade where you wish, multiple clients and enormous variety of work, if it is available. Most [contractors] will have a much better life/work balance”.
And the umbrella trade group makes a powerful point, highlighting that, “It is a benefit to keep your professional/work/business affairs/finances separate from your personal affairs. A PSC is one way of achieving this separation.”
Not surprisingly, the IIM is highly supportive of the benefits using a PSC can bring to contractors: “Limited company structures are the correct way to allow self-employed specialists to balance the risk and reward of operating as a targeted business resource at a specific point in time.”
The inquiry has unfairly focused on the negatives of using PSCs
Limited company contractor Graham Boyd notes in his evidence that using a PSC means he can “build up a wealth of experience on leading projects” and “become more highly skilled than I would be as a permanent employee”.
“I am concerned as to the whole focus that PSCs are only in existence to avoid tax. So I think the eleven questions being asked [by the Lords] are deliberately focusing on the negative,” explains accountant Peter Disney.
“In my view there has been a natural move away from big business into one-person units who outsource everything. All of this has been driven by technology and is a natural economic shift.”
What are the drawbacks of using PSCs?
Contractor Graham Boyd continues by identifying a fact that is commonly ignored, which is that limited company contractors actually do pay rather a lot of tax. “I frequently hear that directors of PSCs only pay 25% higher rate tax on dividends,” explains Boyd. “What is rarely, if ever mentioned, is that dividends are only paid after Corporation Tax of circa 20%.
“This therefore makes the [marginal rate of tax approximately] 40%. As a successful PSC will invariably earn more than an equivalent permanent employee, this actually provides higher tax take for the government than the permanent alternative.”
It’s not all positive, as the IIM notes: “The typical interim manager’s life is one of relatively short-term assignments, interspersed with significant periods of costly, unpaid ‘downtime’.”
The IIM’s view on ‘freedom to contract’ is a good conclusion to the PSC-focused element of the written evidence to the Lords: “It appears to us that individuals have a right to use whatever legal construct they choose to earn a living, provided that construct complies with the general law in the UK. To do otherwise is discriminatory.”
ContractorCalculator also submitted written evidence, and has published a summary of the contribution focusing on PSCs.