Personal Service Company

What is Personal Service Company (PSC)?

A personal service activity, as is clear from its name, has primary purpose of providing personal services and it includes a wide range of activities or professions, including law, engineering, medicine, design, finance, accounting, performing arts etc and as the name implies, a personal service activity focuses and emphasizes on directly providing a personalized services such as legal advice.

Personal Service Company Guide

A personal service company is a term coined by the HMRC in order to describe the companies which are set up either by an individual or small group of individuals to offer their services via the medium of the company rather than in a personal capacity and the company is owned and managed by the individual or small group of individuals as a limited company. Although there is no concrete definition of a personal service company, HMRC views the contractors who are working for their clients using their own limited companies as personal service company and also uses the lack of clear definition of the term “personal service company” to their advantage while checking the tax affairs of the contractors.

Difference Between personal service company and managed service company

The basic difference between a personal service company and a managed service company is that in the former case, the company is owned, managed and organized by the individuals or a group of individuals whereas later is owned and governed by separate set of owners and are subject to different regulations by HMRC.

Personal service companies Uses

Personal service companies are most commonly used for the contract jobs considering that many recruitment agencies and clients will not prefer to hire self-employed individuals unless they have their own limited company and there are number of reasons for the same, risk being one of the major one because everyone wants to sign a contract or hire services of a firm rather than of an individual. Also doing so brings its own share of hassles such as sick pay or holiday of the individual whereas in case of a firm like a recruitment agency it is being taken care by the firm itself and also there is no employment relationship. In addition to this, going or hiring services through a firm adds additional layer of protection which is otherwise missing in case of an individual and a worker who is involved in off-payroll working when they work for a client through their own intermediary, often a personal service company. Without the intermediary of the PSC, an individual’s employment status would be determined by their relationship status with the client company, although the question would be whether they are an employee or self-employed.

Personal Service Company and IR35

The term “personal service” was coined by the HMRC through the introduction of IR35, which was launched in April 2000 in order to arrest disguised employment. Under IR35, it was stated that if you consider yourself or your limited company as a personal service company , then you need to be thorough with the IR35 status. Also any and every contract you undertake will be reviewed for its IR35 status and that’s possibly the only pitfall of using or having a personal space company i.e. you must be fully aware of the provisions of IR35 and must try your best that its provisions do not apply. HMRC designed IR35 rules in order to prevent the avoidance of tax and NIC through the use of personal service companies and associated partnerships and the rules are applicable if you as an individual has sold his or her services directly instead of a company, then you will be listed as employed rather than as self-employed. A personal service company has its own share of advantages for those who wish to offer their services with the benefit of limited liability primarily because they are not very expensive to set up or to start with and also considering the pace at which the self-employment is increasing, the use of PSCs is likely to increase as well and with a little bit of planning at your end, you can for sure avail all the benefits and advantages associated with the personal service company.

There are various reasons why one should set up a personal service company, such as:

  • Creating a clear ownership structure: The clear and unambiguous ownership arrangement and the share structure of a personal service company is a feature which is not in other structures such as LLP etc. Also the details of the personal service company are publicly visible at the Companies House. Also the company’s Memorandum and Articles of Association sets out the guidelines and rules which govern the shared ownership if that’s the case i.e. in case if you have an ownership in conjunction with your spouse and since the Articles of Association and Memorandum lists out all possible scenarios, things are more clear than in an unincorporated environment.
  • Planning for the future: It is much easier to pass down the ownership of a business when it is a matter of transferring of shares. Owning a personal service company deals not only with the issue of succession but it also spreads the value of the business amongst the family members, which is for sure a lot beneficial from the Inheritance Tax point of view as well. Thus it helps in planning better for the future in terms of ownership of your business.
  • Facilitating the sale of the business: Having or creating a personal space company assists or facilitates the sale of the business, firstly because of its clear structure and secondly because since everything in listed out in the Articles of Association and company’s memorandum, it is much easier to sell of the business to the new owner. It is no brainer to think that it takes a lot in order to sell your business which in turn depends on various factors, especially on the reputation of your business.
  • Minimising risk to personal assets: Since the personal service company operates as a limited liability company and thus provides minimal risks to your personal assets and protects them from being dragged in a court case. Although there is always an option of giving insurance protection to your personal assets, having or owning a personal space company through a limited liability is still considered as one of the most logical way of protecting your personal assets.
  • Efficient remuneration planning: Having a personal service company helps you in doing efficient remuneration planning because routing it through a limited liability company enables you to pay dividends to your shareholders either in addition or in place of salary and thus you can save on your tax and National Insurance (NIC) paid to the HMRC. It also enables its owners to hold the earnings within the company and paying the salary and/or dividends over a period of years and thus can be quite an effective and legal way of minimizing the payable tax.
  • To obtain work: It will not be wrong to say that even today most of the clients, especially multinational companies would like to work to the individuals or the contractors who are offering their services through a company. It is a general perception and though a bit misguided one, many clients would still swear by this principle. And very often the case is “No company no work”. It is also a feel good factor to say that you own or operate through a company.
  • Advantage for clients: Using a personal service company reduced the risk of getting into any kind of potential arguments but having said so, it does not necessarily eliminate all IR35 related considerations and in the world of business, it is all about word of mouth marketing so if your clients are happy and satisfied, it will work in your own favor only.
  • Sounds professional: Having “limited” in your company name will for sure gives you more professional outlook along with greater air of respectability which could give you the edge when it comes to landing a new contract.

There are various benefits of owning a personal service company and if you have a limited company then:

  1. You are your own boss.
  2. You have the option to hire people as the company grows.
  3. You can claim a range of expenses.
  4. You can collect payment through a personal service company as an individual.
  5. You have an efficient pay structure in place.
  6. You have a stronger and better work-life balance.

For the contracting sector, a personal service company is known and defined in terms of a limited company which has a sole director who owns most or all of the shares and it generally supplies professional services to end user clients directly or indirectly i.e. via an agency and in real world scenario, most of the contractors have no other option but to use a limited company and most of the contractors who are working through personal service companies or limited companies opt for hiring a full-time accountant who helps them in fixing their taxes and finances by taking care of your business and personal taxation needs. Having a specialized accountant will also ensure that you are contracting in the best possible manner.

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