What is a personal service company?

A personal service company (PSC) is a limited liability company with an individual contractor, consultant, or self-employed individual as its sole director. This type of company typically provides professional services, such as IT, design, and engineering, to its clients, sometimes via an agency.

Some contractors are obliged to set up their business as a limited company because, in many instances, the clients they target only offer contracts to businesses structured in this way.

These clients typically have no wish to take on an employee, so a PSC offers them an alternative method of accessing talented individuals without the burden of employment costs. Contracting with a limited company also mitigates some of the clients’ risk.

So what are the characteristics of personal service companies, and are there any tax implications when setting up a PSC?

What does a personal service company ‘look like?’

The characteristics of a personal service company include:

• Having a sole director, who might also be the sole shareholder
• Obtaining work through a registered company
• Delivering services through the limited company
• The contractor/director dealing with the company’s finances and bank account

Setting up a personal service company offers you several advantages as a director:

• It’s a tax-efficient way to run your business
• A limited company is perceived as having more status and credibility than businesses operated by a self-employed individual
• You can claim a wide range of business expenses as a limited company
• You can hire other people to work for you as your business grows

Although the benefits of operating as a limited company are clear, the structure also has potential drawbacks, one of which is IR35 tax legislation.

What are the tax implications for personal service companies?

Personal service companies are significantly affected by the IR35 legislation that was brought in by HMRC in 2000. This legislation was introduced to prevent perceived abuse of the tax system.

HMRC believed clients hiring personal service companies were deliberately avoiding the costs of employment, and that in reality, contractors were ‘disguised employees.’ The fact that directors of personal service companies can also limit their tax liability by taking salary and dividends in a tax-efficient ratio, has also come under HMRC scrutiny.

Professional help for personal service companies

Providing high quality services whilst remaining compliant with tax and employment rules in this complex operating scenario can be daunting, so obtaining professional guidance is highly advisable.

Seeking advice from an accountant who specialises in this area offers reassurance that you’re not falling foul of UK tax laws, and that you’re also running a business that’s tax-efficient.

If you’re considering setting up a personal service company, or already operate in this way, Handpicked Accountants can help. We’ll provide reliable referrals for qualified accountants in your area, based on longstanding professional relationships and extensive knowledge of their specialisms and working practices.

Please contact one of the team to find out how the system works, and let us help your personal service company flourish in this challenging environment.