Personal Service Companies Clampdown Due (IR35)
The government is expected to crack down soon on the use of personal service companies (PSC) that use the IR35 scheme to reduce costs.
These company structures are popular for entertainers, IT contractors and business consultants. However, the government feels the system is being abused, leading to a review of personal services companies. We are likely to see related changes that will affect business owners and contractors in the next budget.
What Is A Personal Service Company?
Personal service companies are referred to as business structure, such as a limited company, that a majority of contractors rely on to create the necessary professional image and to manage their finances in the most tax-efficient way.
The use of personal service companies has increased dramatically since the recession. With companies looking to reduce their headcount and associated costs. Whilst former employees enjoy lower tax and NI bills.
Why Are The Government Clamping Down?
There are now more than 200,000 personal service companies in the UK that the government looks set to target. The reasons are two-fold; first there is a fear that companies are exploiting a loophole to avoid benefit and pension obligations to contractors who are employees in all but name.
This is a legitimate concern; however, sceptics may point to the estimated lost revenue that is the real reason. The use of personal service companies costs the treasury £400m each year . Tax avoidance/efficiency has been a controversial political issue. Personal service companies are low hanging fruit for the government without directly increasing taxes.
The revelations that there are members of the BBC and the public sector using the structure to lower tax thresholds has added fuel to the fire. Adding social acceptance to the pursuit of reform to the IR35 scheme rules.
The UK has a new chancellor and the autumn statement is only a few months away. An announcement on personal service companies and the IR35 scheme is expected to be included.
Potentially signalling a huge shift in the way personal service companies work. Changes to enforcement could have a huge impact on the accountancy sector and small business owners.
Tax structures should not be abused by companies to reduce costs and disguise employees. This must be balanced with a need to protect the 5m businesses in the UK, particularly those that legitimately use contractors.
Hopefully changes will keep the right balance between rewarding entrepreneurship and enforcing the rules of the system fairly.
If you are unsure how IR35 and personal service companies affect you then give our team a call 01945 588105