Member Article

Accountants warn caution on limited status for ‘freelancers’

Waltons Clark Whitehill is urging individuals trading through personal service companies to take note of the Inland Revenue’s continuing aim of stamping out what it considers as an abuse of the tax system.

The term ‘personal service company’ is not defined in law. It is understood generally to mean a limited company, the sole or main shareholder of which is also its director, who, instead of working directly for clients, or taking up employment with other businesses, operates through his company. The company contracts with clients, either directly or through an agency, to supply the services of its director.

This practice has expanded significantly over recent years as it brings flexibility to the end user as well as tax/NIC benefits to both parties, but the Inland Revenue has concerns that the practice is being misused.

Graeme Surtees, Director at the Hartlepool based firm of chartered accountants and business advisers, said: “Personal service companies (PSCs) have been a controversial topic on the tax agenda for a long time. Such companies can offer significant tax and commercial advantages but are often frowned upon by HMRC. Legislation, often termed IR35, has been around for quite some time but it is much criticised because the provisions are complex, and rely on contract-by-contract assessment and a sound understanding of case law.

“A House of Lords select committee recently reported on the use of personal service companies. The select committee essentially mirrored the widespread criticisms that the business sector has made about IR35 in recent years but despite this IR35 seems like it is here to stay.

“With an estimated 1.5 million such companies now in operation in the UK, this is now a very common way of working but we can advise on the best way of working, tailored to a client’s particular circumstances.”

This was posted in Bdaily's Members' News section by George Hardey .