ATXP6 UK
Syllabus A1. Income tax A1c. Income from employment

A1civ/A4vvi. Personal Service Companies

Syllabus A1civ/A4vvi)

Identify personal service companies and advise on the tax consequences of providing services via a personal service company
and
Identify personal service companies and advise on the tax consequences of services being provided via a personal service company

What is a personal service company?

An individual offering services to a client, therefore being employed by the client will not get the income tax and national insurance advantages that a company would get from offering the same services to the client.

One way in which an individual might seek to avoid being classed as an employee is to form a limited company (a personal service company) and then to hire out his or her services in the name of the company.

This would allow the individual to get the tax and national insurance advantages that are available to a company but not a individual.

Illustration

Mary works for Jake Ltd. and earns a salary of £60,000 per annum. 

What are her NIC payments?

  • Solution

    Employee Class 1:

    
46,350 – 8,424 * 12% = £4,551
    
60,000 – 46,350 * 2% = £273

    
Total £4,824

Illustration

Mary owns 100% of the share capital of Mary Ltd. and is employed full time by Mary Ltd. 

Mary Ltd. offers services to Jake Ltd and earns £60,000 per annum from this contract. 

What are the NIC payments of Mary Ltd?

If Mary does not take a salary from Mary Ltd. then there will be no NIC implications for Mary or Mary Ltd.

Anti-avoidance legislation (the “IR 35” legislation) now exists to stop this kind of disguised employment.

The legislation applies to relevant engagements, where a worker provides services to a client through an intermediary (usually a company) – wherein, if the intermediary company did not exist, this individual providing services to a client – would be treated as getting income from employment.

For example, if Mary Ltd. did not exist, Mary would be employed by Jake Ltd directly, and therefore receive employment income from Jake Ltd and pay income tax and national insurance on that income.

It is only because Mary Ltd. exists that the services are being offered through the intermediary to save tax.

If an intermediary company receives income from a relevant engagement during a tax year and this income (less allowable expenses) is greater than the worker’s employment income received from the intermediary in that year, then the excess is treated as a deemed salary payment made on the last day of the tax year.

The deemed payment is subject to both income tax and national insurance contributions.

Conditions to be classified as a personal service company:

  • The company enters into a contract to provide services to the client

  • The services are carried out by the individual

  • If the services were carried out under a contract between the individual and the client, then the individual would be regarded as an employee of the client

  • The individual must own >=5% of the share capital in the intermediary company

Calculation of the deemed salary

Income from relevant engagements £A

Less: 
Statutory deduction (5% × £A) (X) 
NICs paid by employer (X) 
Expenses paid by the employer which would be deductible under employment income rules (X)
Pension contributions by employer (X) 
Salary paid by employer (X) 
Deemed salary including employer’s NICs £B

Less: Employer’s NICs (£B × 13.8/113.8)

Deemed salary £C

Ignore any dividends paid by personal service company

Illustration

Jake owns all of the shares in Jake Ltd. 

Under IR 35 legislation, Jake Ltd. is a personal service company. 

Income from the Relevant Engagement £85,000
Costs to administer company £3,000
Jake’s salary £50,000
Employer contribution to OPS £2,000
Dividend paid to Jake £10,000

What is the deemed salary of Jake?

  • Solution

    Amount received in tax year £85,000

    Less: 
    Statutory deduction (5% × £85,000) (£4,250) 
    NICs paid by employer ((£50,000-£8,424) × 13.8))  (£5,737)  
    Pension contributions by employer (£2,000) 
    Salary paid by employer (£50,000) 
    Deemed salary including employer’s NICs  £23,013
    Less: Employer’s NICs (£22,977) × 13.8/113.8))  (£2,791)
    Deemed salary  £20,222