Owners of personal service companies could face stricter tax rules

Individuals who run a personal service company (PSC) are warned that they could face higher tax bills in the future as HM Revenues & Customs (HMRC) looks to re-evaluate its tax rules.

HMRC have put forward a proposal to amend Intermediaries Legislation, which could have a serious effect on freelancers.

The legislation – often referred to as IR35 – was introduced in 2000 and aims to tackle ‘disguised employment’. 

It requires individuals working through an intermediary to pay broadly the same tax and National Insurance Contributions as any other employee, where they would have been providing the same services directly.

This mainly refers to personal service companies, which are enterprises where people provide their services usually through their own company.

In HMRC’s latest discussion document they say there is a “growing body of evidence which suggests there is significant non-compliance with the current rules.”

They point to the fact that the number of those paying tax under IR35 has remained fairly static, while the number of PSCs has increased dramatically from 200,000 PSCs in 2011-12 to 265,000 in 2012/13 – a number that is expected to continue to grow.

HMRC officials estimate that during 2015, the cost of non-compliance regarding IR35 will total a staggering £430m.

While HMRC are only currently consulting on this issue, it shows that this is an area of particular interest for them and one that is likely to be targeted within the next few years.

IR35 legislation can be quite complex and can add an additional burden to the running of you businesses, while you are trying to focus on building a reputation and deal with your clients requirements.  For some individuals it may be best to seek professional help.

Those who take on employees from a PSC also need to be aware of the proposals, as one of the measures put forward by HMRC would make it a requirement of employers to declare a person’s employment where they felt IR35 rules may apply.

Why this still remains a proposal on paper, there are a number of indications which suggest that this could be the way that HMRC intends to monitor PSCs in future.  This could create an additional regulatory burden for businesses and it is an issue that they will need to monitor.

If you would like help with IR35 legislation or you are interested in setting up a personal service company, please contact us.