Freelancer’s Question: As the taxman is going to target freelancers he perceives to be falsely self-employed from April, would it be safer for my freelance consultancy business to become a personal service company, or are such PSCs also in scope of the new rules? Even if PSCs are in scope, is it at least likely that these freelance company structures should not normally be affected by the proposed framework?
Expert’s Answer: There has been much speculation as to whether personal service companies (PSCs) are outside of scope of the new proposals to target false self-employment.
Our analysis of the draft legislation is that every individual working through a company is within scope of the legislation as it is currently drafted, as they are unavoidably ‘personally involved in the provision of the services’, this being a new proposed test that triggers the tax.
The only way to avoid this would be if payments are made by the company by way of dividend or employment income. However if dividend payments are in consequence to the services, for example where the dividends are made regularly based on payments received, as is often the case with PSCs, HM Revenue & Customs would be entitled to look for payments from the organisation which has the contract with the end-user (the Head Operator or ‘HO’), on the PAYE basis (making the HO liable for 13.8% employer NICs). Again we are not sure whether this is an intended outcome and HMRC is providing mixed messages on that front.
So a worker operating through their own limited company (a PSC) is indeed an area of the proposals subject to some confusion. But provided they are paid by way of dividend or employment income by the company, these individuals are not brought into scope.
It should be remembered, though, that it is always possible for a limited company to pay in a different way, for example by way of gross payment and the worker may not be a shareholder. While many PSCs will not pay that way, the risk of incorrect payment leaves the agency open to risk and therefore will require yet further due diligence, when no such requirement currently exists. So even a PSC poses a risk [to agencies] unless the PSC only ever deploys the shareholder/director.