If you’re a contractor operating your own limited company, you’ve probably heard of personal service companies. Understanding the term is essential when calculating your tax liability under IR35, legislation introduced to distinguish between employees of a company from self-employed contractors. The term is however can be a little ambiguous and knowing whether you fall under IR35 rules may not be clear at first.
What is a personal service company?
Neither the government nor HMRC have provided any clarity about what defines a personal service company (which often works in HMRC’s favour when it comes to tax investigations).
Generally speaking, a personal service company for contractor can be described as a limited company under the control of one director. As a contractor, you will be the director of your limited company and you will own most of, if not all, its shares.
How they work
Since many businesses refuse to hire self-employed contractors, you may feel forced to set up your own limited company in order to win contracts.
Businesses can be hesitant to enter into a contract with a self-employed individual because this would entail them assuming full employment responsibilities such as providing sick pay, holiday and other employee benefits.
You will also present a more professional image by operating through your own limited company which could make the difference when competing for contracts.
Talk to us
Many contractors use personal service companies to reduce their income tax liability and national insurance contributions. Our team of accountants and business advisers help contractors manage their tax affairs and work to ensure that you minimise your tax bill.