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Personal Service Companies post April 2020

Personal Service Companies post April 2020

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Good morning.

I've a number of clients with PSCs whose clients have indicated they will be treating them as off-payroll workers from April and deducting tax and NI via PAYE. Can anyone give me a good reason for those with PSCs in this situation (assuming their company has no other income) to keep their limited company running? They may have a few expenses they can charge to the PSC, but the tax saving from these is unlikely (at least in my clients' cases) to offset the accountancy fees they're paying. (I'm not trying to find an excuse to keep these companies running, quite the opposite!)

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By paul.benny
09th Oct 2019 12:33

The effective demise of the PSC does give an opportunity for the workers to make themselves redundant and pay a £30k tax-free redundancy payment. This could even trigger a tax loss in the year and a refund of prior year CT paid.

I would be inclined to leave any such moves to a late state in case the IR35 deadline is moved. I'd also consider keeping the company open just in case something changes.

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Replying to paul.benny:
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By whatdoyoumeanwashe
09th Oct 2019 12:52

Interestingly, I have read guidance to contractors of a big name bank which states that they will not change their decision to terminate all PSC contracts prior to April 2020, even if the IR35 deadline is moved. This seems to be linked to their assertion that their decision to get rid of PSC contracts is not motivated by IR35 at all. A bit like the government's decision to prorogue parliament had nothing to do with Brexit.... Based on that, I'm not sure there is much point in keeping the company open, unless of course the end client changes its mind...

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Replying to whatdoyoumeanwashe:
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By paul.benny
09th Oct 2019 14:24

Even if there is no use for 'employment' purposes, having a limited company can help unlock various things like business-only pricing and memberships.

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Replying to paul.benny:
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By whatdoyoumeanwashe
09th Oct 2019 16:17

I struggle to see those things being worth more than my accountancy fees. If they are I'll be opening shell companies for everyone in the neighbourhood!

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Replying to paul.benny:
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By SWAccountant
09th Oct 2019 17:34

Except for CTA2009 s79.

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Hallerud at Easter
By DJKL
09th Oct 2019 14:39

Will the "employers" be willing to take them on directly - whilst tax/NI treatment may be changing ,employment rights etc are more favourable to employers on a company to company invoicing basis, so will your clients have a choice if they wish to continue contracting?

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Replying to DJKL:
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By whatdoyoumeanwashe
09th Oct 2019 16:24

I believe they will. Banks have thousands of psc contractors providing services to them. This ir35 change doesn't change their need for manpower, so if they don't want to take responsibility for contracts being outside of ir35 they'll have to engage on another basis. From the document I've just read from one bank, that means a mix of umbrella companies, fixed term PAYE contracts, full employment, or goodbyes. I doubt the latter category will be very big.

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Replying to whatdoyoumeanwashe:
Hallerud at Easter
By DJKL
09th Oct 2019 16:33

Why not just carry on contracting with companies but deal with the Tax/NI.

Certainly my son contracts (software development) , in his case usually UK government departments via a main contractor and them to end client, but certainly to date, apart from his time in Frankfurt, his having a company has been their requirement not his.

I would be really surprised if they would take on holiday pay/sick pay et al without a drop in the daily rate from his current £500 or so a day (more in London)

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Replying to DJKL:
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By whatdoyoumeanwashe
09th Oct 2019 16:59

If they use an umbrella company I don't believe the "fee payer" will be liable for holiday/sick pay etc. I agree historically that it was usually the end client has required the limited company, but from what I'm seeing (with banks at least), that's about to change. And if that's right, it seems a waste of accountancy fees to keep using a company when it's no longer a requirement and there's no tax advantage...

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Replying to whatdoyoumeanwashe:
Hallerud at Easter
By DJKL
09th Oct 2019 21:00

Interesting question if the umbrella company would be liable for sick pay?

Whilst for holiday pay presumably it could dock out of "earnings", if all earnings have been distributed and the individual was then ill what then, if the contractor is an individual employed by an umbrella company who pays SSP?

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Replying to DJKL:
Neil Armitage
By Neil Armitage
11th Oct 2019 11:52

Yes the umbrella company is liable for any stat payments such as SSP, SMP etc. SMP is recoverable to some extent, but SSP is a hit they have to take.

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Replying to whatdoyoumeanwashe:
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By Rgab1947
11th Oct 2019 11:33

Like to see how banks react when the PSC IT contractors call it a day with banks.

Off course HMRC engineered an exception for their PSC IT contractors. Don't know if the exception is legal but hey we are HMRC and we can apply the law selectively.

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By GR
09th Oct 2019 15:54

It makes more sense for the contractors to close their companies once they are happy with their new permanent role in order to avoid accountancy fees, insurance fees, bank charges, late filing penalties, potential HMRC investigations, book-keeping, etc. Generally, any benefit to keeping the company open would be pretty minor compared with the benefits of closing the company.

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By WhichTyler
09th Oct 2019 21:39

all their clients? do some still have contracts that are genuinely not deemed employment?

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By pauljohnston
11th Oct 2019 11:13

Some contractors like the freedom of working for "their own company" and if that contractor has more than one contract he/she is not bound by the working rules of a permanaent employer.

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By ianthetaxman
11th Oct 2019 11:18

I don't think IR35 is dead, but the new rules certainly are aimed at squeezing more and more people onto payroll. Even if someone has the right contract in place and meets all the criteria to operate via a PSC, they still run the risk that their contract will not be renewed unless they are paid via PAYE.

The big players will decide not to take on contractors in view of the perceived risks imposed by HMRC. If contractors don't want to be treated as employees of the end user, and probably take a pay cut in doing so to fund the additional costs/hassle factor incurred by said end user, I doubt the end user will be bothered, as there's likely to be a long queue of people waiting behind the contractor, happy to work as an employee.

I suppose the risk is that the skills required to undertake the work may or may not be held by the eventual employee, but my guess is that with a limited number of contracts to fulfill and a much larger pool of potential workers to choose from, the end user is going to come out on top.

Unless, of course, there is a huge increase in PI claims as the standard of work across the country falls....

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By Matrix
11th Oct 2019 13:17

If the contract is an off payroll contract with the PSC then they can’t shut down the PSC, they would just suffer PAYE/NI. This would be a disaster unless they have agreed an enhanced rate, not least because it exposes previous years if no deemed payments etc.

If, alternatively, they are going on the payroll proper of course the company isn’t required.

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By Mikec1965
16th Oct 2019 10:15

My understanding of the rules (simplistically) is that if the PSC is engaged in an establishment post within the client company (that is, a role that would be filled by an employee), and can not meet the criteria of being self-employed, then this would be the correct treatment. However, this situation is open to interpretation and the PSC can appeal the status imposed on it by the client company and if successful there would be no change in their relationship or tax treatment. In my opinion, this is primarily a contractual issue, and should encourage the employing company to review it's stance on a number of key points in its relationship with the PSC, but will not do so unless challenged.

The way you have framed your question suggests to me that you are accepting the situation as a given and are trying to advise the individuals to close their companies.

I believe the challenge to PSCs is whether or not they can meet the criteria fully for being self-employed, and if they are willing or able to use the challenges to grow their businesses beyond their current circumstances.

Recent case law suggests that the CEST tool used by HMRC to define self-employed status is not fit for purpose, and does not capture the definition in every case, and therefore every case should be judged individually.

I believe you should discuss the options open to your clients, and encourage them to negotiate extremely beneficial benefit or termination packages with their clients, or encourage them to seek out a broader client base, and grow accordingly.

Another possibility (and I would welcome comments on this), is that contractors form LLPs and provide services to their clients through that. The LLP would have multiple clients, and the potential for substitution is greater within contracts, and there is less question of whether or not they are self-employed. Of course, if the employer is just using the PSC to avoid paying employment benefits or additional employer costs that result from employment, then the legislation forces the employer or engaging company to review their structure and morally do the right thing.

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Replying to Mikec1965:
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By whatdoyoumeanwashe
16th Oct 2019 10:47

Well yes, I am accepting the situation as a given, because it will no longer be my client's decision as to how they engage with their end client. The end client is going to decide how the relationship will be structured, and I know precisely what the response will be from the big-name banks if a lowly contractor tries to argue that they should be engaged via a different mechanism.
What would be the benefit to the contractor of the LLP structure? 3% NI saving to a max of £1,240 would barely cover the cost of running the LLP. The employers NI saving would be larger but would be in the hands of the "client". I can't see large organisations with hundreds or thousands of contractors wanting the complexity and risk of having all their contractors form LLPs, knowing that if they did the government would be sure to shut that loophole pretty fast.

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By ianthetaxman
16th Oct 2019 11:13

Picking up on another element of this, and seeking clarity on this point - a PSC obtains all of its contract work via just one agency, but they are providing the services to multiple end-users. The PSC receives payment from the agency on a regular basis for the work done by the worker who is provided by the PSC to the end-user.

Two questions -

1. Assuming that a separate IR35 friendly contract is in place between the PSC and each of the end-users, for each separate engagement obtained by the PSC from the agency, is the PSC currently 'safe'(or as safe as it can be) from IR35 attack? Even after 2020, this aspect of the IR35 rules doesn't alter?

2. From 2020, if the end-user says IR35 is appropriate (after appeals have been rejected etc.), how are they going to keep track of instructing the agency, who is the fee payer, to deduct PAYE from the payments to the PSC? I imagine this is the sort of scenario that the banks etc. are trying to avoid by simply stating that all new and existing contracts will be via PAYE?

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Replying to ianthetaxman:
By JCresswellTax
16th Oct 2019 13:31

ianthetaxman wrote:

Picking up on another element of this, and seeking clarity on this point - a PSC obtains all of its contract work via just one agency, but they are providing the services to multiple end-users. The PSC receives payment from the agency on a regular basis for the work done by the worker who is provided by the PSC to the end-user.

Two questions -

1. Assuming that a separate IR35 friendly contract is in place between the PSC and each of the end-users, for each separate engagement obtained by the PSC from the agency, is the PSC currently 'safe'(or as safe as it can be) from IR35 attack? Even after 2020, this aspect of the IR35 rules doesn't alter?

2. From 2020, if the end-user says IR35 is appropriate (after appeals have been rejected etc.), how are they going to keep track of instructing the agency, who is the fee payer, to deduct PAYE from the payments to the PSC? I imagine this is the sort of scenario that the banks etc. are trying to avoid by simply stating that all new and existing contracts will be via PAYE?

1. No
2. Correct

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Replying to JCresswellTax:
By ianthetaxman
16th Oct 2019 14:18

JCresswellTax wrote:

ianthetaxman wrote:

Picking up on another element of this, and seeking clarity on this point - a PSC obtains all of its contract work via just one agency, but they are providing the services to multiple end-users. The PSC receives payment from the agency on a regular basis for the work done by the worker who is provided by the PSC to the end-user.

Two questions -

1. Assuming that a separate IR35 friendly contract is in place between the PSC and each of the end-users, for each separate engagement obtained by the PSC from the agency, is the PSC currently 'safe'(or as safe as it can be) from IR35 attack? Even after 2020, this aspect of the IR35 rules doesn't alter?

2. From 2020, if the end-user says IR35 is appropriate (after appeals have been rejected etc.), how are they going to keep track of instructing the agency, who is the fee payer, to deduct PAYE from the payments to the PSC? I imagine this is the sort of scenario that the banks etc. are trying to avoid by simply stating that all new and existing contracts will be via PAYE?

1. No
2. Correct

Would you mind elaborating on your answer to question 1? Trying to get my head around this scenario.

My understanding was that as long as the PSC has engagements with multiple end-users under separate contracts, they would not be viewed as a worker of the agency.

Under the new rules, the end-user has to decide (rather than the fee payer) if IR35 applies, but if they agree it's ok to continue as before, then the fee payer continues as before too.

If the end-user is 'small' they are not required to make the distinction ( I suppose there could be some of these, depending on the sector), so the relationship between the PSC and the end-user would still remain as before.

As someone else has posted, doesn't it still come down to the strength of the contract in place between the PSC and end-user?

I accept that the shadow of IR35 may still be there regardless.

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By pauljohnston
19th Oct 2019 12:07

I suspect this may well cause a brain drain from the largest companies to smaller companies and some will who work directly with overseas businesses.

It is easy to force HMG industries, NHS etc because their funding comes from the Govermment. But private individuals and private companies will find ways around the spirit of the legislation.

For me as I have said before introduce a Corp tax surcharge say 10% on PSC with the onus on the directors to decide whether to pay at the higher rate but with the but if HMRC show that it was tax avoidance the directors are personally liable for 10% going back say 10 years with a the tax avoidance back date being the date of the introdiction of this legislation. IE if it starts in April 20 that is the earliest date

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By ianthetaxman
21st Oct 2019 09:50

Was speaking to a contractor client on Friday. Their end-user (one of the big banks) has issued the same sort of missive as the others, but in an attempt to buck the trend, have also agreed to offer the contractors a higher day rate if they'll work via an umbrella company, to compensate the worker for their trouble.

The end-user believes that if they don't do this, their quality of output would suffer and they see this as an acceptable way forward. They also believe that it will not be long before big end-users realise that the threat of imposing IR35-esque charges and the big noise caused by the 2020 changes will die down pretty quickly, and that those with well worded contracts will be back to where they were within the year.

If this is the case, there is probably a valid argument to keeping your PSC intact, maybe preparing a set of dormant accounts at a fraction of the cost of a full set of trading accounts etc. and riding out the storm for a little while, rather than winding up the company now, incurring costs, and then having to set up another one if things change for the better.

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