One of the most common questions we hear is:
"How do I know which contractors need an IR35 assessment?"
The answer often starts with understanding what an “intermediary” is, sometimes referred to as a Personal Service Company (PSC).
Many organisations assume every contractor working through a limited company needs an IR35 assessment. Others assume that only one-person companies are caught by the rules. In reality, the first step is to determine whether an individual provides their services through their own company.
What is a personal service company?
A Personal Service Company, or PSC, is usually a limited company through which an individual provides their own services to clients. A PSC is a colloquial term and not in statute, but refers to situations where individuals will often:
- Own (have shares in) the company.
- Carry out the work personally.
- Invoice clients from the company.
- Receive earnings through the company (Salary an/or dividends) rather than directly as an employee.
For example, instead of hiring Jane Smith directly, your organisation contracts with JS Consulting Limited, and Jane provides the services on behalf of her company.
Why does a PSC matter with regard to IR35?
Where an individual provides their services through their own company, the Off-Payroll Working rules, collectively known as IR35, may apply.
Depending on your organisation's responsibilities under the legislation, you may need to determine the worker's employment status for tax purposes before the engagement begins.
Identifying potential PSC engagements early helps ensure your compliance process starts at the right point.
What does a PSC typically look like?
Every engagement should be considered on its own facts, but many Personal Service Companies have the following characteristics:
- The worker owns or controls the company.
- The company exists primarily to provide that individual's skills or expertise.
- The worker is the main person delivering the services.
- The company invoices for that individual's work.
If these characteristics apply, the engagement may require further consideration under the Off-Payroll Working rules.
How are sole traders different from a PSC?
Unlike a PSC, a sole trader does not operate through a limited company. Instead, they contract with clients in their own name and are personally responsible for the business.
Because there is no intermediary company, the Off-Payroll Working rules do not apply to sole traders.
That does not mean there are no employment tax considerations. If a sole trader works in a way that resembles employment, there may still be employment status considerations for tax purposes. These fall outside the Off-Payroll Working rules and should be considered separately.
A common misconception
What should you ask a new contractor?
If you're unsure whether someone is operating through a Personal Service Company, ask a few simple questions during onboarding:
- Will you be invoicing us through your own limited company?
- What is the name of that company?
- Are you the owner or director?
- Do you own shares in the company?
- Will you personally be carrying out the work?
The answers will often indicate whether the engagement should be examined more closely.
A simple example
- Jane owns JS Consulting Ltd.
- Your organisation hires Jane to lead a six-month IT project. Jane carries out the work herself and invoices through her company.
- This is likely to be a Personal Service Company engagement and may require consideration under the Off-Payroll Working rules.
Final thoughts
Understanding what a Personal Service Company is can make contractor onboarding much simpler. Identifying a Personal Service Company is the first step. Once you've identified that a worker is operating through their own company, you can determine whether your organisation is responsible for the Off-Payroll Working rules and whether a status assessment is required.
By asking a few simple questions at the start of the engagement, you'll identify potential PSCs early and ensure the right contractors enter your compliance process.
Partner with the IR35 experts at IR35 Shield
Our team is here to help your business every step of the way. If you need help with your IR35 processes, feel free to reach out. You can email us at info@ir35shield.co.uk or get in touch with an expert to find out how we can help.
