You hear the term personal service company or PSC mentioned quite often. But there’s still quite a bit of confusion surrounding the term, particularly when it comes to contracting and limited company formation.
In this short guide. We’ll address:
- Defining a Personal Service Company
- How does a PSC differ from an MSC?
- Benefits of a PSC
- How IR35 status affects a PSC
- Start your limited company with ClearSky
What is a Personal Service Company
The term PSC is used to describe a common type of limited company that is be established by contractors, consultants and other types of self-employed workers. In short, a PSC sells the work of an individual or small group of individuals, and is owned and operated by that individual or small group of individuals as a limited company.
The term PSC was originally used by HMRC in relation to the introduction of the IR35 legislation back in 2000. You can read more on this topic below.
How does a PSC differ from an MSC?
The important factor when it comes to distinguishing a PSC from a Managed Services Company (MSC) is that the individuals or group in the PSC own and organise it, too.
By contrast, a Managed Service Company (MSC) has a separate set of owners and organisers managing a group of contractors. They are subject to different regulations by HMRC. Be sure to check out our guide on unethical payroll models and the risks associated with these.
Benefits of a PSC
A contractor that sets up and directs a limited company/PSC has a lot going for them.
For any contractor(s) governed by one, a limited company projects a thoroughly professional portrait of the services the individual or group can offer. To this end, someone within a limited company:
- Is their own boss
- Has a tax efficient pay structure in place
- Can hire people as their company expands
- Realises a stronger work-life balance
- Offers a more formal, professional way to present their services for hire
- Can claim a range of expenses
- Can collect payment through the PSC, as an individual
- Has a business-specific bank account
- Admin capabilities (or a dedicated contractor accountant like ClearSky) that can address all HMRC duties, like NIC and PAYE1
The limited company offers a win-win for the hiring client, too. When taking on a contractor through a limited company, public and private sector bodies are doing more than just acquiring the services of a capable specialist. They are also expressing their desired intention not to declare a traditional employer-employee relationship.
How IR35 affects a limited company
A crucial element in classification as a PSC or limited company contractor is your IR35 status. The IR35 status determines whether you are considered to be a ‘true contractor’ or a ‘disguised employee’ and this is assessed on an assignment by assignment basis.
But it’s important to remember that it’s not the end of the world if an assignment does fall under IR35. It simply means you’ll have to reassess your tax requirements on that particular contract.
ClearSky can ensure you stay fully compliant with this. Clients can turn to our assignment review service, complete with guidance on whether a project is likely to fall inside or outside IR35. Learn more about our IR35 review service by consulting our different packages.
IR35 for Public Sector Workers
As announced in the Autumn 2016 budget, from the 6th April 2017, the way that IR35 status is classified for public sector contractors will be changing. Rather than deciding yourself whether or not your contract falls inside IR35, the decision will be made by the public sector body who must inform any 3rd party that pays you. Those working in the private sector or under an umbrella company are not affected by these changes.
At ClearSky, we’re committed to offering contractors like you expert advice to manage your finances in the most tax-efficient way possible.
As a founding member of the Freelancer and Contractor Services Association (FCSA), compliance matters with everything we do. We’ve helped thousands of talented professionals set up and manage their PSC/limited companies over the years.
ClearSky are with you all the way in your contracting career, whenever you need us. Because we understand everybody’s unique, we’ll advise you in a manner that serves your personal circumstances best.
1: A bonus of hiring ClearSky as your contractor accountant is our direct line to HMRC for all queries. That means you won't be stuck on the phone - we do it for you. That's being with you all the way.