A Personal Service Company (“PSC”) is a company where there is only one employee/office holder and the purpose of the PSC is to supply that individual's services to a business. Historically these have been very popular for contractors as those employing the use of contractors liked the flexibility of it, especially in sectors where there was a fluctuating labour demand. The off-payroll working rules (known as “IR35”) were introduced in 2000 and require that individuals, who work like employees, but through their own company, pay similar taxes to other employees.
Using a PSC can be beneficial to the individual contractor as well, including that the individual is protected by the limited liability status of a company. The individual can also achieve tax savings, by having more flexibility regarding how profits are withdrawn from the company.
Changes to IR35 rules for Personal Service Companies
Changes to HM Revenue & Customs’ stance have meant that using a PSC might not necessarily have the same advantages as it did before. HMRC were concerned that the IR35 rules were not being applied correctly, with certain employers (initially in the public sector) using contractors who should have been classed as employees instead. The rules changed in the public sector with effect from April 2017. These changes were to be rolled out to the private sector from April 2020, however, they were delayed to help businesses and individuals deal with the economic impact of COVID-19 and will now be introduced from 6 April 2021.
The legislation is expected to impact around 170,000 individuals working through their own company but who would be deemed employed if engaged directly. If these individuals are to be classed as employees in the future, then there is likely to be no need to keep the respective PSCs open.
Closing your PSC
If you or your client has a PSC that will become redundant as a consequence of these changes, then the company will need to be closed down and dissolved. If there are assets still in the company, then these will need to be extracted prior to closure as any assets remaining in the company when it is dissolved become bona vacantia and transfer to the Crown.
There are two ways in which you can close your company if it is solvent – either by striking it off the Register at Companies House or by placing it into a Members’ Voluntary Liquidation.
If the reserves in the PSC are under £25,000 there is a HMRC concession that says that the full amount can be taken out of the company and treated as a capital distribution. The PSC can then be struck off.
The other alternative is to put the company into Members Voluntary Liquidation (MVL), which will be advantageous where reserves in the PSC are more than £25,000.
An MVL is a solvent liquidation, which is overseen by a Licensed Insolvency Practitioner, who will distribute the assets back to the shareholder(s) by means of capital distribution, as opposed to a dividend. This means that any distributions are subject to Capital Gains Tax, and if the shareholders qualify for Business Asset Disposal relief. then the tax rate can be as low as 10%, rather than Income Tax, resulting in considerable tax savings. There is a cost to placing the PSC into an MVL but these are often more than covered by the tax savings achieved.
In addition, the Liquidator will obtain the requisite clearances necessary for closing down the Company, leaving you with peace of mind that everything has been brought to a proper conclusion.
If you or your clients need advice about closing a Personal Service Company, please contact Elaine Wilcox on 07963 780455 or email elaine.wilcox@armstrongwatson.co.uk
