Personal Service Companies – Time for some Truth

Another subject that dominated the front pages for a while was personal service companies, as used by senior civil servants and BBC celebrities to save tax on their earnings. This caused quite a stir when it was exposed by the media and led to new rules being introduced for those working “off-payroll” in the public sector.

Again, this has led to all personal service companies being tarred with the same brush, thanks to a lack of understanding. The truth is that many temporary staff have no choice but to work through their own companies. The Government Departments or Local Authorities they work for don’t want them on the payroll for obvious reasons but will not hire them on a self-employed basis either. The top bosses and TV stars may well insist on being paid that way but the ordinary worker often has no say in the matter.

In fact, many of these one man bands are genuine businesses in their own right, or are at least have ambitions to be. Also, we should not forget that if you work through your own company you have absolutely no employment rights with the client. For example, there is no pension scheme, no sick pay, no holiday pay, no redundancy pay and no rights against unfair dismissal.

A lot of rubbish was written in the media about the huge tax savings to be made by working through your own company. The main point they all missed (or chose not to mention) is that if you withdraw funds from your company as dividends, you have to pay another 25% tax on them if you are a higher rate taxpayer, and that’s on top of the 20% corporation tax paid by your company. Somehow, that small fact got overlooked in all the hullabaloo about tax savings.

And nothing was said at all about IR35. This is a tax rule that was introduced nearly 13 years ago in April 2000 precisely to stop people using their own companies to avoid being taxed as employees. Ever since then, the Revenue has been hounding ordinary contractors with the IR35 rules, but appears to have done nothing to stop the same thing happening in the Civil Service and the BBC. Makes you wonder why, doesn’t it?

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