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Coronavirus: How the Chancellor’s Self-employment Income Support Scheme applies (or doesn’t) to personal service companies

Heather Self looks at the impact of new Government measures on PSCs.

What is a PSC?

A PSC is a personal service company, typically with one employee who is also the director. Many ‘self-employed’ people provide their services via a PSC, so are technically employees of the PSC.

Who uses a PSC and why?

Joe the Plumber Ltd, Jane’s IT Support Ltd, and so on.

Commercially, there is the benefit of limited liability, but their customers may prefer to deal with a company. However, there’s also a tax angle.

Broadly, operating via a company gives a lower tax and National Insurance (NIC) bill than operating as a self-employed trader (although the tax differences have reduced a lot in recent years). The big issue is “IR35”.

HM Revenue & Customs’ (HMRC) concern is that a lot of those who claim to be self-employed are really employees of their customer – so-called ‘disguised employment’. If the contract is via a PSC, the status of the contractor needs to be tested.

IR35 (the title of a 1999 Budget press release) requires the PSC to check whether, in substance, the contract with the end-customer is one of employment. If it is, the PSC is supposed to pay an extra tax charge, equivalent to applying PAYE and NICs to the contract.

However, deciding employment status is complicated, so there have been many tax cases where HMRC and PSCs argue about it.

The position changed for public sector contracts with effect from 6 April 2017. The customer now has to determine the status, not the PSC.

Many NHS Trusts and other public sector bodies have put their contractors on the payroll – automatically making them employees. Contractors were not happy, as this (usually) meant more tax and/or NICs.

The same rules were about to apply to the private sector, but those changes have been deferred to 2021, although a few big customers (such as  banks) may have adopted these rules already.

So, where does this leave Joe the Plumber Ltd and Jane’s IT Support Ltd?

It’s not good news for Joe and Jane.

Joe and Jane are not technically self-employed, so do not benefit from the self-employed package announced by the Chancellor.

They are employees of their PSC, but it’s going to be difficult (perhaps impossible) for them to fit into the Coronavirus Job Retention Scheme.

HMRC have now confirmed that an owner-managed company can use the Job Retention Scheme, but this will mean Joe or Jane furloughing him or herself, and doing no work for the company (which is different to someone who comes within the self-employed category).  They are able to carry on administration and statutory director’s duties, but they will not be able to do anything which generates revenue for their business. Under the Job Retention Scheme, they would only get money up to 80% of their salary which has been paid via PAYE. Many PSCs pay their owner a very small salary (usually up to the NIC threshold) and the rest as dividends – the dividends will not count for support.

Yes, the PSC structure saves Joe and Jane tax. You might therefore think that means they should not get as much support. But given employees and the self-employed qualify, it seems harsh that contractors with PSCs get very little.

Those who moved to employment status as a result of the IR35 changes may be the lucky ones – they are more likely to qualify for the Job Retention Scheme.

What should the Chancellor do next?

The employee Job Retention Scheme and the self-employed Income Support Scheme are already relatively generous (and expensive for the Treasury), paying out up to £2,500 per month and covering a large proportion of the employed and self-employed.

One way that PSCs could be helped would be to allow them to elect to claim the self-employed scheme. This is more flexible and would allow them to continue to do some work.  But this would be complex to design in the time available, and HMRC seem likely to take the view that those who have, on the whole, paid less tax in the past should not get as much support now.

The Government has effectively ruled out any substantive changes, so it seems that this group have been overlooked, or sceptically speaking, purposely forgotten.

Contact us

For more information, please contact Heather Self.

For further guidance on how you can actively plan for and respond to the Coronavirus crisis as a businesses and an employer, please visit our Coronavirus Practical Guidance Hub.