Possible changes ahead for 'personal services company' tax arrangements

With the UK Autumn Statement expected to change the rules surrounding personal services companies (PSC), questions have arisen concerning how some contractors use them to cut tax bills.

Currently it is a perfectly legal way of using a limited company to lower tax liability, but the way the system works has now come under scrutiny.

Limited company

Some contract workers use a limited company to cut income tax and NI bills. The Treasury believes it could be missing out on as much as £400m in tax revenue due to what they perceive as a loophole in the current laws.

Personal service companies are a perfectly legal way to allow some workers to bill their employers through their own limited company. They then pay corporation tax levies after a small wage, usually at or below the threshold for an individual's earnings before they become taxable.

However, some who use the scheme could actually be in breach of IR35, a tax avoidance rule.

Disguised employees

IR35 concerns “disguised employees”. These are people who are doing the job of an employee, but claiming to be contracted through a limited company that bills for their services.

Tax director at PricewaterhouseCoopers, Iain McCluskey, said that measures likely to be announced in the Autumn Statement next week could be a "very significant change that will cause large businesses who use these types of workers heavily a real process and control headache.”