Is This The End For Personal Service Companies?
Personal Service Companies (PSC) or One Man Limited Companies have long faced the ire of HMRC. The Off Payroll Private Sector IR35 Reform is yet another example of this, as contractors operating through PSCs will no longer determine their employment status from 6th April 2020.
While the proposed changes won’t stop contractors from providing services under a PSC, it may deter risk-averse businesses or agencies from engaging them. Even if it doesn’t, the shift in responsibility and liability means the chances of being caught within IR35 are much higher.
In this guide we explore what the future looks like for PSCs, and the alternative options available to contractors.
What’s threatening PSCs?
The Off Payroll Private Sector IR35 Reform is designed to ensure that any PSCs operating inside IR35 don’t fly under the radar. Contractor freelancers that operate as an employee in all but name, according to HMRC, should have the appropriate tax and NICs deducted at source through PAYE.
Currently, contractors determine their own status and tax / NICs (if any), so they are liable if HMRC challenges their employment status. From the 6th April 2020 though, it will be the engager (end client) and fee payer (agency or end client) who determines whether a contract is inside or outside IR35.
By shifting the responsibility and liability, PSCs come under threat. Unfortunately, for contractors, there are some clients who will prioritise compliance above all else and therefore place all contracts inside IR35, with obvious implications for take-home pay.
Not only is deeming a contract ‘inside’ the less risky option for a business or agency; some may avoid engaging them altogether in light of the incoming changes, affecting contractors’ prospects and earning potential.
How can contractor freelancers adapt?
A large number of contractors will seek an uplift in rates from the end client or agency in order to compensate for the potential increase in tax and NICs. This will lessen the damage of hiring managers classing their contract to be inside IR35, but in turn make their services less viable to the end client.
It therefore works in the interests of both parties to work towards maintaining and proving genuine contractor status post 6th April 2020. Companies that accurately determine contracts on a case by case basis will avoid the financial uplift and retain talent. However, even in these circumstances there’s still an element of risk management at play.
Agencies can help manage this relationship, as well as taking some of the risk away from the end client. Provided the contract doesn’t fall inside IR35, everyone can achieve compliance while maintaining business as usual.
Is there an alternative?
Yes, in the form of umbrella companies.
These payroll providers bridge the relationship between contractors and their end clients by becoming an employer of the former, and absorbing the responsibilities of the latter.
Contractors and businesses who choose this alternative do so for the convenience, security and peace of mind it provides. No more invoices or dealing with HMRC – everything is handled by the umbrella company.
When the other main option main option is to move onto PAYE, it’s no wonder that all parties are keen to explore the alternatives ahead of the incoming changes in April 2020.
How Workr can help
There’s no point burying your head in the sand with Off Payroll Reform. The proposed legislation will require those inside IR35 to change – it’s down to PSCs and businesses themselves to decide what the change will be.
Workr Compliance exists to walk you through your options. It’s never been so important to have a comprehensive understanding of your situation and responsibilities. So, if you’re looking for answers ahead of the incoming Off Payroll Reform, turn to us. Equipped with expert knowledge, a wealth of insights and an umbrella service of our own, we’re sure to support you in your transition.
Speak to our team today by emailing IR35support@workrgroup.com.