Tax system encourages use of PSC's

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‘Confusion and complexity’ in the tax system is driving the increase in the numbers of individuals opting to be employed via Personal Services Companies (PSCs), witnesses told the House of Lords during an evidence session which is part of an inquiry into the use of PSCs and the tax issues they raise report Harris & Co accountants Northampton who have a considerable number of clients who use PSC"s to run their small businesses.

Led by the Lords’ select committee chair, Baroness Noakes, the law lords are looking at the extent to which PSCs are being used, and the efficiency in tax collection based on the rules around their use.

Group tax director at infrastructure company Amey, Robert Fort, said that ‘structural drivers’ within the UK tax system push individuals to use PSCs because of the potential fiscal benefits.

While the most obvious advantages are the different tax liabilities for individuals and the reduction in employers’ national insurance contributions, Fort also highlighted the benefit for companies who do not then have to decide whether someone on a short-term contract is employed or self-employed in the eyes of HMRC. This is covered under IR35 and is decided between HMRC and the individual concerned, thus offering the company protection from any potential tax risk.

Fort emphasised that of Amey’s 21,000 workforce, an estimated 200 to 500 individuals were engaged via PSCs, most usually because of the need for scarce or specialist skills on short term contracts, and stated that there was no indication of ‘disguised employment’ via this route.

However, despite developments such as the recent HMRC review of false self employment, changes to the rules for the Construction Industry Scheme (CSC), managed services companies and umbrella companies, Fort described the current tax system as ‘fragmented’ and said it would be ‘very helpful if it could all be pulled together.’

Alix Thorn, employment and skills policy manager at the trade association Oil and Gas UK which represents over 400 companies in the energy industries said that for high level jobs in engineering design, project management and construction, the use of PSCs for employment was as high as 80%.

Thorn said that in a ‘buyer’s market’ for certain professional skills, the decision to be employed via a PSC was driven by the individual rather than the companies, many of which would like to see a reduction in the use of such arrangements.

Both Thorn and Fort told the committee that attempts to change the IR35 rules by, for example, introducing penalties for employers where the individual was deemed not to meet the criteria for operating under a PSC, would be unworkable in practice and produce a significant administrative burden which would lead companies to opt for larger workforce providers and remove SMEs from the supply chain.

‘What we have at the moment is sticking plasters like IR35 penalties and structural problems with the tax system,’ Fort said.

The committee heard that the use of PSCs in the public sector is more limited and has been reducing in the 18 months since the government indicated it wanted local authorities and the health service to take action on the use of ‘off payroll’ employment arrangements.

Asked whether public sector HR and procurement departments have adequate knowledge of IR35 to understand the definitions and assessments required, Department of Health policy manager Gordon Fleck said that the department had recently had ‘master classes’ on the IR35 regulations from HMRC.

The committee aims to report its recommendations and conclusions, in March.

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