The new tax year is fast approaching and we are noticing a trend in umbrella contractors who are incorporating their own personal service company (PSC) in order to minimise, or even mitigate the restriction on Travel and Subsistence expenses. While we cannot comment on any particular models offered by other accountancy and umbrella service providers, nor on the feasibility of each individual contractor setting up their own PSC without understanding their situation, we would like to provide some general pointers, before the decision to go limited is made. Hopefully, this will assist in a smoother transition, as well as helping contractors avoid potential pitfalls.
IR35 and deemed salary
If you are currently contracting as part of a team to your end client, and have to report to a supervisor, the risk of you being inside of IR35 is very high. This means that your company will have to pay you a deemed salary as if you are being employed, i.e. up to 95% of your contract income will subject to PAYE and NIC including employer’s NI, hence your income / take home will be similar to using an umbrella service. As a result, many providers will insist you can only take a monthly salary, even when you, as the company director, can set your own payment frequency. This is because it can be impractical to compute your deemed salary on a weekly basis. With K&B Accountancy Group, our accountants will discuss your situation with you first, and where suitable, we can suggest a provisional weekly wage, to maintain your cash flow. We will also reconcile your deemed payment on a regular basis, so you are always on top of your finances. However, amendments will need to be made when your circumstances change.
If you are a consultant operating outside of IR35, then you will not be subject to the deemed salary requirement and you should discuss a suitable set up with your accountant for your remuneration. A suitable remuneration package should consider other factors, such as your personal circumstances and requirement, instead of just a generic ‘tax efficient’ model.
VAT and flat rate scheme
Regardless of your IR35 status, a PSC will always have a small financial edge over an umbrella set up. A large portion of this advantage is gained by utilising a VAT Flat Rate Scheme. However, this situation can change if HMRC put any restriction on Flat Rate, for companies that voluntarily registered to VAT (i.e. companies that have turnover below £82k in a 12 months period). HMRC is already aware of any potential tax avoidance by utilising VAT flat rate for PSC. We cannot speculate or provide any further information until the Budget is released on 16th March.
Travel and Subsistence restriction
Having a PSC does not lift the restriction on Travel and Subsistence expenses if the contractor is caught inside of IR35. Please follow the link below for more information on the restriction to Travel and Subsistence expenses:
If you are outside of IR35, the new restriction on Travel and Subsistence expenses will not apply. However, you will still be subject to the 24 months rule, and the expenses must be ‘wholly, exclusively and necessary’ for your business.
Director’s responsibilities and obligations
It is also very important to note your additional statutory responsibilities with Companies House and HMRC, as a company director. You are obligated to submit a self-assessment tax return to HMRC every January, which is not normally a requirement for a PAYE employee. More information on other non-monetary factors that a contractor should consider when going limited can be found on our website by clicking the following link:
Choosing a service provider and the possible pitfalls with MSC
You should choose an accountancy service provider that can explain all of the above to you and only incorporate because you are suitable to use a limited company. Don’t get pushed into a PSC just because your agency or service provider says so, without fully understanding the pros and cons. Last but not least, you could potentially fall foul of the Managed Service Company (MSC) legislation if you use a ‘one size fits all’ PSC solution if its only purpose is to facilitate tax avoidance.
As we are operating both a compliant umbrella with Cloud9 Umbrella, as well as servicing clients in the contractor/freelancer industry through K&B Accountancy Group, we do not have any bias toward umbrella or PSC, nor do we need to push either side to gain additional business. Our recommendation is based upon suitability for our clients, after assessing their individual circumstances and providing impartial, transparent and professional advice. This is at the foremost of our agenda.
Please contact us now on 020 7078 0211 or click here if you would like to take advantage of our no-obligation consultation with our accountants and industry experts.