Personal service companies providing directors to companies

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Individuals sometimes provide their services to clients through company structures – the company (commonly called a personal service company) contracts with the client to provide the services of the individual to the client. From the client’s point of view, one of the advantages of this arrangement is that the PAYE/NIC obligations are moved from the client to the company.

It is fair to say HM Revenue & Customs have regarded such arrangements with a degree of suspicion. Both the ‘IR 35’ rules and the ‘managed service company’ rules negate many of the advantages for the individual. They do this by treating the company as making a deemed payment of employment income to the individual. However, both of these measures were aimed at the personal service companies rather than the clients – who could continue to make payments to the companies without having to worry about PAYE/NICs.

Recently, we have become aware that it may not be so clear-cut if the service being provided is that of the individual acting as director or officer of the client’s company. In this case, HMRC may contend that it is actually the client who should be applying PAYE/NICs to the payments to the personal service companies – if these are payments for the directorship/office which are still in the individual’s name. For the client, the additional tax, interest and penalty implications could be significant.