Experts explain important role of PSCs

Thursday 19 December 2013

As the House of Lords Select Committee on Personal Service Companies (PSCs) continues, experts have been explaining how contractors use PSCs and why.

Brookson’s managing director Martin Hesketh said: "The ‘flexible workforce’ is of critical importance to the UK economy and we should protect and develop this competitive advantage.

"Working through their own personal service company is an important and legitimate way of working for freelancers, contractors and self employed professionals – self employed individuals should get some support from the tax system because of the risks they take on and the benefit these flexible workers bring to the economy."

This appears to be the sentiment now coming across at the committee hearing too and in the third evidence-gathering session, contracting, small business and recruitment experts put their views across.

ContractorCalculator chief executive officer Dave Chaplin said that this sitting has been the best so far, with the panel conveying "very well to the Lords exactly why independent professionals use limited companies to conduct their business".

Those giving evidence also made the distinction clear between highly skilled and well paid contractors and low-paid temps.

Mr Hesketh explained that successive governments have historically shown a lack of understanding of the contractor and freelancer workforce. Knowledge is important and a lack of this has caused attempts at new legislation to lead to significant damage to the contractor and freelancing population.

Why are PSCs important?

PSCs have often been conceptualised in the public arena as a vehicle for tax avoidance, but this isn't the case. Speaking at the third sitting, Mr Hesketh explained that most recruitment agencies are in fact uncomfortable engaging contractors on a self-employed basis because of risks that the recruiter could be liable for unpaid tax if paying the contractor gross.

He added that there is no evidence to suggest PSCs are being used on "an industrial scale to avoid tax". In fact, there are strong commercial reasons for using PSCs, beyond income and taxation.

PCG's chief executive officer Chris Bryce said: "It separates business assets from personal assets, makes it simpler to negotiate with other freelancers with regards to subcontracting arrangements."

What's in a name?

The third sitting also raised questions over the understanding of the term self-employed, with one Lords committee member claiming there should be a simple way of defining it.

Mr Chaplin explained in ContractorCalculator: "It’s a classic case where common sense tells us all that it should be a simple thing to do but when you look at it and the many years of employment case law on which a simple test should be based, the answer is that it is not that simple.”

Mr Hesketh added that while the legislative environment relating to the self-employed element of the flexible workforce is "far from perfect", now isn't the time for more change. Instead, the industry should "press on" with the task of enforcing what's there.

Reforming PSCs and IR35

"As the economy is starting to recover, we must not create further legislative uncertainty and problems for the flexible workforce as it makes a great contribution to economic growth," Mr Hesketh said.

Brookson supports the ongoing efforts of HMRC and the IR35 Forum to improve the administration and enforcement of the current legislation, but claims a widespread shakeup isn't ideal at the moment.

"There are obvious areas of non-compliance and exploitation of vulnerable, low paid worker schemes and government and HMRC should focus strongly on these," Mr Hesketh noted. "However, this sort of industrial scale abuse and evasion is not happening in the professional freelancer/contractor section of the flexible workforce and HMRC focus and enforcement efforts should reflect this."

By Victoria McDonnell

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