PSCs Exist Regardless of Taxation

Some interesting theories on the rise of the PSC

At the recent round of evidence taken by the House of Lords Select Committee on PSCs on Monday, Head of Taxation of the Institute of Directors inferred that even if tax advantages associated with incorporation did not exist PSCs would.

In two separate sessions, representatives from unions and business organisations were grilled by the Select Committee. Those in the firing line were:

First Session

• Frances Corrie – Technical Director, TaxAid;
• Chris Keates – General Secretary, National Association of Schoolmasters Union of Women Teachers (NASUWT); and
• Brian Rye; Regional Secretary for the Eastern Region, Union of Construction, Allied Trades and Technicians (UCATT).

Second Session

• Stephen Herring – Head of Taxation, Institute of Directors (IoD); and
• Neil Carberry; Director of employment and skills, Confederation of British Industry (CBI).

The first session was chiefly dominated by the role of Umbrella companies in the labour market, of whom none of the witnesses had a good word to say about them. Keates said that since 2011 her organisation had tracked a growth in agencies who had a relationship with Umbrella companies. According to Keates, in these situations, agencies are acting as a front for the Umbrella companies and an agency can have a relationship with multiple Umbrellas. She accused Umbrella companies of shameless profiteering and exploitation of its workers.

The NASUWT had found that there is widespread failure by Umbrella’s to explain to workers their entitlements.

Many Umbrella’s that are involved with the teaching profession, says Keates, are based offshore in places such as Jersey and Guernsey. One of these had reported sales of £50 million and annual profits of £7.5 million. Such profits are achieved by depressing teachers’ pay and forcing them to pay employers NIC and making deductions for holiday pay from their earnings.

Frances Corrie reinforced Keates view that some Umbrella companies are exploitative. Her tax charity that provides assistance to those on low incomes who cannot afford accountants, reported that she has seen numerous Umbrella payslips that are far from easy to understand and serve only to bamboozle the worker.

Brian Rye had brought with him his union soapbox and didn’t take long to mount it and point an accusing finger at the construction industry for harbouring false self-employment for at least the last 30 years. Whilst the use of PSCs had remained constant in his sector he had noticed the growth of payroll companies in the last few years that are dominating the landscape.

Rye criticised HMRC for its policing of existing tax legislation and thereby denying the employment relationship. When challenged by the Committee to justify his criticism he firmly believed that the Revenue had failed to notice blatant employment based on consistent working for one construction firm, doing the same work for the same level of pay. HMRC are therefore failing miserably to enforce legislation. There speaks a union man who, no doubt, would wish to see everyone treated as an employee. At least he has something in common with the Revenue.

The second session kicked off with the witnesses being asked what they believed they attributed to the growing use of PSCs. Neil Carberry gave four reasons:

1. The contractual requirement for the use of a corporate entity.
2. In joint venture situations it is easier to structure this by including a PSC. This somewhat puzzled the Committee and the writer too, as neither of us have had experience of this scenario!
3. Many professionals insist on contracting through their own limited company, a theme that has been relatively consistent during these evidence gathering sessions.
4. Companies offer an advantage in risk management. A new business that requires labour would consider it more beneficial and convenient to engage a freelancer from the start as it has no idea if its business will succeed. Better then to use a contractor, who would be more disposable than an employee should the business fail. Quite an interesting and original theory.

Carberry said that companies are experiencing competitive pressure and the flexibility that freelancers bring afford them to align labour with demand.

Stephen Herring added that businesses that are embarking on a new contract to supply its trade are concerned about taking on costs that they can’t pass on to the customer. Thus, they don’t want to be left with employees but no income. Flexibility is key and not the tax advantages of the corporate wrapper because PSCs would still exist without taxation. Mr Herring believes that, when all factors are considered, there are no apparent tax savings and that HMRC should not view PSCs as an automatic form of tax avoidance.

The Lords posed the question as to whether the system of seeking tax assurances that exist within the public sector should be widened to all PSCs. This was rebuffed by Herring who quite rightly asserted that a customer should not be entitled to see confidential tax information and such a measure would be far too intrusive.

Herring is of the opinion that IR35 has broadly addressed its original aims but Carberry believes that the employment status tests can be ‘boiled down’ and made clearer. Please tell us how Mr Carberry!