This summer’s budget affected the taxation of Personal Service Companies (PSCs) significantly, and there are strong intimations issuing from Government sources that even more profound changes to how they are taxed are coming.

People who have made the tough decision to walk away from the security of salaried employment for greater work flexibility and a somewhat more benign tax environment run most PSCs.

Many accountants are of the view that the new dividend tax charge measure was always coming, snagging those just under the higher rate tax band with an additional £2,000 in personal tax. While many are prepared to pay it, some are concerned that the rise of 7.5% sounds suspiciously like a stepping-stone to 10%.

The Chancellor, it seems, is reinvigorating his efforts to crack down on incorporated entities that are designated under IR35 rules as vehicles for ‘disguised employment.’ Uncertainty about reforms to IR35 and the prospect of new crackdowns on apparent disguised employment are likely to be damaging for the owner-manager business sector.

Currently, the indications are that the engager will have responsibility for determining employment status and it is frankly most unlikely that employers will risk getting this wrong. Already, accountants are being asked by agencies to confirm the IR35 compliance of their clients, although accountant Steve Holloway of the Association of Accounting Technicians strongly advises his professional colleagues to avoid doing so. As he puts it: “A lost IR35 investigation may result easily in a tax bill of £100,000 and I think we can guess who will be left holding that particular baby if the accountant has ‘declared’ compliance.”

Estimates suggest that around a million PSCs (and possibly more) have been affected by the new dividend tax, and these same entities will be further affected by any additional IR35-type legislative crackdowns. Many of these PSC owners face being forced back into employment.

However, some may choose to continue contracting by utilising the services of an umbrella company, secure in the knowledge that they no longer need fear IR35 investigations and are freed of the onerous administrative burdens of handling all their financial and tax affairs.