Why 1,796 defunct PSCs may be just the start

When whatever it is that they’re protesting about gets waved through by the government, we tend to forget protesters.

Even before their arguments get discarded by officialdom, their credibility can suffer, as the IR35 petition has shown, writes Nick Hood, business risk adviser at Opus Restructuring.

But spare a thought today for all those who challenged the T&S legislation, which came into force nearly a year ago, because they fought to try to save 1,796 personal service companies (PSCs).

Without these almost 2,000 now-defunct companies, the UK’s corporate insolvency mountain would not have risen last year by a sizeable 12.6%. And without the likes of trade bodies, 50 MPs and even the odd umbrella company, the government could claim it was never warned.

Other than to HMRC, and the actual companies themselves of course, the Insolvency Service confirming this quarter that 1,796 PSCs all entered liquidation on the eve of 2017 due to “changes to claimable expenses rules” will likely shock many. Not that tax officials would tell you there's any reason to be glum. As far as they’re concerned, by forcing these PSCs into voluntary liquidation they are shutting down not just simple traders, but also unacceptable tax arrangements that deprive the exchequer of its dues.

The collapse of the 2,000 is all because before April 2016, contractors could generally claim travel expenses to and from a client’s place of work for up to 24 months on each contract, plus accommodation costs and a reasonable amount for subsistence.

But ignoring the protests from swathes of the contractor community, HMRC tightened up the rules and started disallowing these costs as a deduction from profits. This was principally on the basis that if an employee of the contractor’s client couldn’t claim such expenses, why should a contractor who HMRC defines as being under the “Supervision, Direction or Control” of the end-user, be able to? In essence, then, this crackdown was aimed at workers within IR35.

As the Insolvency Service figures indicate, the crackdown has had a big impact on some contractors working through PSCs. Generally, the 'permanent workplace' for contractors is their home and therefore, travel to any client premises would be treated as being to a 'temporary workplace' and the expenses would therefore still be a legitimate deduction from income. But unfortunately for owner-mangers’ bottom lines, the expenses which are no longer allowable can be substantial for those working away from home for extended periods. 

In fact, for those working on a tight margin, the T&S legislation and its test of SDC could mean contracts are no longer viable, even though those same contracts were viable before April 2016. It doesn’t take a non-IR35 specialist like us (we are primarily insolvency advisers), to realise that it is vital for contractors to give proper consideration to whether their PSC's assignments fall within the legislation. The 2,000-odd now liquidated PSCs are proof that the financial implications of this are acutely real.

The rub for us all is that despite the numerous objections from everyone from the Office of Tax Simplification and The Association of Recruitment Consultancies to public sector bodies and the CBI, the Revenue regards IR35 as a growing business. And it will be quietly pleased. Remember, increased tax liabilities were the cause of the sudden surge in contractor insolvencies at the end of last year (a 12% rise) because of the T&S rules. What the department is now set to do with IR35 in the public sector will result, in income terms, for PSCs from anything to a 13% loss, up to as much as a 30% loss -- again, due to a higher tax take. Alongside some 34,000 petition signatories, many will hope that the few thousand victims of the T&S legislation are not foreshadowing an even higher number of collapsed personal companies, 12 months from now, due to next month’s reformed IR35 legislation. Only time -- and the taxman -- will tell.