Personal Service Companies (PSCs) are set to be a focal point in the upcoming March 2024 Advanced Tax exams, presenting a crucial area for candidates to understand thoroughly.

In today’s gig economy, many freelancers opt to invoice their clients through their own companies, leveraging the advantageous tax treatment of dividends over salaries. However, the introduction of IR35 regulations has reshaped the landscape for PSCs, particularly when engaging with small organizations.

Under IR35, PSCs are required to calculate and pay PAYE on the deemed salary when working with small clients. This calculation involves subtracting a 5% deduction for expenses from the invoiced amount and accounting for any salary and employer national insurance paid by the PSC. Notably, the deemed salary is inclusive of employer’s national insurance, totaling 115.05% of the relevant payment.

Let’s delve into an example: Sangeeta, an IT Consultant, operates a PSC and engages with a small client. Her gross income amounts to £100,000, with £4,000 in incurred expenses. The PSC pays Sangeeta a dividend of £50,000. After deductions, the deemed salary is computed to be £82,573, on which PAYE must be paid.

To mitigate potential double taxation, Sangeeta can elect to include her £50,000 dividend as part of the deemed salary.

For engagements with medium or large organizations, the process differs. These clients issue a status determination statement to the PSC, outlining the deemed direct payment on which income tax and national insurance deductions must be made. This direct payment is calculated based on the PSC’s invoiced amount (net of VAT), minus any direct materials and employment expenses. Essentially, the end client treats the PSC as an employee, ensuring tax compliance.

Importantly, the PSC is permitted to deduct the deemed direct payment when computing the deemed salary, preventing a double charge to PAYE.

In summary, mastering the intricacies of IR35 and PSC regulations is essential for tax professionals preparing for the March 2024 Advanced Tax exams. Investing in resources like Tax Condensed or Advanced Tax Condensed can provide the necessary foundation to tackle these complex topics with confidence. Don’t miss the opportunity to excel in your studies and career journey!

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