Draft 2016 travel and subsistence legislation - Briefing 3: Will there be a surge of PSC contracting and, if so, what risks might that involve?


Written on 15 December 2015

On 11 December 2015 we issued a briefing looking at the key points and likely problems with the draft travel and subsistence legislation released on 9 December 2015, and on 14 December 2015 we looked at how umbrella models would be affected. Those were the first two briefings in a series of briefings about the draft legislation.

In this third of four briefings we comment on the impact of the proposals on users and suppliers of personal service company contractors (“PSCs”).

The measures will extend to PSCs only where ss 48-61 ITEPA (the so-called “IR35” provisions) apply. Also, there will be no tax debt transfer risk for hirers or staffing companies regarding PSCs (except in relatively limited circumstances). On the face of it, it appears that there may be an Indian Summer for PSC arrangements. However, for reasons set out below, it may not be a good idea for large numbers of people to sunbathe in public during that Indian Summer – there are dangers, and the Indian Summer may not last long.

  • PSCs face a change from 6 April 2016 in the form of worse tax treatment of dividends. Following this the differential between dividend tax and tax on employment income will be materially reduced.
  • That is why the T&S status of PSC arrangements will become relatively more important, especially for lower paid PSCs who perhaps previously would have been umbrella workers. (T&S is likely to be a higher proportion of the pay of former umbrella workers than relatively higher-paid traditional PSC workers).
  • The news from 9 December 2015 is that PSCs will be able to pay themselves T&S tax free if they are outside IR35 (ss48-61 ITEPA), and that staffing companies and hirers will, broadly speaking, not be liable for underpaid tax if the PSC is held to be inside IR35. However, the director of the PSC will generally be personally liable if the PSC is held to be inside IR35.
  • There is no follow up yet to the summer 2015 discussion document about IR35 and the suggestion to apply a much tighter “supervision, direction or control” IR35 test. As such HMRC will have to apply the existing vague (and difficult for HMRC to enforce) IR35 test, and as a result may continue to struggle to prove that particular PSC contractors are inside IR35.
  • Therefore, for the time being, staffing companies and hirers may consider that, so far as possible, staffing arrangements should use PSC models. Many workers who previously worked via an umbrella arrangement may consider operating on a PSC basis instead hoping to be able to continue receive T&S tax free, claiming they are outside IR35. Many intermediaries will receive substantial referral fees from providers of accountancy services to aspiring PSC contractors.
  • However, staffing companies and hirers must note the following:
    • There are some roles where it is very hard to argue that a PSC is outside IR35, especially for lower-paid workers who previously operated via umbrella companies.
    • HMRC says that it is tracking PSC usage, and the intermediaries legislation reporting arrangements (in place since April 2015) provides data about this. HMRC may prefer “proper” consultation before any changes to IR35, but a more rapid change cannot be discounted if there is a major PSC surge. Might new measures be introduced so that hirers or staffing companies are liable for a PSC’s tax if the IR35 test is failed?
    • Various measures are already in place to pass liability to hirers and staffing companies for certain types of “arrangement” and “encouragement” into PSC models, and hirers and staffing companies must be very careful to avoid these traps. These measures include the 2007 MSC legislation (ss61A-J ITEPA) and anti-avoidance provisions in the 2014 intermediaries legislation (ss46A ITEPA), both of which, in different ways, were designed to address the risk of surges in PSC arrangements. Significant referral fees to staffing companies from accountancy service providers may make a judge think there was bound to have been some encouragement by the staffing company.
    • Individuals may be pushed into PSC arrangements as a method of keeping staffing company profits, hirer charge rates, or worker take home pay rates at the levels of the “good old days”. However they may, if and when the PSCs are eventually assessed to be inside IR35, harbour a serious grievance against any staffing company or hirer who pushed them, and hold them responsible for the personal liability the director will then have for tax on what he or she thought was tax free. We recommend that, if staffing companies and hirers are to avoid claims, individuals must be entirely free to decide for themselves whether to adopt a PSC model, and significant referral fees to staffing companies from accountancy service providers may, again, make a judge wonder what was really going on.
    • Some individuals may decide that operating via a PSC is just not worth the bother.
    • In the long run the Government has asked the Office of Tax Simplification (“OTS”) to review employment status tests. Whilst the future of IR35 and PSC models may ultimately be determined by that process, we suspect that there will be earlier action by HMRC outside the OTS process. Other countries have struggled with the exercise the OTS has been tasked with, and all involved accept that this review is a complex process and may not be complete for a few years.
  • Generally, our view is that
    • PSC arrangements will not suit all situations from April 2016.
    • HMRC is able to, and says it will, monitor any growth in PSC usage.
    • Any increase in, or inappropriate use of PSC arrangements on a volume basis, should be handled with care. If a supplier relies on them, and is thinking of selling or obtaining institutional investment, it should expect the investor’s advisers to carefully review contingent liabilities in this area and adjust price to reflect risk.
    • The use of PSC models from April 2016 may merely be an “Indian Summer”.
    • On the other hand, these issues are not unique to the UK – Governments around the world are struggling with the rise in self-employment, including via new platforms like Uber. Will this make the UK Government hold back from further attacks on self-employment models?

What next? 

Later this week we will issue a final briefing looking at the impact on outsourcing arrangements and other aspects of the legislation.


On 20 January we are running a seminar that will look at the future for flexible workforces, and why staffing and umbrella companies need to act now to ensure that their offerings keep pace with legislative change and offer commercially sensible arrangements. Find out more >


In the meantime we are offering fixed price consultations for any business affected by the changes. In these consultations we will:

  • Review your current arrangements and types of worker/types of engager.
  • Review other legal and commercial developments affecting you at the moment.
  • Discuss the best options for your business taking all factors into account, followed up with a written report. 

We will look at the detail of the proposals and their impact on the various options at which companies have been looking.

  • Usage of PSC models: what is safe going forward?
  • What umbrella arrangements may still work?
  • How can outsourcing arrangements operate outside the new regime?
  • How can direct engagement models offer a viable and profitable alternative?
  • How can you reduce risk of claims by disgruntled workers if there is no option other than to push down take home pay rates?

Our advice is confidential and protected by legal privilege. Generally speaking, only solicitors registered by the Solicitors Regulation Authority and practicing barristers benefit from legal privilege.

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*This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.