The revelation that Ed Lester, Chief Executive of the Student Loans Company, was having his £182,000 salary paid through his own personal service company as part of a tax avoidance scheme has brought such arrangements into the public eye.
Whilst the use of such companies is common knowledge to those in the recruitment industry, the exposé and the resultant announcement by Danny Alexander, Chief Secretary to the Treasury, that Mr Lester will be paid net of PAYE tax and NICs in the future, has led some commentators to question the very legitimacy of working through a personal service company (PSC). This has been exacerbated by Alexander’s further order of a review of the tax affairs of all top civil servants.
Use of a PSC can be a very effective way of ensuring lower income tax payments and significantly reduced NICs, provided that the way it is structured works within the strictly drafted tax legislation, notably the Income Tax Earnings and Pensions Act 2003 which contains not only IR35 legislation but the Managed Service Company legislation. Furthermore there have been suggestions that the onset of the AWR has brought about an increase in the use of PSCs as they provide a way for individuals to operate outside of scope of the regulations.
Whether the story will bring about a wholesale examination of the use of company structures generally, or will expedite the Treasury’s considerations on IR35, is yet to emerge. Press coverage seems to imply that it is Mr Lester’s status as a public servant which is at the root of the outcry rather than the structure itself. However any further revelations of this nature within other government departments, perhaps even HMRC itself (especially if the review is extended to include consultants and other advisers) is likely to keep the issue on the front pages and potentially bring into question the fundamental bases for personal taxation in the UK.