Contractors who work through their own limited companies will often hear the company described as a personal service company, or PSC, particularly in discussions about IR35.
Despite the widespread use of the term, a PSC is not a separate legal form of company and Companies House does not recognise it as a formal classification.
HMRC itself says that personal service company is not defined in law. It is simply the term commonly used for a company through which an individual provides their own services.
Some PSCs have one director and shareholder, others have two or more. A company may eventually take on employees or subcontract work as the business grows.
Companies House never changes a company’s status from a PSC into something else, because PSC was never a distinct company type (like Ltd or PLC) in the first place.
Why PSCs are so closely linked to IR35
The original IR35 rules, now contained in Chapter 8 of ITEPA 2003, targeted engagements where an individual supplied services through an intermediary, but the underlying relationship would have been one of employment if the client had engaged the worker directly.
A contractor’s limited company is the classic example. The client may have a contract with an agency, the agency has a contract with the PSC, and the contractor performs the work. In a direct engagement, there isn’t a legal entity – a PSC or agency – between the individual and the client.
IR35 deals with this by constructing a hypothetical contract between the worker and the client. The question is whether that relationship would have been one of employment or self-employment.
That takes you into the familiar status tests: whether the worker has to provide their services personally, the degree of control held by the client, mutuality of obligation and the other terms which may point towards employment or someone genuinely carrying on a business of their own.
Our IR35 status tests guide covers these in more detail, while the IR35 case law library shows how the courts and tribunals have dealt with them in actual disputes.
A PSC isn’t inside or outside IR35
This distinction is easy to lose because people routinely talk about an “inside IR35 company” or an “outside IR35 contractor”. Strictly speaking, the status attaches to a single contract engagement.
A contractor could use the same company for several clients and find that one contract falls inside IR35 while another falls outside. HMRC also treats the rules on an engagement-by-engagement basis.
This concept makes sense when you understand what’s actually being tested.
One client may control where and when the contractor works, expect them to perform the services personally, and use them much like its permanent staff.
Another client may commission a defined piece of specialist work, but leaves the contractor largely in charge of how and when the work is carried out.
In both cases, there is a limited company in place, but the working relationship between contractor and client is completely different.
Read our guide to what inside and outside IR35 mean in practice for the practical and tax differences between the two.
Who decides the status of a PSC contractor?
Under the original Chapter 8 IR35 rules, the contractor’s intermediary was responsible for deciding whether the legislation applied to an engagement.
That changed first in the public sector in 2017 and then, from April 2021, for engagements with medium and large private-sector clients, where the Chapter 10 off-payroll rules apply.
Where Chapter 10 applies, the client now decides the employment status. It has to take reasonable care when doing so and pass its conclusion, with reasons, to the worker in a Status Determination Statement.
If the client decides that the engagement is inside IR35, the deemed employer is responsible for operating PAYE. In a straightforward agency chain, this is usually the fee-payer immediately above the contractor’s company, although responsibility can shift where the statutory requirements have not been met.
The position is still different for a small private-sector client.
Chapter 10 does not normally apply where the client qualifies as small, so responsibility remains with the contractor’s intermediary under Chapter 8. If the engagement falls within IR35, the PSC must deal with the deemed employment payment and the resulting employment taxes.
The small company exemption is therefore much more than an exemption from paperwork. It changes who is responsible for determining status.
PSC or sole trader?
A sole trader works without a limited company (intermediary) between them and the client.
They contract personally, invoice personally, and pay tax on their business profits through Self Assessment.
As there is no intermediary, the Chapter 8 and Chapter 10 intermediaries rules do not apply to a straightforward sole-trader engagement.
Employment status can still be an issue, however, and a client which treats someone as self-employed when the true relationship is employment may face PAYE and National Insurance liabilities under the ordinary status rules.
This is why saying that sole traders are simply “outside IR35” is misleading. They are outside the intermediaries legislation, but they still have an employment status for tax purposes.
We cover that distinction in does IR35 apply to sole traders?
PSC or umbrella company?
Umbrella working is sometimes bundled with PSC contracting because both commonly involve an agency sitting between the worker and the end client.
Legally and for tax purposes, though, they are quite different arrangements.
A contractor using their own PSC normally owns and controls the company supplying the services. An umbrella worker is ordinarily an employee of the umbrella company and receives their pay through PAYE.
The umbrella invoices the agency for the assignment, receives the money and then processes the worker’s salary and employment taxes. There is no contractor-owned company receiving the assignment income.
This is also why an umbrella role should not really be described as an “inside IR35 contract”.
If the worker is genuinely employed by the umbrella and paid under PAYE, their PSC is not subject to an inside-IR35 determination.
Read more in our guide to IR35 and umbrella companies.
Can a PSC have several clients?
Yes, absolutely. Many contractor companies do, either simultaneously or over the course of a year.
A contractor who works for several genuine clients may have stronger evidence that they are in business on their own account, especially where they also market their services, negotiate fees, take financial risk or invest in the business.
That evidence still has to be considered in the context of the particular engagement. The tribunal is deciding whether the hypothetical contract with that client would have been one of employment, not whether the contractor runs a business in the abstract.
This became an important point in the recent Atholl House case, where the Court of Appeal considered what information about a presenter’s wider activities could properly be taken into account when assessing the hypothetical contract.
Read more in our guide to being in business on your own account.
What about the contract?
A PSC will normally have a written contract with either the client or an agency. There is no special form of “IR35 contract”, nor is there a clause which guarantees that an engagement sits outside the rules.
The wording still matters. Rights dealing with substitution, control, hours, location, termination and the scope of the services may all form part of the hypothetical contract which eventually has to be tested for employment status.
What the parties have actually agreed matters just as much. A substitution clause inserted into a template will carry little comfort if the real agreement was that only the named contractor could ever do the work. Equally, a contractual right does not simply vanish because nobody exercised it during the engagement.
Courts have repeatedly distinguished between the written terms and the real agreement.
Personal service company or person with significant control?
One final source of confusion is Companies House, which uses exactly the same initials for something completely different.
In Companies House terminology, a PSC is a person with significant control.
This normally includes someone who owns more than 25% of a company’s shares or voting rights, although significant control can also arise in other ways.
So the owner of a typical contracting company may be both things at once: they work through a personal service company, and they are also recorded at Companies House as a person with significant control over it.
The overlap ends with the initials. The Companies House PSC rules deal with ownership and control of companies; the term “personal service company” is simply shorthand commonly used when discussing intermediaries, contractors, and IR35.
Why the term still gets used
“Personal service company” is simply a convenient label for the contractor’s own limited company, rather than a separate legal form of company in its own right.
In IR35 terms, the label matters far less than the arrangement it describes: an individual supplying their services to a client through an intermediary they own or control.
The status decision is then made by looking at the hypothetical relationship between the individual and the client.
The presence of a PSC in the contractual chain brings the intermediaries legislation into play, but it does not affect an inside/outside IR35 test.
IR35 status is determined by the terms of the engagement, the obligations accepted by each side, and how the work is actually carried out.