HM Revenue and Customs has this month shattered its own ‘blanket assumption’ that personal service companies are formed primarily to avoid tax.
A study, run by Ipsos MORI on behalf of the tax man, showed that the potential to minimise tax liabilities is only the fourth most widely cited reason for registering a business as a company, with limited liability status ranking as the top reason for incorporating.
Other participants stated that national insurance and tax savings had ‘no bearing’ on their choice for limited company status.
This study follows Stephen Herring, head of tax at the Institute of Directors, revealing HMRC’s tendency to regard PSCs as “automatic evidence of some form of tax avoidance” in a report to the Lords in January 2014.
Commenting on the results of the report, Mr Herring said: “The report at Section 1.4 is consistent with my evidence…there is a world of difference between a decision being made on the tax treatment only and tax being taken into account before a decision is made, or afterwards.”
Commenting on the study, Ben Dunn, Finance Director at JSA Services comments: “ We hear time and time again that contractors are frustrated by the assumption that they have chosen to incorporate primarily in order to avoid tax. This research really does debunk that myth.”