A Personal Service Company (PSC) is an Irish limited company set up by a professional to provide services, aiming for corporation tax benefits. Revenue applies strict anti-avoidance rules, often reclassifying income as personal employment earnings if the setup lacks commercial substance, ensuring fair taxation.
A Personal Service Company (PSC) is a limited company in Ireland set up by an individual professional, such as a consultant, freelancer, or contractor, to provide services to clients. The primary aim is to benefit from the lower corporation tax rate of 12.5% on profits, rather than paying higher personal income tax rates up to 52%.
However, Revenue Commissioners apply stringent anti-avoidance rules to PSCs. If more than 51% of the company's income derives from services personally provided by one individual to a single client, and certain control tests are met, Revenue may reclassify the income as employment earnings. This prevents abuse where professionals incorporate solely to reduce tax without genuine business substance.
You might consider a Personal Service Company structure when transitioning from self-employment to limit liability and optimise taxes. Yet, compliance with Benefit in Kind rules for personal extractions and maintaining proper records is essential to avoid reclassification and penalties.
Revenue uses specific tests to determine PSC status. The key 'relevant services test' checks if services are provided personally by one person to another person or connected entity. If the company has fewer than three employees and meets the 5/12ths rule (services to one client exceeding five twelfths of turnover), it triggers scrutiny.
Control tests examine if the individual, their associates, or connected persons control the company. Trading receipts from relevant services must not exceed 95% of total turnover for safe harbour. These rules ensure only genuine trading companies, not disguised employments, claim corporation tax treatment.
If Revenue deems your Personal Service Company a PSC, they adjust trading income as employment earnings. This imposes higher PAYE, PRSI, and USC at marginal rates, plus employer PRSI liabilities. Back taxes, interest, and penalties may apply, potentially unravelling years of tax planning.
Directors face personal liability for unpaid taxes. Proper structuring, such as employing family members or diversifying clients, can mitigate risks. Consult advisors familiar with financial year end planning to navigate these complexities.
Professionals form PSCs to access corporation tax rates, limited liability protection, and expense deductions unavailable to sole traders. Dividends can extract profits at lower effective rates post-corporation tax. Pension contributions and capital allowances further enhance benefits.
However, administrative burdens increase, including corporation tax returns (CT1) and CRO filings. Weigh these against tax savings, considering Revenue's aggressive PSC enforcement.
Diversify clients and employees to fail Revenue tests. Document commercial substance through marketing efforts and contracts. Extract profits via compliant salaries and dividends, avoiding excessive director loans triggering Benefit in Kind.
Maintain robust records for tax interest defence. Professional advice ensures compliance whilst maximising legitimate benefits.
Sole traders face higher taxes but simpler admin. Partnerships share liability. Genuine trading companies with multiple employees avoid PSC rules. Consider share option schemes for growth-oriented setups.
Revenue continuously refines PSC guidance, emphasising economic substance over form. Recent focus on IT contractors highlights enforcement trends. Stay updated via professional networks to adapt structures proactively.
