A Brief History of Single Person Companies (SPC)

Single person companies were a payment structure which took off in around 2003, they were present before then, but due to the higher running costs and comparable benefits they proved less popular than composite companies. What changed in 2003 was the introduction (by the then chancellor Gordon Brown) of a £10k tax free band of small business corporation tax. The allowance lasted for just 1 year before being removed, but single person companies remained as they were a more stable structure, and less vulnerable to IR35 than the composite companies before them.

How did a single person company work?

Single person companies were, at face value, very similar to composite companies. A contractor's wage was still split into two parts (minimum wage taxed as PAYE and the remainder paid as a dividend and taxed at 19% corporation tax), and business expenses could still be claimed and used to reduce the corporation tax due. The main difference was that (as the name might suggest) contractors were alone in their limited company. Due to the costs associated with setting up a company for each contractor companies providing SPCs introduced a "set-up fee" due to the cost of setting up the company with Companies House. Set-up fees dried up in 2004 when the tax free allowance was stopped, as the financial advantage was significantly reduced.

What was the benefit to contractors?

When single person companies took off in 2003 the financial benefits were enormous. The £10k tax free allowance reduced the amount of corporation tax due, and as a result could increase weekly take home by almost £50 over what people were earning through a composite company. Companies providing single person companies charged roughly 50% more than they were for any composite companies but the gains to the contractor more than covered the extra cost.

A good financial comparison of how things stood in 2003 is that based on 40 hours at £15 per hour a contractor could take home £436 though standard PAYE and through an SPC with no expenses they could expect £490, over 81% of their gross pay.

This advantage was not to last, after a year the tax free allowance was stopped, and the financial advantage fell back in line with that of the older composite structure. Set-up fees stopped and weekly fees returned to around the same level as that of composite companies.

Contractors and companies stuck with the single person company structure and composites disappeared from the scene. The stability and resistance to IR35 of single person companies far outweighed that of composite companies and this was seen to be their long term benefit.

Why single person companies stopped:

Single person companies had a good run of well over 4 years. Their stability was such that new legislation had to be introduced in the 2007 budget to shut them down. The legislation in question was "Tackling Managed Service Companies", and it spelled the end of wage payments as dividends, the end of big financial advantages, and the beginning of more legally sophisticated and complex payment methods, the most popular of which proved to be umbrella companies.