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Service Company Employer Annual Return

Service Company Employer Annual Return

I have declared my company to be a service company on my employer annual return for many years.

For the first time this year I have received a letter from HMRC saying “You … stated that you were a service company … This means that we treat the figures on you return as provisional and expect to receive an additional return, or confirmation from you that the figures on the original return were correct”

Has anyone else had such a letter?

How can HMRC deem my return to be provisional?

What is the additional return they are expecting?

Replies

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17th Jan 2013 09:07

Did you understand the question correctly?

The wording of that question is extremely confusing to non-specialists. They aren't using the words "Service Company" in the general way that you or I would use them. They are referring specifically to a company which is caught by the provisions of IR35, I believe.

Maybe this is old news to you, in which case I apologise, but I've come across many employers who thought that they should tick that box because they were operating a "service company" in the generally accepted sense of the words, rather than HMRC's narrow definition of "Personal Services Company".

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17th Jan 2013 10:02

Tom - do you understand the question?

TomMcClelland wrote:

The wording of that question is extremely confusing to non-specialists. They aren't using the words "Service Company" in the general way that you or I would use them. They are referring specifically to a company which is caught by the provisions of IR35, I believe.

Question 6 is asking if the employer is a service company through which a shareholder provided personal services to a client of the company.  It does not follow that only companies caught by IR35 should answer Yes.  It is a two part question and it would be correct for many companies (firms of accountants, for example) to reply Yes - it is a service company - and No - the intermediaries legislation (IR35 rules) has not been operated.

I might also add that companies which have calculated the salary payable under the IR35 rules and have then actually paid that salary to the working shareholder should also answer No to the second part.

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17th Jan 2013 10:57

I'm sure your knowledge is more detailed than mine.

I didn't go back and check the detail of the question before replying, but I think my *general* point still applies.

The point I was making boils down to the wording of the question on the form. It just says, "Are you a service company?" But in fact the detailed guidance limits those who should answer "Yes" to that question to a very small proportion of those businesses who would in normal conversation refer to their businesses as "Service Companies". So it is easy for a business to mislead HMRC into thinking that they are a service company as defined by E10 when in fact they didn't look at E10 (as most businesses don't).

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17th Jan 2013 13:51

What Booklet E10 actually says

TomMcClelland wrote:

The point I was making boils down to the wording of the question on the form. It just says, "Are you a service company?" But in fact the detailed guidance limits those who should answer "Yes" to that question to a very small proportion of those businesses who would in normal conversation refer to their businesses as "Service Companies". So it is easy for a business to mislead HMRC into thinking that they are a service company as defined by E10 when in fact they didn't look at E10 (as most businesses don't).

 

Booklet E10 is only available as a PDF document, so I quote from it:

"For the purposes of question 6, ‘service company’ includes a limited company, a limited liability partnership, or a partnership (but not a sole trader) which provides your personal services to third parties.

The first part of the question should be answered ‘Yes’ if:

• an individual performed services (intellectual, manual or a mixture of the two) for a client(s), and
• the services were provided under contract between the client and the service company of which at any time during the tax year, the individual performing the services was a shareholder or partner, and
• the service company’s income was, at any time during the year, derived wholly or mainly (that is, more than half of it) from the services performed by the shareholders or partners personally.

So, if you are a service company in the year to 5 April 2012, tick the first 'Yes' box under this question."

 

On this definition, almost every one man company supplying services to clients should be answering 'Yes'.

If 12Pay is a payroll provider, shouldn't you know this?

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17th Jan 2013 10:23

I agree with Euan.  There is an old but useful link on Accounting Web http://www.accountingweb.co.uk/topic/tax/p35-question-6-ahead-game/409030 which explains the various options for answering Question 6.  

For many of my clients, I answer Yes to Part 1 and No to Part 2.  I have never received a letter from HMRC stating that the return is provisional because of the client being a service company.  I wonder whether you also answered Yes to Part 2, and HMRC are following up because of this?

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18th Jan 2013 08:02

Thanks for the responses, but they don't address my questions

We have had the debate about a) are you a service company and b) has the intermediaries legislation been applied before at Accounting Web. I thought that the majority conclusion was a) yes and b) yes even if under b you had looked at the intermediaries legislation and decided that deemed payment is nil because none of the customers are deemed employers. However, I am not asking about that. What I am asking is…

 

Has anyone else had such a letter?

How can HMRC deem my return to be provisional?

What is the additional return they are expecting?

 

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By DMGbus
18th Jan 2013 08:49

Provisional return

The concession that a provisional return could be lodged within the traditional P35 deadline timescale was introduced purely for IR35 companies to ensure that time was available to prepare a supplementary return if need be after analysing a company's records just after 5th April.

With the IR35 companies that I dealt with I avoided a provisional P35 followed by a supplementary one by requiring the clients concerned to provide me year end information immediately after 5th April so that annual accounts could be drawn up before the 19th May P35 deadline and therefore a single "IR35 accurate" P35 could be drawn up by 19th May.

 

 

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18th Jan 2013 09:53

Answers to your questions
I have not.Probably because you answered Yes to the second part of Question 6.  I suspect that the letter from HMRC saying “You … stated that you were a service company..." was shorthand for "You stated that you were subject to the IR35 rules".  Either that or HMRC has made 2 + 2 = 5.DMGbus has explained.

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18th Jan 2013 10:31

Thanks for all your responses

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26th Jan 2013 11:42

2011-12 return online

I'm completing my return online for 11-12. It no longer asks if IR35 applies, it only asks for a figure for the income withdrawn through a "service company". I am happy that IR35 doesn't apply to me (or my wife) as we meet all the HMRC tests for not being 'deemed employees', but - reading through the wording of the request for the amount withdrawn through the 'service company' - I cannot see how I can honestly put 0.00, but without the supplementary option to say that the shareholders/directors do not fall within the remit of IR35, am I risking an IR35 investigation by putting a figure in the box?

Given the total waste of time and effort the IR35 legislation has proved to be to HMRC, I'm amazed that they continue to re-word the tax return year after year to try to force more people to say that they are covered by IR35 whether or not they actually are...

 

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26th Jan 2013 13:17

Personal income tax return

My understanding is that you should enter on your personal income tax return the figure which it asks for (whether or not IR35 applies to you).

So mfwiniberg you should NOT be entering NIL here.

It does not follow that any additional tax liability or enquiry will arise.

(I would presume that the company answered the two parts of Q6 on the P35 as (a) Yes, (b) No.  I agree with Euan on this.)

David

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26th Jan 2013 16:42

Personal Income Tax Return

Thanks for that.

I think I will add a comment to the return pointing out that I am not within the scope of IR35, just to make it clear...

 

Mike

 

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26th Jan 2013 19:32

confusion between P35 and self assessment

Mike - I think there might be a slight confusion between the P35 and the Personal Self Assessment Tax Return.  The P35 is the company's Employer Annual Return, and would indeed have included the two-part question to which you probably answered a) Yes and b) No when the return was submitted at the end of the 2011-12 tax year. This question has been around in its existing form for a few years now.

The personal self assessment tax return for 2011-12, which you are now completing online by the deadline of 31st January, has for some years included the "service company" question requesting total income drawn from a service company.  There has never been a second part to this question, and there is no need to include any additional statement regarding IR35 - my personal view would be that one would not wish to draw attention to oneself by making any comments in the return regarding IR35 status, but just to enter the relevant figure in the box provided.

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27th Jan 2013 13:53

sparkler; You are right, I had confused the two. I also reached the same conclusion as you and just filled in the figure and said nothing more.  many thanks!

Mike

 

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