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2007/08 P35 and SA tax returns: Who's not a service company?
After a spate of queries from clients, Nichola Ross Martin tries to work out the answer to question 6 on the 2007/08 P35.Ask anyone what is meant by the description “service company” as in, “Are you a service company?” and they will probably tell you that it is a company that supplies services. They might enlarge on this, and say something along the lines of “supplies services, as opposed to, lets say, manufacture or processing”.
If you are an employer and you found the same question on your end of year PAYE return, would you give the same answer, or would you now say that a service company might be something else? A trick question perhaps?
The 2007/08 end of year P35 return now includes the following question:
“Are you a Service Company?” No/Yes
If 'Yes', have you operated the Intermediaries legislation (sometimes known as IR35) or the Managed Service Companies legislation? No / Yes
This replaces a question posed the previous year which went as follows: “Do the rules relating to services provided through an intermediary (sometimes known as IR35) apply to any worker listed on this return?”
The problem for many employers seems to be that they are not up to speed with the language of tax or IR35, as if you are in the wrong business sector or started your business post 2000, you would have possibly not heard all protests and howls that met the original budget announcement and its introduction (backdated) into that year’s Finance Act. Faced with the question “Are you a Service Company?” you can see that some employers feel lost as to how to answer.
There also is no point in thumbing through the 111 pages of CWG2 Employer Further Guide to PAYE and NICs for a possible clue, as instead of describing what is meant by the term “Service company” it just lists out the rules of IR35. Hit on Google and you will note that service companies predominantly appear to supply company formation services, in which case, many accountants might too consider that they are service companies. Why not?
So what sort of company should tick “yes” on the 2007/08 P35? It’s a bit problematical; if you are “up to speed” with IR35 you might be more familiar with the term: personal service company. The question is then should one take the narrow view that “service company” really means “personal service company” or should one just throw caution to wind and tick “Yes” in that every business that supplies services (including accountants) is a service company?
Postscript
Following the comments in response to this post, I have reached my own conclusions as to what disclosures are necessary for both the P35 and SA returns. See my posting of 27 March below: "Round and round we go" - I will also be utilising the white space of my SA return.
Number of comments: 52
AccountingWEB.co.uk 25-Mar-2008
Categories: Tax News, Tax - Nicki Ross Martin
Times read: 13260
Whoever designed the questions and guidance should be fired, but I think where IR35/MSC rules do not apply, then answer to Q6 is 'No' (and second part is then n/a).
Reasoning is:
The entire purpose of the form P35 question must be to identify cases where IR35/MSC rules apply - they can have no purpose to identify 'normal' service businesses where IR35/MSC rules are not applicable.
E10 is extremely badly worded, but it does say "If you are a service company (as explained above) in the year to 5 April 2008, tick the first ‘Yes’ box under this question." The explanation refers to IR35/MSC. Someone forgot to write 'a service company is one where the IR35 or MSC rules apply'.
I think a 'literal' interpretation is wrong and will get you into trouble if you answer 'Yes' and e.g. there is a minimal PAYE liability returned.
"the company's income is derived wholly or mainly from the provision of the services of company employees whose total income is treated as employment income"
Please can some please explain in simple English what this means?
Also
Say I am a director of a company. All I do is the administration, am a equal shareholder with a 3 other people. It employes 2 people, and they together with one of the other shareholders, who works part-time provides the services which the company receives all of its income. I spend all my time handling all of the admin for these 3 people, (dealing with the day to day office functions). The third shareholder, does nothing.
The company is very profitable, and only the only 2 working shareholders take a small salary. Substancial dividends are paid to all 3 shareholders equally.
Do all the shareholders have to complete the SA box?
What would happen if we all ignored this box and left it blank?
I think.... that "service company" is a far wider description than "personal service company", so I believe that any one-man band company, including Dave the plumber Ltd, would fall under the description of "service company".
If you look at the guidance notes in E10 for q6, you'll see from the first four paragraphs that the context for HMRC's definition of a service company is much narrower and I think includes only those companies caught (or potentially caught) by the IR35 or MSC rules. In para 5 they refer to the "explanation above" so I think they are clearly meaning the first four paragraphs to be read together. Since there isn't a legal definition of service company, that is the best guidance available on which we can rely. Our "commonsense" interpretation of "service company" is irrelevant. I think on that basis Dave the plumber Ltd can safely answer "no".
I should add, of course, that I am neither an accountant nor a lawyer, just a humble director of a small company (which I think isn't a service company by HMRC's definition).
that "service company" is a far wider description than "personal service company", so I believe that any one-man band company, including Dave the plumber Ltd, would fall under the description of "service company".
I think to say that only those caught by IR35 or who should be but have "clever" contracts, fit the description of "service company" is too narrow a view to take.
I have several clients who were "self-employed" but formed companies purely for tax reasons who I think are actually "service companies" for this purpose.
So as a sole trader accountant, who I do not believe IR35 applies to, what do I tick or not tick??
This really is confusing, and we're meant to advise others???
Having read most of the preceding discussion points what about a holding company that owns a group of companies, there is a management charge which is mainly for directors time spent in the subsidiaries. Is it therefore a personal service company?
We - I and the wife (a fully qualified accountant) - are shareholders in our little company since formation about 17 years ago.
The company provides our accountancy and tax services (no-one else's) to over 100 clients.
I believe that, in no way, would we be classified as "employees" of those 100 clients if our limited company didn't exist.
It follows I do not believe IR35 legislation applies to our company so I will be answering "no".
I do not propose answering "yes" and relying on the fact that there are no "relevant engagements".
Or have I misunderstood something here?
I asked whether "service company" really means "personal service company", the response is not as precise as some would like:
"We do provide guidance in support of Question 6 on the P35 - and this can be found at Page 18 of the Employer Helpbook E10(2008). If the guidance is unclear we can review to clarify for future years."
Rebecca Benneyworth has her own views on the questions and legality of this line of questioning, and it is really worth reading through these, because she sheds some more light on why the questions are as broad as they are. HMRC have also responded to this issue. I have added this to the bottom of her piece .
The P35 is an Employer Return. This suggests to me that you complete it as the Employer. The person signing the declaration is doing so on behalf of the Employer (hence it asks for an Employer signature rather than a Director's signature).
So, when the form asks "Are you a Service Company' etc., the question is directed at the Employer (who is completing the return) rather than the person who is physically signing the declaration.
It has been alleged elsewhere that the initial intent of IR35 was to avoid the exploitation of poor hapless employees who were forced by their employer to become contract workers with few if any employment safeguards - employee on the Friday, contract worker on the Monday.
How making them employees for tax purposes but not for employment purposes helps, escapes me however.
A legal figure said at the time something like "in a free work market, the tax-disadvantageous IR35 positions would therefore disappear" without appreciating that the worker is not always free to choose her terms.
But has anybody actually rung up HMRC and asked them directly WTF they mean by these questions?
Surely the diligent journos at AccountingWeb have somebody at HMRC we could pose the question to.
NeilW
Steve,
OK, I have over-argued the point in order to make it.
Under IR35 we have repeatedly seen that the same sort of evidence has been argued in both directions. In one direction employment has been deemed and in the other it has not.
At the heart of it is the question about whether or not Joe Blogs has been 'hired' to do some work or whether a Solicitor who happens to be called Joe Blogs has been hired.
So, very broadly a PSC or MSC is defined based on whether the company has been created to sell Joe Blogs or sell the services of a Solicitor who happens to be called Joe Blogs. But such a thing cannot always be clearly define and in many cases it's not clear until it reaches the SC's and they make a determination which may or may not be reality.
Yes, I know what HMCE are trying to get at and I know that it is wrapped up with trying to identify people who might fall within the remit in particular of IR35 deemed salary calculations but such things are nebulous and a declaration is absolute.
In many ways it's down to HMCE wanting to believe that in this world only Black horses and White horses exist and that therefore if you ever see a Zebra it is in fact a Black horse disguised with white stripes in order to avoid Black Horse Tax. In return the Zebra has to argue that it is in fact a white horse that has been attacked by paint-wielding activists because HMCE cannot conceive of a Zebra.
Anyway,
despite the quality of the question I suspect that a pragmatic answer is simple. If you know that you are going to answer Yes (or should) to the follow-on question then it makes sense to answer Yes to Q6. Otherwise No is the obvious choice.
Last year's questions were more clear but clearly were not proving helpful to HMCE in targetting investigations. I don't see how this new set of questions will improve matters but there you go.
I hear Starbucks calling me...
So as long as the company supplies services that are not tied to the labour of named individuals, it is not a "(personal) service company" in the IR35 sense.
But what about the "notional contract" that the Commissioners have attempted to inspect in previous IR35 cases ?
What about clients who sign up to one thing then say another when cross-questioned by HMRC (see other articles !!)
All to complete a tax form ... arrgh !
If we apply strict legal / dictionary meanings to every term a lot of the UK tax legislation will have holes / ambiguities in it (and I deal with a lot of these so called 'loopholes'). But if we apply common sense and try to understand what HMRC is trying to achieve, the picture becomes clearer.
P35 Q6 is asking firstly if the employer is a 'service company'. Page 18 of E10 defines a service company as a company offering 'personal services' to an end client and goes on to talk about IR35 and MSC in such a way that this is clearly the context within which 'personal services' should be read.
Secondly, it asks if the IR35 or MSC provisions have been operated. Again the E10 guidance talks about PAYE/NI on deemed payments in this context.
My view then, is that if the employer's income could potentially be caught by IR35 / MSC then you tick Yes to the first part of Q6. If you do not have to apply the IR35 / MSC provisions because there is no income from relevant engagements you tick No to the second part.
If you want to apply the strict legal definition of terms when completing your P35 so be it although I think you may be spending many hours in the future arguing the toss with HMRC about incorrect returns / penalties / discoveries etc. I for one will be taking the common sense approach as I would rather argue, should the need arise, why my client doesn't fall within the IR35 / MSC provisions.
I suspect HMRC will ignore this part of the 07/08 P35 because there will be so many incoherent responses. Expect a change in wording for next year?
The 07/08 SA return, page TR4 / TRG15, also talks about personal services but I think this is more about collecting info on who extracts profits as a small salary / large dividend (most small companies?) rather than anything to do with IR35 / MSC. I also wouldn't expect the PAYE section of HMRC to talk to the SA section so I don't attach too much importance to any consistency or conflict with the P35 Q6.
Steve,
I've had a look at the current E10 pdf and the disclaimer at the end.
The question is "Are YOU a service company" and then in E10 that you refer to it describes a service company as including Ltd Cos, LLPs and Ps as outlined.
The end of the declaration starts with the words "I declare and certify that" and continue with "All the details on this Return and any forms enclosed or sent separately are fully and truly stated to
the best of MY knowledge and belief..."
Even as a company director there is no way that I can be legally described as a Ltd Co. It and I are separate legal entities. In the case of a P or LLP the same cannot be said so clearly.
In fact, the Ltd Co. can and will continue to exist as a legal entity after my own death even though at that point I cease to exist as a legal entity and of course that Ltd Co as a separate legal entity may continue to trade and may continue to incur tax liabilities. If something continues to exist after I cease to exist then it and I cannot be said to be the same thing. If it and I are not the same thing then clearly any question which asks "Are you It?" has to be answered in the negative since one does not require the existence of the other.
So, even if you accept the guidance of E10 despite the disclaimer (including that it was correct as of Dec 2007, given that this is now going to be April 2008) then the correct answer for a Co. Dir following the guidance still has to be No since an individual cannot by definition be a Ltd Co. A partnership may also continue in some form after the demise of a single partner but it is not so clear-cut.
I still feel like a [philisophical] pedant on this but I do feel that our role as taxpayers is to fill in declarations and comply with tax legislation as defined in law and it is up to the lawmakers to make clear their intent.
I may of course from the P35 and the E10 booklet infer what the intent of HMCE was but that inference has no value.
Just looked again at E10. All seems clear now. There's no proper definition of a service company, but there is an explanation. Para 5 of the guidance for question 6 reads:-
If you are a service company (as explained above) in the year to 5 April 2008, tick the first ‘Yes’ box under this question.
The 'above' can only mean the first four paragraphs. Paras 2, 3, and 4 make it clear that the context is the IR35 and MSC rules.
Para 1 is confusing on its own because it attempts a definition of 'service company' which is too vague. However, if the 'personal services' of one or more persons are taken in the strict IR35 sense of the services of named individuals who are effectively employees of the end-client, all becomes clear - and all other companies that provide services of whatever sort (e.g. accountants, technical consultants, hairdressers, chimney sweeps, etc) are not actually service companies, so the correct answer to q6 would have to be No.
It just seems that HMRC want their cake and eat it to me!! We should all lobby hard to get some detaield clarificatoin from HMRC on this shambles
John is of course correct it is a legal declaration but unfortunately it is full of ambiguity.
Guidance notes are indeed just that guidance. They are not legally binding and are at best an interepretaion of definitions and legislation that HMCE wish to use. We know that at times HMCE published guidance notes have been somewhat creative interpretations of law and in the case of S660a they may attempt to retrospectively rip them up.
HMCE have not explicitly provided a definiton for a Service Company but have given an inference as to what such an entity might be like.
There is not a legal definition of what a Service Company is. There is a description in legislation of what a PERSONAL Service Company (PSC) might look like and there is also a description of what a MANAGED Service Company (MSC) might look like.
In the case of a PSC it is apparent that such an entity is a transient thing that appears and disappears according to the assignments within a particular tax year (or part thereof).
In the case of an MSC it is clear that this has some transiency to it but more critically it may come into existence based on the unknown behaviour of a third party with which it is in a relationship - say a firm that supplies Accountancy Services but is not primarily a traditional accountancy firm.
Since we have in legislation two woolly descriptions of two different types of Service Companies it might be possible to infer that these are the only two types of Service Companies that might exist.
However the wording of the P35 by using the term "Service Company" does not allow us to infer whether this is something that is similar to, includes or is different from the descriptions already legislated for of a PSC and MSC.
In the absence of an explicit definition "A Service Company is....." in the P35 itself and in the absence of an explicit definition in law of what a Service Company is (if I,m wrong please cite) then we are bound by convention to use a common english interpretation of the words.
There is no common english intrepretation on which we can reach agreeement and therefore it is sensible for people who feel they may be affected by this (since they do not manufacture and sell widgets) to reach a judgement. I suspect 50% will judge in one direction and 50% in the other.
Of course, Nichola does have a valid point that if you are calculating deemed salary payments in accordance with the 'IR35' legislation then of course it makes sense to tick the Yes'es if only for an easier life...
I may be souding like a pedant on this but it is madness to have to sign a declaration when no-one is the least bit clear about what it is that you are declaring...
I was looking at the guidance note written next to the question. I should have realised that that was far too simple a solution!
Maybe they should print a guidance note to tell you which guidance note to follow, and by the sounds of it some sort of caveat to warn potential form filers that the guidance does not do what it says on the cover!
Nicola
E10(2008) is an Employer Helpbook "Finishing the tax year up to 5 April 2008"
There is a specific chapter on filing in the form P35 Employer annual Return
I agree that this is not legally binding guidance but at least it gives some idea to what the Revenue are expecting.
At the moment I actually think like you that a service company relates to an intermediary service (i.e. IR35) or a managed service company and this is from the definition in E10 if you include the extra paragraphs.
Nichola - on the front page of the P35, two thirds of the way down on the left hand side in a white box headed "Help", it states "For step-by-step guidance on completing this Return: see the Employer Helpbook E10 Finishing the tax year..."
Surely this is a legal declaration, and accordingly it is not open to us to 'interpret' what the Revenue are asking. If they are asking "Are you a Service Company" and the company does provide all or mainly services, then the answer must be "Yes". "Have you operated the intermediaries legislation....?" also has to be "Yes", because service companies are obliged to, although in many cases they have no 'relevant engagements'.
I therefore agree with Neil here, and am looking forward to the chaos in the Revenue for having such a wooly worded declaration. Once again, this is indicative of the systematic incompetence of today's Revenue.
Neil
Good point, but how many employers know that?
David
Where on the P35 or SA 100 does it tell us to also refer to E10?
Sadly I would reiterate the earlier comment, we need to refer to E10(2008). Which specifically gives guidance on answering question 6. This gives a definition of a service company. Though stil very vague it does specially mentions LLPs and partnerships are companies for the purposes of this question.
My query is that in answering the first question do look at just the first paragraph of the guidance or the first five.
The question should really be "are you an intermediary service company or a manged service company".
The common useage of the word company is not restricted to bodies incoporated under the Companies Acts. It includes unincorporated entities like partnerships.
So ticking 'No' to the first question because your business is a partnership isn't strictly speaking correct.
I would have to agree with Nichola in only answering Yes if you think that the IR35 legislation applies to your company.
At best, CWG2 refers only to this (as the direct reference on the P35) and there is no clear definition otherwise provided.
The CWG2 section relating to the 'service company' is actually called "Payments made to an Individual Worker through a Service Company or Partnership"
... which implies it is for partnerships also, but as the form doesn't state this I see no reason not to go strictly on the legal definition of a company and answer No.
David Toohey
The Accountants Circle
Excel Accounting Tools | Wholesale Support Services
As the P35 question directs you to booklet CWG2, which in turn does not tell you what it means by service company, but tells you about IR35, I suggest that you only tick "Yes" to the question "Are you a Service company?" if you think that the IR35 legislation applies to your company. This keeps the question in the context with the recommended guidance.
If you have then accounted for the deemed payment as required, then tick yes to indicate that you have, or no to indicate that you should have.
If you happen to be a partnership employer then obviously you are not a company, which makes life slightly tricky, as you cannot therefore be a service company.
Whilst the P35 question is clearly checking that income from "disguised employments" is dealt with correctly - I think that the SA 100 question is doing the same, it has just been drafted in a really odd way.
The SA 100 guidance tells you to complete the income from service companies box:
"If company income derives:
- wholly or mainly from services provided to third parties by you personally or
- wholly or mainly from services provided to third parties by you personally and your fellow shareholders and your shareholding is directly linked to the level of company profit you generate (that is, linked to the amount paid by third parties in respect of your personal services).
In all non-IR35 cases a company's income is derived from the principle activity of the company, what ever that is depending on its objects clause.
In IR35 cases, the company's income is seen as "disguised employment income" or as the courts like to say "employee like income" as without the presence of the company, the income would otherwise be the employment income of the relevant worker, who would in that case be an employee.
I would therefore take the same view as for the P35, it is primarily an employment status matter; a company's income is only deemed personal income when IR35 applies. So if IR35 applies or should do, then you are a service company, if not then you cannot be.
I shall be putting a note in the white space of my return to explain my conclusion and cross ref to the P35 for good measure.
... trying to frighten people into No, No so that they can issue penalties for filing a clearly incorrect P35.
What penalties ? If you've paid the correct tax, that is surely all that you need to do. Giving the "wrong" answer to a question that is irrelevant to that - and which Mike Carter has already pointed out is worded so badly as to allow ONLY a 'no' answer (I am not a company of any sort, I am a person) - surely can't lead to any penalties ?
The flip side of that of course is that HMRC are trying to frighten people into No, No so that they can issue penalties for filing a clearly incorrect P35.
After all every modern marketeer will tell you we are all in the service business...
Unless clearly an IR35 case I intend to answer both questions with a no. HMRC will be too busy getting excited looking at those that have volunteered up a Yes answer I believe and not feasible to seek clarification of all those that will surely answer No.
If you file your P35 electronically, ignoring the question isn't an option, as it will be rejected automatically by HMRC's systems, if not your own software. This rule is in the "Quality Standard".
I have a feeling they'd also reject paper returns where the question isn't answered.
Well, PCG is getting a lot of requests for advice on this, and I believe the powers that be are still working on it.
I would prefer that we could come up with a justification to just tell everyone to ignore the question. Or even write "DON'T KNOW" or "REFUSED" next to it. After all, no tax rides on this, and the meaning is so uncertain that whatever you put could conceivably be used against you at some future date.
Would that amount to "civil disobedience"?
I think there is technically a legal requirement to answer all the questions. But if there is no tax riding on an answer there can be no penalty for not doing so.
Would anyone here be happy to advise a client to just ignore the "service company" question?
I thought I'd take a quick look at the CWG2 as the P35 says to look there for more information.
A quick search does bring up pg71-73 on 'detail' of the service company... without any obvious definition to directly answer the questions everyone is asking (not that I noticed anyway).
It does simply go straight into details of legislation/IR35. With no definition there or in any legislation I would also be tempted to either ignore the question, or put a no. Or possibly all Yes in 'protest' as suggested by Neil Wilson?
If they are relying on the 'definition' described on Page TRG14 of the tax return guide... will that include "complete this box if"? Apart from that, I've not seen anything clear either.
It does make me wonder if there's a couple of guys sitting somewhere that go over this stuff over a coffee... send it off to get others to do up memos to ignore... then pass it through a few boxes... then pass it to one guy and wait for him to tick it along with all the other stuff he doesn't read.
David Toohey
The Accountants Circle
Excel Accounting Tools | Wholesale Support Services
Good point Paul (SC) -
Stuff the HMRC "duck morphology" tests and guidance notes (as per income shifting too) - if it's not defined in legislation, stuff it !
I think it's more of a crude attempt at a statistics grab and a long-play for the new tax penalties regime.
Are you a Service Company?: Yes/No
Have you operated...... legislation?: Yes/No
The answers to both questions do in fact have to be 'No' - at least on the grounds of grammar if nothing else.
"I" am not a Services Company. Any Ltd Co is an entirely different legal entity.
I don't operate legislation. I may comply with it. I may find it applicable but I don't operate it.
The P35 is a declaration signed (or e-signed) by a named person and so in the context the "I" can only apply to that person. A company is never referred to in this way.
When combined with the SA forms they are perhaps trying to make it easier to 'prove' that you deliberately misled them and are liable to higher penalties rather than made a different interpretation under law.
I've long since given up the hope that the people who write these things will study either English or Law.
The wording is so sloppy that they are encouraging false Yes'es and higher and incorrectly paid tax.
Looking at the guidance the dreaded word 'personal' makes an appearance and talks of providing the personal service of one person.
So it is about what you supply then?
If one supplies bespoke software that is not a person.
If one supplies oil rig designs that is not a person
If one supplies project management that is not a person (it is a skill)
And look in Company Law - no mention of Personal Service Companies; Sole Traders, LLP, LTD and PLC. maybe but no Personal Service Company.
The only thing I've got to do with the letters PSC is that they are my initials, but nothing else
Until there is some definitive definition then I would tend to suggest the answer is 'No'
Right, clearly lots of debate & no concensus winning through...
I'm not going to let HMRC get away with causing this amount of confusion in the run up to 19 May & delay me in my business of billing my clients.
So, I've decided I wil be advising my one-man-band clients that their SATRs & P35s should at least be consistent with one another.
That is, they should make no declaration of 'service company' income until HMRC come out with clearer guidelines, that there is debate in the professional community as to the ambiguity of the question, that they understand any 'risks' by declaring 'No', but given they are not IR35 basket cases they shouldn't have much to worry about if ever HMRC get round to challenging them...
Too bold a stance for anyone?
One downside of answering 'yes, yes' is that - as I suggested before - this new wording might have more to do with the intended family business tax (income-shifting) than IR35 and MSC. These would have been handled perfectly well by the previous wording.
FBT isn't happening this year - but if you answer 'yes, yes' this year it may be harder for you to justify a 'no' answer next year. It also hands HMRC, on a plate, statistics that it doesn't yet have - how many service companies are there in total, where the company's income can be identified as due to identifiable work by individual shareholder employees?
Since it makes not the slightest difference to the 2007-8 (or 2008-9) tax payable, I would ask again - is there any penalty for a 'wrong' answer of 'no' - which denies them that information - which I don't see they have any statutory right to collect, and which, as many of the FBT consultation submissions showed is of little or no meaning anyway ?
"Yes, yes, yes .." (!)
OK, Steve H:
YES - this is a company providing services
YES - the relevant legislations have been "operated"
and then in the "white box" ...
“Do the rules relating to services provided through an intermediary
(sometimes known as IR35) apply to any worker listed on this return? - NO”
OR
put YES ..blah.. YES ..blah.. NO ..blah.. in the white box ?
Grrr - if it hadn't been for that pesky HMRC wording I'd have got away with it !
Follow the natural language interpretation of the questions.
Yes you are a company that provides services, and yes you have operated the intermediaries legislation. (which all service companies must operate whatever they do).
And the extra tax to pay was zero because there are no 'relevant engagements'.
This sort of language is nuts. It's like the definition of 'employment agency' in the Employment Agency legislation which includes all forms of marketing and sales for all service businesses.
So I see no downside to answering yes, yes and plenty of upside if it is organised in a mass protest fashion so that there are thousands and thousands of such answers - all of which will be entirely accurate according to the woolly definition.
What do you reckon Gareth?
NeilW
If you think you re a "service company" what does it mean to have "operated" the services companies legislation:
1) never heard of it/have not stopped to think about it
2) have considered it and decided it does not apply
3) have considered it and decided it applies to some of the companies earnings, but enough salary has been taken that no more tax is due.
4) have considered it and decided that it does apply, and have paid the extra tax under IR35.
Presumably 1) is a NO and 4) is a YES, but what about 2) and 3) ?
This question is causing us problems already and I'm hoping someone can suggest anything remotely helpful we can say to our customers about this.
Our service doesn't include advice, but we have already had customers ring up and ask how they should answer this for
1) A nursery, which provides a child-minding service
2) A consultancy which has been advised it is outside IR35
I expect many more questions like these.
The best we can do at the moment is point them to the guidance in E10, which Neil Tonks helpfully quoted in this thread.
It isn't clear how the question should be answered, but it is clear that common sense will not, in general, lead to the correct answer. For example:
- A company that provides automated services (such as online payroll) should answer No
- A partnership that provides mostly products, but a bit of consultancy on the side, should probably answer Yes
I posted the same question earlier today on Any Answers entitled 'Are you running a Service Company?' - plenty of hits so far but no-one has come back with a response as yet...
There is a worrying difference in the definitions of a 'service company' between TR4 (and notes on TRG15) and the P35 question 6 example.
TR4 makes it seem inconsequential to declare 'serviced company' income - but tie this in with Q6 of the P35 and you immediately have a conflict.
I service my clients personally through my company so per TR4 'Yes' I run a 'service company' but when it comes to filing my P35 then it's a 'No' to Q6 as there is no way I am subject to IR35.
This problem is going to be hitting us for real very very soon so we need answers fast!
I keep seeing Agency contracts which insist the clients work for either a Service Company, or a Service Managed Company. The agencies seem they have to do this to make sure the person does come under IR35! etc etc
And the latest - throughout March, every morning I have heard a local firm of accountants invite sub-contractors to come them, so they work using a "umbrella company" to reduce their tax bills... etc. etc..........
From the words that Stephen Leonard found, it seems to me that this was designed for the aborted income-shifting legislation. Since there is now no tax difference between a 'service' company and a 'non-service' company (provided you're not caught by IR35 or the MSC rules), does it really matter whether you tick the box or not ? What penalty can they impose for a 'wrong' answer if it makes no difference to the tax you owe ?
HMRC do provide a little guidance on this, in booklet E10(2008):
"A service company is a company through which the personal services of one or more persons are provided to end clients. For the purposes of this question, ‘service company’ includes a limited company, a limited liability partnership, or a partnership."
Mind you, the same booklet also says that
"If you tick the second box ‘Yes’ but the amount of the deemed employment payment is provisional, confirm this on a separate sheet and send it with your P35."
but sending the sheet with your P35 could be a problem if you file it online!
Neil
This is just another example of how low the Revenue have sunk.
They don't seem interested in making sure that people pay the right amount of tax. They are too busy hiding in the bushes in order to pounce on the unwary.
HMCE want an easy way to identify IR35 [et al.] investigation candidates and an easy way to justify strong tax penalties for giving 'wrong' answers.
The existing P35 clearly has not been too helpful in doing that.
The new forms are trying to work together to create some sort of vague definition to which an application (correct or otherwise) of various bits of recent legislation can be targetted at.
HMCE are clearly not exactly too willing to give a concise definition since it allows for 'avoidance'.
I will soon need to answer these questions in some way and will also need to look for evidence that supports whatever decisions I make.
The interesting question is going to be whether or not MyCo has been providing a service and providing a set of products. The contracts support one view. HMCE may or may not take a different view.
My local garage services my car. Is that a service? Are they a service company?
They've clearly wanted to avoid the words 'personal' or 'managed' in order that the net be cast as wide as possible.
No doubt the people who wrote the question took a narrow view of what the definition of 'service' might be but felt unable to share it....
Could this new box be linked in some way to the new 2007/08 SA returns?
Having had a quick glance through the 2007/08 tax return guide I noticed that there is a new box on Page 4 of the return regarding 'Service Companies'. Details of the amounts included on the tax return which were derived from Service Companies need to be entered in total into the box.
Page TRG 14 of the tax return guide gives a summary of what a service company is and it says
You should complete this box if you have received any form of income (including employment income and dividends) during the year from a company through which you provided your services personally and of which you are a sole or joint shareholder.
Complete this box if the company's income is derived
- wholly or mainly from services provided to 3rd parties by you personally or
- Wholly or mainly from services provided to 3rd parties by you personally and your fellow shareholders and your shareholding id directly linked to the level of company profit you generate (that is linked to the amount paid by 3rd parties in respect of your personal services)
If this is the definition of Service Company for SA purposes is it the same for PAYE?
Surely, if there's no legal definition of a "service company", it's whatever you want it to be ? In that case, if you fall outside IR35 and MSC rules, the only safe and correct answer to the first question must be "no". If HMRC should happen to question this answer, then you can supply them with your own as-narrow-as-you-like definition of a "service company" which happens not to include your own company.
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