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Institutes tackle HMRC on service companies questions
Following criticism by members for apparent inaction, the two main tax institutes have announced that they have written to HMRC querying the newly introduced service companies question which appears on page TR4 of the 2008 Self Assessment (SA) tax return. The SA question, together with another similar version on the PAYE end-of-year P35 has caused widespread confusion for agents and taxpayers alike.The ICAEW Tax Faculty and CIOT say that they have written jointly to HMRC with a number of concerns which need to be addressed. The CIOT adds that "the hub of our concern is that this question seems to go beyond the data gathering nature of the tax return into areas that should be addressed through an enquiry." Both bodies say that they will publish further guidance once HMRC respond to them.
The problem is that the P35 question, (after much sifting through guidance notes) relates to businesses within IR35 and the Managed Service Companies (MSC) rules, but the SA question appears to be much broader and this lack of clarity is a major issue for anyone attempting to sign off their return "correct and complete to the best of my knowledge and belief". It asks taxpayers for the ‘total amount of any income included anywhere on this tax return, derived from the provision of your services through a service company.’ It refers to page TRG15 (Tax return guide 15) which gives the following guidance:
"You should complete this box if you have received any form of income (including employment income and dividends) during the year in question 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: Do not complete this box if you are a shareholder and company officer of a company and 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, or derived wholly or mainly from the manufacture/provision of goods."
Whilst part of this guidance clearly relates to shareholders in MSCs, the other part appears to include most small owner managed businesses, irrespective of IR35.
The issue was highlighted over two months ago on AccountingWEB.co.uk and tax editor, Nichola Ross Martin then asked HMRC for better guidance for taxpayers and agents, as well as commenting on the legality of such a broad question. Its responds then was:
"HMRC disagree with the suggestion that the question is not within the scope of section 8 TMA. That section allows HMRC to include whatever questions are considered necessary for the purposes of establishing the amounts in which a person is chargeable to tax on income received - including establishing whether income is correctly being returned as dividend income."
It will be of interesting to see if HMRC changes its tune in this matter.
Related links:
So are you a service company, and why does it matter? And can HMRC ask you?
Rebecca Benneyworth examined questions relating to the new phraseology of form P35, and the powers of HMRC to ask such questions
2007/08 P35 and SA tax returns: Who's not a service company?
The problem with the P35 and SA question highlighted by Nichola Ross Martin
AccountingWEB.co.uk 8-May-2008
Categories: Tax News, Tax - Nicki Ross Martin
Times read: 4386
by 1 user(s)
I think the difference is that Dave is unlikely to be accused of being a disguised employee because he has all the badges of trade. There is no possibility of him being accused of being a disguised employee of his many customers, whose custom he can accept or decline, who cannot in any way tell him how to do his job etc etc.
IT consultant Ltd may not be a disguised employee but he is likely to be accused of it whereas Dave is not.
Its good to know that I understand the legislation...
BUT
I have a hard time seeing the difference between Dave the plumber who incorporated to save tax v. being self -employed and Mike the IT consultant who incorporated to avoid paying PAYE as an employee.
To me both situations are that the company, Dave the plumber Ltd/ Mike the IT consultant Ltd, is a service company and so should be ticking the P35 box and each director should be putting a figure in that box on his SA tax return about service companies.
There is no logic in saying that one is a service company and the other isn't.
But hey whoever said tax law was logical?
Peter - you have it.
Not necessarily the same answer for the Service Co questions on Tax Return.
My client, lets call him Dave the plumber Limited, provides the time of Dave to third parties.
Dave is the only shareholder and sole employee of the company and the company does not use sub-contractors
BUT
As the company is outside IR35 and the MSC legislation he does not need to complete that box on his P35 or his SATR for 2008.
Is that right?
Thanks for letting me know. Sorted now. Short outage only.
Mark
Ha!
Mark,
Your link does not appear to be working
Service company question 2008 SA return page TR4:
- If you are not sure about the question or your answer, don't fill in the box or file your return until HMRC and tax institutes offer clearer advice. **
- If you are a service company (taking service company to mean a company within IR35 or a managed service company (MSC)), await clarification on what income should be included and the legal issues are resolved by HMRC and tax institutes.
- If you know that you are not a service company (taking service company to mean a company within IR35 or a managed service company (MSC)), then it is not necessary to complete the box. You can "file your return, but you might want to put this on hold and wait for further advice from HMRC and tax institutes for peace of mind.
** You may want to take some additional professional advice if you are unsure if you are within IR35, or think that you are a boarderline case.
Nichola Ross Martin
Tax editor, AccountingWEB.co.uk
Here's the advice we included in our practical tax update a few weeks ago:
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This is an odd question, because if the income has already been declared on the tax return, why do HMRC need to have that information duplicated in another box? We believe the purpose of this section is to identify individuals who work through their own personal service companies, drawing most of their income as dividends rather than salary and hence avoid paying significant amounts of national insurance. As such it is similar to question number 6 on the 2007/08 P35 form, which was discussed in our newsletter of 3 April 2008 (you can read this online if you don't have it to hand).
As with the P35 form, individuals who complete this box with a significant figure may leave themselves open to investigation under the IR35 or the Managed Service Company provisions. In future years this information may be used by HMRC to launch an attack. Although the Income Shifting provisions have been abandoned for the moment, the dragon is only sleeping. New provisions, hopefully more workable, will be introduced next year to take effect from 6 April 2009.
So should your clients complete the service company box or not? Like many other commentators I tend to think that HMRC have over-stepped their powers in asking a question which appears to have no bearing on the taxpayer's tax liability for the year. If this view is correct, the taxpayer should not answer the question and should not be subject to penalties if he omits the requested information.
The HMRC guidance on how to complete the services companies box provided on pages TRG 15 and TRG 16 of the tax return guides raises more questions than it answers. In particular; should the box also include benefits in kind, interest and rents received from the company.
The various accountancy and tax bodies are seeking further guidance from HMRC concerning the service company question and we will let you know when further advice is received. In the meantime, if you have clients that operate through their own personal service companies, you might want to set their 2007/08 tax returns aside until the official advice is clear. Other taxpayers can safely ignore the service companies box.
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Mark Lee
Tax Advice Network
