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:
Rebecca Benneyworth examined questions relating to the new phraseology of form P35, and the powers of HMRC to ask such questions
The problem with the P35 and SA question highlighted by Nichola Ross Martin