Form P35 Question 6 - better now? by Rebecca Benneyworth

After the drama last year with the new question six on form P35 have we faired any better this year? I take a detailed look at this year's guidance. Last year HMRC issued supplementary guidance part way through the P35 filing season. Have they got it "right first time" this time?


Employer Helpbook E10(2009) provides the current guidance on how to complete question six on form P35.

Continued...

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Is the P35 final or provisional?

AnonymousUser | | Permalink

For most cases where we answered "yes/no" to the equivalent questions on the 2007/08 P35, we received in February 2009 a letter from "Customer Operations" of HMRC stating:

"You indicated at q.6 of the 2007-08 ... P35 that work had been carried out through a service company ... and deemed payments had been received during the year.

I have not received your written confirmation that the provisional figures shown on the P35 return do not need amending.

You must now submit a further P35 ... showing ... the amounts which need to be added to ... the original entries."

As HMRC were clearly treating "yes/no" to mean that the return was provisional why could they not phrase the question accordingly, rather than the confusing & vague wording they have settled on, which has clearly confused 99% of the accounting profession?

Spoke to IR35 unit at HMRC

Anonymous | | Permalink

Interestingly, I spoke to the IR35 helpline at HMRC re this to hear their opinion. He also agreed that it was a very badly worded question and that he has had 241 calls regarding this.

He also said had it been up to him he would have had into three parts with an additional question "If you are service company have you considered whether the IR35 legislation applies to your company".

Anyway, he said that as far he is concerned the most appropriate answer is yes, no for most companies even for people who dont fall under IR35 legislation etc based on how it has been phrased..

Therefore, a one man band ltd company such as an accountancy firm with 50/60 clients should still be answering yes, no as Rebecca has stated.

Consequently, he expects many companies will be answering yes, no to this.

He also said that the purpose of the question was purely for statistical purposes and that people should not get too worried about the question and not start expectnig a wave of compliance enquiries.

The likelihood is that the question will be phrased differently again next year.

Regards

Gone fishing

AnonymousUser | | Permalink

I can't see why the question can't be far simpler; e.g. "Is this return provisional? Y/N"

Anything else is just a fishing trip - the same goes for the Service Company question on page TR4 of the tax return.

RebeccaBenneyworth's picture

answers

RebeccaBenneyworth | | Permalink

@anon
Agreed. The question cannot apply to sole traders as the definition of servoce company includes only companies and partnerships.

@John Smith
Your arguments appeal to me John, and I agree that in truth the answer is still unclear. However, interesting as I find it to engage in the debate about "personal" I am also aware from my "other life" as a speaker that many practitioners want to cut to the chase of an answer, so I decided to summarise where we seem to be up to.

I return to my final comment in my original article. The guidance is a little better but there is still plenty of room for improvement. Will it be clearer next year? I dearly hope so but I won't be putting any money on it!

Soletraders

Anonymous | | Permalink

Ok so since the general consensus is a yes, no answer for service companies including ltd companies, limited liability partnerships and ordinary partnerships.

I assume soletraders such as consultants who have 2/3 clients or maybe just one client and are paying wages to admin staff will be answering no, no as this question is not applicable to them.

Regards

Not entirely convinced... (Part 2)

John Z | | Permalink

cont...

There have also been suggestions that the company and individual must answer the same way. They are different legal entities and must make judgements in their respective capacities based on the conflicting guidance and advice, and at the different appropriate times (I am confident even more views will be expressed come self assessment time!). The wording on the front of the self assessment form clearly refers to "personal" service and is different from the wording on the front of the P35. The initial wording may well lead the interpretation of any more detailed guidance. The P35 guidance suggests that "the first question narrows those employers who need to consider whether the second question applies", a strong leader to "is this about IR35", again which may lead to varying interpretations.

As others have correctly stated, if most consider a Yes / No on the P35 to be right, HMRC will struggle to gain anything useful from this, and which some might well argue is almost a good reason to do precisely that..!! But ultimately, it must depend on the individual circumstances, nature of relationships and projects, products, or services etc being delivered by a company; and I am not sure I accept that every micro business in the country where the shareholders' efforts might be calculated to comprise more than 50% of business turnover should automatically be answering Yes / No. Equally, if that in fact was HMRC's intention, then I am sure that they should have been more than competent enough to achieve that without all this ambiguity and debate...

Hope that's useful...

Not entirely convinced... (Part 1)    1 thanks

John Z | | Permalink

Hi Rebecca,

From comments here and elsewhere, I am personally still not sure that there is any definitive answer on this, despite the lead here towards a mass Yes / No filing (!); and that one could very easily justify either response to this, ie Yes / No or No / N/A (assuming of course that IR35 is a non issue), depending upon individual circumstances.

1) There is evident confusion over what personal or personally relates to, if reading the differing and contrary guidelines and advice, here and elsewhere;
2) There will be cases where individuals may clearly be able to assert that they do not perform services for clients (part 1 of the guidance notes), but for the company that employs them (not just legally as is the implication from part 2 of the guidance notes, but in commercial reality); and
3) The tax consequences are irrelevant in any case.

In 2) above, to provide but one example, there will be many cases where a solution or a project is say being delivered by a company to a client. For example, a company employee might collect information, discuss issues with the client, go away and analyse and assess such information, before then collating / writing a report. All of this activity is being carried out directly for the company. The end product (report / recommendation etc) is then presented to the client. Hence, it is not an "individual performing services for the client"; it is instead an end product commercially being delivered by the company to the client, and of which the only act that might be deemed as personal (but not personal service) is say the director presenting it to the client, ie in his capacity as client "lead". That the employee(s) may (or may not) also be the directors (or even sole director) in the example above does not change the business or commercial reality of this. This is just one example, and I am sure there may be others.

cont...

In summary

Anonymous | | Permalink

This thread has drawn useful comment and debate, and I have had a number of direct comments in addition.

During the last month or so I have come around to thinking that for many businesses - almost all service based businesses operating through partnerships or companies the appropriate answer will be YES / NO. I was reassured to hear that HMRC also expect that will be the answer given by many, of which a subgroup will be those potentially caught by IR35 but who consider themselves "safe". There will be many other businesses, however, giving YES/NO. That also seems to be the consensus among many accountants I have spoken to around the country.

So to conclude............

Anonymous | | Permalink

Before reading all these comments, I had decided that the best answer was Yes, No (assuming IR35 didn't apply).

After reading all this, I am now more confused than ever. Many people here have put forward a storng case for No, No.

"Taxtips" have recently stated that yes, no is the most appropriate answer and (I certainly get the impression that is what Rebecca Benneyworth is also suggesting).

Given the fact that the deadline is fast appoaching, is the general concensus for a yes, no answer just as the general concensus and guidance from ICAEW for the service question on the tax returns was that it would apply to all the relevant service companies even if not affected by IR35.

Certainly, if everybody files yes, no then HMRC cannot investigate them all and will have to look at other criteria.

I am going to start filing the Returns tomorrow so I guess I have to make a decision but I think yes, no is the best answer.

Regards

Anon

Consistency...

eddybee | | Permalink

As mentioned below I no longer am giving tax advice, but if the questions on the P35 and tax return are the same then I struggle to see how different answers can be given. so the end result is likely to be yes/no.

Taking this into account is there any good reason why it should be no/no?

On line help

eddybee | | Permalink

If you click on the question mark next to q6 on the online form the following "help" (?) comes up:

"An intermediary or ‘service company’ is a company through which the personal services of one or more persons are provided to end clients. The only engagements affected by the IR35 rules are those in which the worker would be classed as an employee of the client if it were not for the service company involvement.

Where the IR35 rules apply, the intermediary may have to account for an additional amount of PAYE and National Insurance contributions on the deemed payment, which is based upon the income from the engagements, after an allowance for certain expenses and pension contributions. "

I stopped giving tax advice 5 years ago, but it seems to me that manyemployers would refer to this when completing the form on line and not the employer handbook. When reading this closely it doesn't seem to be helpful to the debate (as a "Yes- no" could still potentially be the answer). However as it talks primarily about IR35 and in a quick read could be taken to suggest that part 1 is asking whether you are under the auspices of IR35.

However -the question in the employer handbook is the same as in HMRC's guidance to the service company question in the income tax return http://www.hmrc.gov.uk/sa/service-companies-question.htm and I would have thought that a consistent answer to the same question is appropriate.

Given the differences in opinion here and the inconsistencies in HMRC's guidance it seems to me that the Revenue have got something wrong - I am just glad that I don't have to give advice on the subject!!

David

re: Personally

Anonymous | | Permalink

It seems to me that HMRC are deliberately misleading people into misunderstanding the concept of "personally".

They are trying to muddy the waters regarding 'a contract of service' and 'a contract for services'.

It seems to me that providing 'a contract for services' is not doing so 'personally', by definition.

p.s.
I am not a lawyer

RebeccaBenneyworth's picture

HMRC view

RebeccaBenneyworth | | Permalink

In discussion with policy people at HMRC responsible for this area I did chat in outline about question 6, and the likely answers that would be given - that is "yes" and "no". My main point was whether the question serves much useful purpose if almost all service companies and partnerships answer yes/no, which seems to be the prevailing view here. There will be many "yes" I am a service company but "no" I haven't operated IR35 becasue it does not apply to me answers.

My impression was that it is accepted that yes/no will be the predominant answer, but that ALONE will not be sufficient to trigger enquiry - that the risk criteria are more sophisticated than that. Obviously the exact risk criteria were not revealed to me, but I found it interesting to discuss the usefulness of the answers with "the other side" as it were. I feel a little more relaxed about yes/no answers as a result but still frustrated that the question isn't clear (in my view).

@Clint : This is an interesting question which has sent me back to FA 2007 to do some more analysis. Answer in a bit....

HerMaj

AnonymousUser | | Permalink

How about this one?

As our Head of State, The Queen acts in that capacity on her official duties meeting greeting wining and dining her firm's clients. Her personal capacity applies to her personal affairs, not her profession as Head of State.

Arguably then, as a director of my firm, I am operating in that official capacity when I do work for my clients. My personal capacity is exercised when off duty and in the pub.

So No/No, on the grounds that there can be no higher precedent than our own Head of State.

Never mind that HerMaj doesn't pay tax...it's the principle, right?

And the opposite view

Laurence52 | | Permalink

The position is silly. My reading of the guidance is that for a service company with non-IR35 contracts the corrects answers are Yes/No which is opposite to Jason's posting. The problem is that a service company with IR35 contracts which has not complied would also answer Yes/No. But then I think it unlikely that such a company would answer Yes/No as that is asking for trouble.

I read the guidance as follows:
"the first question narrows those employers who need to consider whether the second question applies". So is the company a service company? Yes or No.

"If the answer to the first question is no, the answer to the second question will be similarly no." So where the company is not s service company answer No/No.

If the answer to the first qustion is Yes, you have to consider whether the IR35 legislation applies. If it doesn't then answer Yes/No. If it does apply and you have complied then Yes/Yes. If it does apply and you haven't complied then Yes/No.

So I would expect a Yes/No answer not to automatically give rise to an enquiry as the HMRC would hardly expect a non-compliant IR35 company to answer Yes/No.

Personal tax return question

AnonymousUser | | Permalink

Sorry if you think that this is thread drift, but I think it is relevant:

I should be interested in comments on how the new penalties regime will apply in respect of the following two situations:

Common to both situations, IR35 should have been applied but was not applied, subsequently discovered by HMRC. In both cases the company's participator omits any reference to income from a service company, in the question on his personal tax return for 2008-09, box 1 at the foot of page TR4, an omission that is also held to be (at least) careless.

Subject to the above common factors:
Situation 1:
Employer answered "yes/no" to question 6 on P35. (the second part of the question is held not to have been careless)
Situation 2:
Employer answered "no/no" to question 6 on P35 (carelessly or deliberately in error as regards the first part).

I am confident that I understand the issues of how the penalty regime might be applied to the company in respect of any errors on question 6. My question is what (additional) penalty is applied, and on whom, for the error on the personal tax return.

The loss of tax in each case is the same, and is a liability of the employer. The error (or at least the one that concerns me) is one made by another party, namely the participator of the company, which error has no bearing on the liability self assessed in the tax return in which that error arises.

I recall an article in Taxation last year (Keith Gordon, 18 September 2008, issue 291), questioning whether HMRC had the authority to ask the question in the personal tax return, but even that article conceded that the extended powers in FA 2008 granted authority for 2008-09 tax returns.

My take is that answering "no/no" (situation 2) already sets the level of penalties, so that then to omit an entry in the personal tax return would not increase the penalty already set. Unless they could go for a double whammy and raise an identical penalty on the participator equal to that already raised on the company (possibly increasing the overall penalty to more than 100% of the tax lost).

I don't really have a take on the effect of situation 1. It might be argued that the maximum exposure to penalties in the personal tax return is £300 (plus daily penalties which would of course be avoidable). If that is the case, I would expect a number of taxpayers to be willing to run that risk.

[EDIT] Just had another thought. What would be the consequences if you worked out the entry that should go in that box, but leave the box blank and instead enter it in the white space? That would serve to annul its effectiveness as an automated statistics-gathering tool, while providing some protection in the event that it ever gets picked up.

jasonholden's picture

Yes/No, No/No or Yes/Yes ... who knows?

jasonholden | | Permalink

I think the problem is the ‘crap’ guidance yet again, as this question can be interpreted anyway you like if we are honest.

Looking at question 6 on the P35 on its own, that to me reads as though it is asking are you a service company under the IR35 regime, rather than are you a service company?

Then you read the guidance, and from the way it is written I take it to mean you actually look at part 2 of the question first, but then that is madness, I would imagine it is correct whether you say Yes/Yes, Yes/No or No/No based on the guidance being so poor.

Unless you are in reality caught by IR35 that is, but then again, that piece of legislation is also poorly written as HMRC find out with all the cases they loose, Dragonfly being the exception for obvious reasons.

Jason
Holden Associates
A Blog for Small Business

jasonholden's picture

Or maybe it is No and No!

jasonholden | | Permalink

This is madness!

Having read the guidance again, and again, based on the paragraph:

Question 6
Question 6 is deliberately in two parts. The first question narrows those employers who need to
consider whether the second question applies. If the answer to the first question is no, the answer to the
second question will similarly be no.

As it states the first question narrows those employers who need to consider whether the second part applies, then I guess looking at the second part which is about IR35 etc then if that does not apply you answer No to part 1 also, even though that answer does not accord to the next section of the guidance:

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

This makes it a No and No answer, unless you are caught by IR35 in which case you should have dealt with it correctly.

It really is appalling, when are the Muppets going to let someone with some intelligence deal with this?

Jason
Holden Associates
A Blog for Small Business

P35 and personal tax return

Laurence52 | | Permalink

The HMRC guidance for the personal tax return for 2008/9 relating to the service companies question (at the foot of page TR4) is exactly the same as given for the first part of quation 6 to the P35.. So HMRC will be expecting there to be a consistency in replies given to the P35 and the personal tax return.

There is no mention of any ability not to answer the question on the personal tax return ie no difference between IR35 income and non-IR35 income. The only out is where there is only employment income from the company.

Link to Question on SAR

Anonymous | | Permalink

The other half of this question is on the SAR - the "Service Company" question. A tax barrister has appealed against the service company question, see:

http://www.taxationweb.co.uk/tax-news/personal-taxes/tax-barrister-appeals-against-service-company-question.html

jasonholden's picture

It must be Yes and No?

jasonholden | | Permalink

This question is still ridiculous in its wording and guidance.

After reading the guidance, several times, yes it is poorly written, but that will not change, and IMO the only answers can be, if you do not have staff and the shareholder etc does most of the work then Q1 will be Yes, and if you are not caught (in your opinion and the facts, as this is still such a grey area) by Intermediary legislation then Q2 will be No.

Which means that the majority of the SME market will be answering Yes and No.

It looks like from some of the responses so far people are trying to read too much into this, I personally, for what it is worth, think that there is nothing anymore sinister in this question from HMRC than a simple case of a very poorly worded question, again, and for the majority of clients this is a genuine Yes and No reply.

Jason
Holden Associates
A Blog for Small Business

martintallett's picture

Reasonable care

martintallett | | Permalink

I have appointed an accountant to do my company accounting.

I also spend 1% of my turnover each year on legal opinions to make sure I am not caught by IR35.

Is it necessary for my accountant to document his working in answering part 1 of this question including the calculation in clause 3?

What amounts to reasonable care here... dismiss the question as badly worded and take my chances?

Document the conclusions arrived at in answering this question?

How does 1% of turnover sound in terms of reasonable care ?

RebeccaBenneyworth's picture

@last poster

RebeccaBenneyworth | | Permalink

An interesting angle which made me think hard.

I disagree, however. The requirement to operate IR35 leads directly to entries of tax and NIC on the P35 (ignoring the "provisional amounts" issue). So the return contains an inaccuracy, or perhaps two - viz absence of PAYE and NIC and incorrect responses to question 6.

I would then argue that the answer to question six goes to the heart of the inaccuracy as if a company (reminder - the tax is due by the company as is the return) has failed to properly address the point, and that failure is careless then a penalty is due. So it is my assertion that a combination of the failure to account for the tax and NIC and the careless answer of question 6 are part of the same issue and the attitude of the company in addressing question 6 is therefore pertient to the penalty issue.

However, if you are absolutely sure that you are right about being outside IR35 then the answer to question 6 is irrelevant to penalties as they are not in point, there being no understatement. Similarly if you are confident that you have exercised reasonable care in whatever answers you arrive at, there can be no penalty. But there might of course be a compliance check.

other adverse consequences of answering wrongly

garethgreen | | Permalink

I am sure I am outside IR35, as I wrote to the IR35 unit giving a full description of the facts and they have confirmed I am not caught. So the risk of penalties is negligible, but I still don't want to get caught having incorrectly answered no to the first question. The risk is that HMIT starts wondering what else you might have got wrong. (Nothing to hide, but I still prefer not to have to waste time satisfying HMIT on a fishing expedition.)

That's not to say everyone ought to take the same approach, but it is how I prefer to do it. I have decided to answer yes no, then write to remind them that they already know I am outside IR35.

So the rational option -

Anonymous | | Permalink

- if certain that you're not caught by IR35 and if you also want to minimise the risk of the hassle and expense of an investigation, is to answer 'no'/'no' ?

RebeccaBenneyworth's picture

The penalty aspect

RebeccaBenneyworth | | Permalink

In the above article I wanted to review the guidance this year and establish whether it has improved since last year. The answer seems to be "only slightly".

A number of members have asked about the consequences of getting this wrong for penalties, so here's a quick summary.

This return is covered by the new penalty regime as it is due for filing on or after 1 April 2009. As such, there is no penalty for a mistake having taken reasonable care. In any event the penalty legislation only applies if there is an inaccuracy on a return which leads to an understatement of tax.

So in terms of penalties here are the triggers. If you consider the question carefully and answer to the best of your abilities as an unrepresented taxpayer then you cannot be penalised. IF you are unsure you should seek advice and if still unsure make this clear when you submit the document (P35). If you are careless and do not even try to get it right you expose yourself to a penalty but only is the tax is understated. But if you think you're outside IR35 and you aren't then there could be a lot of tax and NI at stake.

Finally, if the agent makes a careless error on the form then he and his client will need to demonstrate that the client took reasonable care to avoid the inaccuracy by appointing a suitable agent, giving him all of the information he needs and checking the return within his abilities.

Deliberate mis-statements leading to an underpayment of tax are liable to a 70% penalty. 100% if you try to cover it up.

personal services vs performing services personally

garethgreen | | Permalink

Steve H

The trouble is, the guidance does not mention personal services; it asks if you performed the services personally. Yes, the services are, contractually, performed by your company, but looking at the total wording of the guidance, I think it is clear that "performing" is not a reference to which legal person is contractually liable to perform the service for the client. (Otherwise, the second bullet would not make sense.)

To John Smith

AnonymousUser | | Permalink

Yes, they are looking for companies that fall within IR35. However it would do them little good to ask "part 1: Do you fall within IR35? Part 2: If so, have you complied with the legislation?" Clearly, no-one in their right mind would answer "yes/no" to a question worded thus.

The purpose is not to check the mechanical compliance of those who self-certify themselves as falling within IR35, but to identify those who self-certify themselves as falling without IR35, quite possibly having given the matter careful consideration, but whose business practices fall within particular patterns of activity that increase the risk of that conclusion being challengeable.

I do not know whether HMRC seriously expect a flood of "yes/no" answers. I suspect that they expect EITHER a flood of "yes/no" answers which they can then go ahead and audit with a minimal wastage of resources, OR a flood of 70% penalty loadings on those cases which answered "no/no" but subsequently, for some other reason, get challenged on IR35 and are found to fall within it.

In either case it is a win/win scenario for HMRC, the losers being those who are quite rightly outside of IR35 but have to incur the aggravation and professional costs of justifying that conclusion when HMRC come knocking after they have quite correctly answered "yes/no" in accordance with the guidance.

Who is providing services...

John Z | | Permalink

Rebecca,

You have focused very clearly on the third aspect of the guidance to Part 1. Perhaps one might also consider the first part further?

I (as an individual) do not consider that I provide services to any of my Company’s clients, and nor am I ever contractually obliged to. In reality, I personally carry out duties for my Company, which employs me. It is my Company which delivers various completed professional services and solutions etc to its clients.

Or, to put it a different way, one might easily suggest that there is an inherent “personal” implied in the first part of this, rather than this simply being relevant to the third part.

For me, as others have noted below, this simply exagerates the lack of clarity with all of this, and would suggest that in the absence of unambiguous advice, frankly it doesn’t matter one jot whether a company puts Yes or No, as there are a variety of arguments for choosing to interpret this as they wish. On balance, my business should probably simply put No to Part 1; as there would appear to be little value added or merit in entering a Yes.

Personally, I am struggling to believe that HMRC in fact expect to see a million or more micro businesses answering "Yes / No" to this; and would have thought that they are looking for companies, as they indicated last year, that “fall within the ambit” of IR35 (!)..

Equally, as Steve H has pointed out, assuming the correct tax has already have been paid, then for most businesses this will simply not matter (ie if one puts Yes or No “allegedly” incorrectly) - there can be no penalty.

"personally"

Anonymous | | Permalink

"services performed by the shareholders or partners personally"

The services offered by my company are those of an independent chartered engineer. These are not 'personal services' - they are professional consultancy services, always to corporate clients, and always well outside the scope of IR35. The tax I have to pay does not depend on my answers to these questions. Do I really have to answer them? If I simply answer 'no'/'no' is there any penalty?

What about using an agency?

AnonymousUser | | Permalink

Many limited company contractors use agencies. In this case, the contractor's company does not have a contract with the client for whom the work is done, but with the agency.
Surely then, the answer to the first question is NO.

It would serve "them" right ...

AnonymousUser | | Permalink

... if every employer answered "yes" to the first part, regardless of its accuracy, and then answered accurately to the second part according to whether a deemed payment has been calculated. That would render the question useless as a risk analysis tool. Those who answered "yes" in error to the first part would not be exposed to any significant extent because no loss of tax could result from that error. It is not going to happen, of course, but you can dream.

It would be quite nice to get some guidance from the professional bodies as to whether HMRC are entitled to phrase the questions as they have and as to their interpretation of "personal" in this context. But I don't hold out any hope, given the way that they caved in when providing guidance on the similar question in the personal self assessment tax returns for 2007-08, which effectively said "just go quietly and do what HMRC say".

We have some clients who take out separate insurance against IR35 enquiries, and I guess it would be prudent to ask the underwriters if they have an opinion on what answer should be ticked.

RebeccaBenneyworth's picture

For Simon

RebeccaBenneyworth | | Permalink

You are exactly the type of business that is having problems with this. If you decide that the answer to Part 1 is YES, then I am afraid part 2 is NO as you have not accounted for any deemed payments nor have you paid out the earnings in full as salary.

So another vote for Yes, No then.

But the guidance says otherwise

garethgreen | | Permalink

In answer to Simon, the HMRC guidance clearly says that you should only answer yes to the second question if you have actually deducted tax/NIC. Were it not for this, then I agree that you could answer in the way you propose.

What does question 2 mean?

AnonymousUser | | Permalink

"If 'Yes', have you operated the Intermediaries legislation (sometimes known as IR35) or the Managed Service Companies legislation?"

If I have answered yes to the first part as I am, for example, a payroll bureau with me as the director doing all the work for 40 + clients, then I am clearly (I hope) not subject to making IR 35 payments.

I could argue that the answer to question 2 is also yes as I have operated the intermediaries legislation correctly in not making an adjusting payment of salary to myself. I have been through each contract to see if a deemed salary needs to be paid in respect of that contract and have decided that it does not.

Therefore a Yes, Yes answer would be the correct response with a £6000 salary and dividends.

OK I worded it badly

Anonymous | | Permalink

My example was based on a real client - although not a firm of accountants. They have an office administrator doing part time filing etc earning LEL and sometimes a bit more (paid weekly by the hour) so P35 is needed. My reference to no staff really meant "no professional staff".

Two-man partnership with a P35?

David Heaton | | Permalink

I'm with David Kirk. Most of the data HMRC will collect with the answers from a thoroughly confused constituency of 50% of over 1m employers will be meaningless, even when sorted by HMRC's risk analysts. It's sad that the question that they really want to ask cannot be asked plainly, but that's probably because the intermediaries rules themselves are not plain. Bad law cannot be fixed by better guidance or better questions on a checklist.

On a separate note, I'm confused as to why the example two partner practice with no staff might have a payroll and a P35 at all, unless they already *know* that some of their engagements fall within IR35 and have registered a PAYE scheme just for the deemed payment, which would mean that they should know the answers to Q6 anyway.

Agreed..

Dave Paveley | | Permalink

I think we are all sometimes guilty of interpreting the way we want to (just think about the application note g debacle).

In this case I am firmly in the yes then no brigade, as I was last year with no employer compliance reviews as yet.

P.S. Dragonfly? Why did the PCG ever back that case!!

Clear English?

MikeBellisimo | | Permalink

I think 10 years into this nonsense it might just be the case that they cannot express what they want in either English or Law.

They've had several years now at trying to make this Q6 clear either through the question or through the guidance notes and they've still not done to well.

We were all here last year chatting trying to work out what they meant and despite that here we are again. It bodes not well for 2010.

Substitution

Anonymous | | Permalink

As members in practice of our accounting and taxation professional bodies, we need to have someone avaliable to step in if we can't perform the work for one reason or another. What are peoples thoughts on how this affects your IR35 status?

Also having read the Dragon fly decision, it's clear that Mr Bessell is an employee, and I can hand on heart say that my personal service as a one man band, has no parrallels with the Dragon fly IR35 case.

Although I have to say I will probably tick Yes to part 1 and No to part 2 and agruee that the questions have been worded badly as ussual if HMRC come knocking.

Incompetance rather than a deliberate wide net

AnonymousUser | | Permalink

Reading E10 page 18 carefully the introduction to the guidance on question 6 says:
"The first question narrows those employers who need to consider whether the second question applies"

So should we not interpret that statement as meaning: if part 2 of the question makes no sense to the employer, as IR35 or MSC could not possibly apply to his business, then question 1 should be answered 'no' ?

The detailed guidance to part 1 of the question clearly does not narrow the population of employers to those to whom part 2 would apply, it does just the opposite, but what is the intention behind the guidance? If the intention is to apply part 1 to only those to whom IR35 or MSC could apply, should we not answer in that question in that manner? I.e. 'No' unless IR35/ MSC really does apply.

A statement is clearly needed from HMRC to make the position clear.

RebeccaBenneyworth's picture

Doug

RebeccaBenneyworth | | Permalink

Google "Dragonfly consulting" and you might not sleep tonight. According to the reports it cost him £99,000 in tax interest and penalties - not sure about costs as the PCG helped. I think IR35 is now back with a vengeance and all the people who just got "clever contracts" without any attempt to seriously review their real working arrangements should be very concerned.

I do agree that Question 6 is about IR35 compliance, and of course those answering No and No don't have a problem if they are right (or have made every effort to be sure that they are - being careful). The trouble is that Part 1 doesn't say "Are you potentially caught by IR35 or the MSC legislation?". If it did we would have no problems.

Dougscott's picture

No! No! And double no!

Dougscott | | Permalink

Well I'm going to put no and no for all my clients and my own company (even though I'm a one-man band limited company accountant) because IR35 simply doesn't apply and I believe that is what the question is asking.

If the rest of you want to put yes and yes please do!

Anyway who ever heard of anyone ever getting caught out by IR35 who has received proper advice? My understanding is that HMRC have failed in most cases where the Professional Contractors Group has been involved.

Surely no penalties?

Anonymous | | Permalink

Maybe this is just being naive, but surely if you fill in everything else correctly and have paid the right amount of tax, then whatever you answer to these questions is irrelevant, because they have no bearing on your tax liability ? On that reasoning, if you answer 'no'/'no' or simply leave them blank (if the online system allows) I would have thought there should be no question of any penalty - as long as you're certain that you're not caught by IR35. So the umpteen hundreds of thousands of 'genuine' companies whose shareholder employees happen to provide services through those companies shouldn't need to worry too much about putting in the "right" answers. Or is this just too complacent?

'Personally'

davidkirk | | Permalink

What I understand HMRC to be after is to capture in the third part of Q1 people who ought to be considering whether IR35 might apply. It might well be the case that they have done, and have come to the conclusion that the answer is 'no'.

Surely the natural and ordinary meaning of 'personally' is 'in person'. Thre is nothing in the ordinary use of the word that suggests any obligation to do work personally.

Shareholders

MikeBellisimo | | Permalink

Alan,

in context it's liable to be a shareholder of the company which is providing services to the client. One share would qualify!

They are trying to cover both IR35 and the MSC legislation in one quesiton but
I wonder how many EDS employees should now answer the question in an affirmative!

Shareholder of whom?

Anonymous | | Permalink

On the first question: -

"the services were provided under a contract between the client and the company of which, at any time during the tax year, the individual performing the services was a shareholder or partner, and "

shareholder of who? of the "client" or the "company"?

Clear as mud (not you Rebecca!)

AnonymousUser | | Permalink

1 The guidance refers to Question 6, and states that it is in 2 parts. However, instead of referring to part 1 and part 2, it then refers to the 2 parts as “questions”.

It introduces “the second question”, then goes on immediately to state that “For the purposes of this question, ‘service company’ includes a limited company, a limited liability partnership, or a partnership”. This latter statement therefore appears to refer only to the second part of Q6, and not the first. (It seems I differ from Rebecca on this.)

2 With regard to the first part, I don’t understand the third bullet. What does it mean to say “at any time during the tax year”? (Unlike in the second bullet, where it is clear whether someone is a shareholder at any particular time.) Does it really intend us to attempt to isolate various sources of income – presumably distinct contracts, but who knows – in order to determine whether, at any time, they were mutually contemporaneous, and then, having done that, to determine what proportion of those income sources derived from a personally performed element?

3 The information demanded does not appear to fall within Reg 73 of the 2003 Paye Regulations.

4 Finally, I share Umpa’s confusion.

Apart from that, it's crystal clear.

Confused Too?

MikeBellisimo | | Permalink

Is it me are HMRC still confusing the issue about the difference between a contract of service and a contract for service?

There is a difference between being obliged to personally provide a service and providing a service personally because it is convenient to do so.

Under the new regime does this 'guidance' or interpretation of the tax law become pseudo-law inasmuch as they'd argue that taking it under advisement would amount to a failure to take good care.

I cannot help but feel that they should legislate properly in the first place rather than continue in this half-baked way.

Confused

AnonymousUser | | Permalink

I am confused, especially surrounding the example of the jobbing builder working through a limited a company. As I understand it, IR 35 was brought into existence to tackle percieved abuse of disguised employment by the use of a company/partnership.

If a decorator operates his business through a limited company and does jobs for individuals over the year and these individuals for whom the work is done are different year on year than I cannot see that the company is caught by IR 35.

Yet reading the guidance (and ignoring the materials issue as sometimes the client will purchase these) it would appear that the conclusion reached is that the answer to the first question must be yes, to me, in this case this is the incorrect answer, unless I am missing something?

I believe in this case the answer to part 1 is no, but the guidance leads you to a yes, as Rebecca says the answer to part 2 here would be no, but a yes and no is going to very likely lead to questions or at the very least put you on the radar screen.

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