HMRC resolves P35 'Service Company' riddle?

@Andrew
Even so, do the clients in case 2 expect specifically to get Mr Jones doing the work, and no one else but him, or is it "just a firm" as far as they are concerned ?

That is the kind of discussion taking place in IR35 status cases, IIRC.

I'd agree with David's interpretation - if no individual is named, so that the work is (or may be) carried out collectively, then both of Nichola's (bullet-pointed) conditions relating to the "first question" must surely produce a "no" answer.

I think the word "personally" is superflous - the sentence makes perfect sense without it - and as such is a red herring. For me, the word "individual" is key: especially if we take that to mean an individual with a stake in the "company", as opposed to an individual employed as underling?

Live eg:
I'm in the middle of filing a P35 for a small firm of mortgage brokers: two directors, both qualified IFA's, one trainee; and a Girl Friday. Because 3 out of 4 of them dispense services, then the business "consists wholly or mainly of providing the services of individual to clients." In spite of which I'm ticking "no" to the first question on the grounds in my first para above: put simply, they do not provide the services of INDIVIDUALS to clients; they provide the services of a TEAM to clients - it's a collective effort. My GP has a similar approach - I've yet to see the same doctor twice.

So that's "no" to the first question - all agreed?

Further down my pile I can see a similar firm, except they have only one qualified principal and three Girl Fridays. So only 1 of the 4 dispenses the services - the other three being support staff. So I guess I'm going to have to tick "yes" for question 1.

I seem to have arrived at the conclusion that two or more principals working a team approach allows me to tick "no" to Q1

As pointed out already, almost all services are performed by persons, so I can only assume that the deliberate use of the adverb "personally" is meant to distinguish certain types of services. The natural interpretation is that it means services where it has been agreed with the company's client that the services will be performed by a named individual. So, if the service is that specifically James Smith will (say) design a website for the client, the answer to Q6a is Yes. If the service is that the website design will be carried out, but the person who will do it is unspecified (or just happens to be James Smith, but need not have been), the company is not a service company for this purpose.

The existence of a substitution clause would appear to be relevant here, though I am sure that HMRC would not agree that a substitution clause necessarily means that services are not "personally performed" by an individual.

"Actually, Stephen, they are homophones !"

Count Arthur Strong asked me to post here on his behalf to tell you that he took exception to your comment. He thinks a person's sexual orientation is private and not an appropriate matter for facetious posting here.

Well that's not exactly what he said but I'm trying to make it understandable as he had been imbibing a little

Actually, Stephen, they are homophones !

Check out the first post below, which includes: "Whose fault is that, prey?"

Yep, it's the prey's fault.

Ed rules OK. Love it.

The penalty point is apt. I'm just answering a delegate where the officer has denied the existence of the capping rule (nil tax o/s at end Jan). So how the (blink blink) would Ed be able to hold his ground?

@roger
Yes, and Ed Reardon had a run-in with the taxman the other week.

Something didn't seem right however - he received a £100 penalty for late SA submission, but his tax was NIL so he shouldn't have been penalised at all.

I expect that finer point was lost, or omitted in the interest of a good storyline ...

is indeed a star of the English language

But my favourite Radio 4 wordsmith is Ed Reardon, whose cynicism and bitterness would have suited him ideally for a position as a Special Compliance Office inspector

Well, what's the odd malapropism between friends? I happen to be a big fan of Count Arthur Strong...

I think YJ has got the best plan. Now, how about the SA question...that's if you have the software*of course.

*SA software issues also seem to be a moot point according to some of the folk over in Any Answers.

Nichola Ross Martin
Tax editor, AccountingWEB.co.uk

The quote: "Use of the description "service company" is very confusing for your average employer who is not a tax expert." is my own, not that of HMRC.

Nichola Ross Martin
Tax editor, AccountingWEB.co.uk

Remember to keep it all within "the ambit" of IR35/MSC legislation. You are trying to use normal dictionary meanings which will of course not do here.

Nichola Ross Martin
Tax editor, AccountingWEB.co.uk

Joking aside, all the better for accountants! The more confusing the better as it means that more folk will get us to sort it out for them.

Nichola Ross Martin
Tax editor, AccountingWEB.co.uk

HMRC realise that this has been a horrible mess, and they have attempted to diffuse the situation, albeit somewhat unsuccessfully. I can't see any point in asking for further guidance as you not going to get prosecuted for answering the question wrongly, and many employers have already filed their returns, and HMRC is seemingly not concerned about their past answers.

YJ you have already asked HMRC's helpline for an answer, they gave you one which seems to answer your question.

Whilst you may get picked up on if you fail to apply IR35 or the MSC legislation when you should have, with or without any P35 responses (see earlier articles on this site "IR35 the lottery"). It seems that if you are close to coming within either of these rules, you are expected to know about them. You may need professional help to work out your status issues but that is just a feature of our over complex system.

Maybe HMRC should have made the question a bit more basic: "Would your worker be an employee if he worked for your client directly and not through your company or partnership?" Or maybe they should revert back to the wording used last year.

Nichola Ross Martin
Tax editor, AccountingWEB.co.uk

I presume you originally intended to say, "defuse the situation", but you were actually dead on, in saying, "diffuse the situation" - they have spread out and fuzzified any meaning, with their response !!

Well, in the spirit of HMCE and "ambit of IR35" perhaps when calculating "amount of tax now payable" we should put something like "£1 or something maybe more, maybe less, not entirely sure actually"

will be difficult to rely on as you can't prove who said what. A clear written answer from HMRC is much better.

However, I do agree many people seem to be fed up with this now and have decided already what they are going to do. On to more important matters.....

Nicola,

Firstly, thank you for the time you have spent on our behalf trying to get to the bottom of this.

In view of the remaining unclarity, are you planning to ask HMRC to clarify their answer along the lines of a straight question (you may have done so already).

"does Q6 Service company = company caught by IR35/MSC"

Out of interest, which HMRC department did you ask?

@Arnold Smith
His post has now mysteriously vanished, but it said something like:
tbbbttt
kbbt;k;k

Good idea Arnold - just enter some gibberish on the form, when they get back to you to ask what it means, retort, "well, you started it !"

Nichola,

But the P35 is intended to be prepared by unrepresented employers, not by accountants/tax advisers. How can an empoyer who has battled to reconcile deductions wth payments etc be expected to know they have to turn to a specialist when they reach the last question on the form? "Are you a service company" does not look like a techincal question.

So it would be best to do this:
1) Answer No, No
2) in the White Box, state:
a) This company is not a Managed Service Company (ref 2007 xxx)
b) The Intermediaries Legislation (ref 1997 xxx) does not apply

?

Would a helpful soul say what the ref...xxx's should say !

The first bullet point covers virtually every business with employees! Even manufacturing businesses must have some individuals who personally perform services for a client and the services are provided not under a contract directly between the client and the worker but under arrangements involving the limited company.

and the limited company business consists wholly or mainly (>50%) of providing the services of individuals to clients must cover most of the service sector plus some of the rest.

Is that really what they mean?

Interviewer: So question 1 means "is the work done by the company caught by IR35 ?" Yes or no ?!

Minister: Before I answer that, can I just say ...

Interviewer: NO !

;-)

Should the words "Of employment" be put between:
' not under a contract... and... 'directly between the client and the worker'?
and what do they mean by 'arrangements' ?

I wonder if it would have been at all possible to ask several questions rather than trying to overload one question which when they posed it would have referred to not one but three different pieces of legislation - IR35, MSCs and Income Shifting.

Whenever there is ambiguity one has to ask who benefits.

"...the limited company, limited liability partnership or general partnership’s (the service company) business consists wholly or mainly of providing the services of individuals to clients."

This would still include any service business including Accountancy practises, meaning a 'yes, no' answer.
This criterion is prefaced by "within the ambit of IR35..." but then goes on to give a generalised method of distinguishing whether to answer yes or no to the first part of the question.
Rather unhelpful, I think.

They say they aren't going to use the info for IR35/PSC fishing expeditions, but do we believe them?

The first bullet point following: "The first question should be answered “yes” if:", would catch every company in a service industry, unless they provide virtual, mechanised services. All services are performed by an individual personally (how can they be performed impersonally).

The new guidance will not help unrepresented employers to twig that IR35/MSC legislation does not apply to them, they may never have heard of either of these.

Why have HMRC used such an ambigous term as 'within the ambit of' rather than 'caught by' - you could say many companies are within the ambit of the rules, they just don't apply to some.

It seems to me that the simplistic tests given in the bullet points at the end of their guidance are not sufficient to determine definitively whether or not chapters 8 or 9 of ITEPA apply.

I love the express admission by HMRC that the legislation is "very confusing for your average employer who is not a tax expert". Whose fault is that, prey? So, despite that the legislation is so confusing, HMRC has apparently managed to distill the whole of chapters 8 and 9 of ITEPA into a couple of brief bullet points.

Still in doubt about the impact of the question on the individual employee's self assessment tax return. Is it safe to consider that question also solely in light of the relevance of Chapters 8 or 9?