Only a few days remain before another tax year elapses and heralds in the filing of the Employer Annual Return, form P35, which must reach HMRC by no later than 19th May.
Each year part 3, question 6 – 'Are you a Service Company?' of the P35 causes some debate, i.e., to tick or not to tick the 'yes' box.
Some contractors eye the question with suspicion, believing that it is designed to ensnare them in an IR35 trap. It is true to say that its purpose is to make life easier for HMRC by asking freelancers to identify themselves and assist the department in their IR35 risk assessment. The question has been with us for a good number of years now and is only one of the information sources HMRC have at their disposal. Have IR35 enquiries increased because of it – statistics suggest not.
Honesty in answering the question is the best policy because by putting a tick in the 'No' box could have the contrary effect of heightening your risk of IR35 enquiry if HMRC already know that your company is a service company.
Section 124 of Chapter 4 of CWG2 (Employer Further Guide) entitled 'How to complete question 6 on the P35 Employer Annual Return' provides some useful guidance which has been refined over the years. It explains that a service company includes a limited company, a limited liability partnership or a partnership which provides a freelancer’s services to third parties.
The answer to the first part of question 6 should be 'Yes' if:
- an individual performed services (intellectual, manual or a mixture of the two) for a client(s), and
- the services were provided under a contract between the client and the service company of which, at any time during the tax year, the individual performing the services was a shareholder or partner; and
- the service company's income was, at any time during the tax year, derived wholly or mainly (more than half of it) from the services performed by the shareholders or partners personally.
The second part of the question asks whether or not the IR35 rules have been applied during the year ended 5th April 2012. The 'Yes' box should be ticked only if:
- income has been treated as deemed employment income by virtue of the IR35 or MSC legislation, or
- an engagement is within the IR35 rules but the deemed payment is nil because sufficient amounts of employment income have been paid.
In all other circumstances the 'No' box should be ticked.
A link to the guidance can be found on the HMRC website or via the link below.
Define ‘client’:
The ‘normal’ case is that the contract is between the ‘service company’ and an agency. The services are performed for a third-party ‘client’.
No should be ticked because there is no contract between the service company and the client.
Alternatively, if the agency is deemed to be the ‘client’ then No should be ticked because the services are not performed for the ‘client’ but the ‘end user’
No ambiguity there at all then!
Best check the wording on the form is the same as given in the article and the wording in the contract(s) before assuming an own goal.
Interesting, if I work as subcontractor, but my wife is shareholder (does not do any job than I am not a Service Company?