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The Service Company Question
Newsletter issue - April 09.
It's time for employers to complete the annual form P35, and this year section 6 of part 3 is causing confusion once again. This asks two questions which require yes or no answers:
- Are you a Service Company?
- If "yes", have you operated the Intermediaries legislation (sometimes known as IR35) or the Managed Service Companies legislation?
Guidance on how to answer these questions is found on page 18 of the leaflet E10 (2009): Finishing the Tax year up to 5 April 2009. A service company in this context can also be a partnership or LLP, if it has employees. If the business has no employees it will not be completing a form P35.
The introduction the guidance to section 6 says:
The first question narrows those employers who need to consider whether the second question applies.
This is a helpful statement as it leads you to believe that if your business is not a Managed Service Company (MSC) and is not affected by IR35 you can answer "no" to both the first and second questions. However, the detailed guidance to question 1 indicates that you should answer "yes" to question 1 if the owners of the business perform any services in person for the customers of the business, and the income from that work forms at least half the total business income. Services are generally anything that is not the provision of goods.
It is clear that you should only answer "yes" to question 2 if the IR35 or MSC rules do apply to your business, all other businesses should answer "no". However, a "yes" to question 1 and "no" to question 2 may may trigger a tax enquiry.
We believe HMRC is using this to try to identify companies that may be subject to IR35 or the MSC rules but are not operating them. If you are concerned that this might apply to your business, please contact us.