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Are you still a Service Company? – that P35 question again

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The P35 season is rapidly approaching and the Employers Annual Return is accompanied by renewed and improved guidance on how to answer question 6, ‘Are you a Service Company?’.

As before, the question is in two parts and the Employer Helpbook E10(2009) provides the current guidance as to how it should be completed.

Part 1 - Are you a Service Company?

Page 18 of Helpbook E10 states that this 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.

It is understood that HMRC interpret 'personally' as to mean 'in person'.

Part 2 - If 'Yes', have you operated the Intermediaries legislation (sometimes known as IR35) or the Managed Service Companies legislation?

If the answer to part 1 is 'no' then this question will be 'no' also.

The Helpbook states that this question should only be answered 'yes' if income has been treated as deemed employment income and PAYE/NICs deducted in accordance with the Managed Service Company or Intermediaries legislation ( IR35). Furthermore, if you have deducted PAYE and NICs on deemed payments under IR35 or MSC legislation then the 'yes' box should be ticked.

There is further guidance for those whose engagements are caught by IR35 (but not the MSC legislation).

Hopefully, the improved guidance should help reduce the hullabaloo caused by the appearance of the 'Service Company' question last year. For those contractors who intend to answer 'yes' to part 1 and 'no' to part 2, you will need to be confident that your contractual and working arrangements fall outside of IR35.

23rd April 2009

© 2009 All rights reserved. Reproduction in whole or in part without permission is prohibited.
Image: Question mark by Marco Bellucci

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