Are you a Service Company? (P35, q.6)

[CrazyMoose]

End of Year, P35 Return - Question 6

"A 'Service' company is one in which a worker performs services for a client under a contract between the client and the company. The worker is a shareholder in the company and the company’s income is derived wholly or mainly from the services provided by the shareholder personally."

I answered 'Yes'

Next question...

If 'Yes' to question 6, have you operated the Intermediaries legislation (sometimes known as IR35) or the Managed Service Companies legislation?

I answered 'No'.

A couple of things have been bothering me since submitting the annual return last week.

1. Is this question merely a filtering mechanism for HMRC to "go after" all those that answered 'Yes' and then 'No'.?

2. If the answer to the above question is 'Yes', what should I do about it?

3. After a couple of failed attempts by HMRC (see 2007 & 2008 P35s), is this question still not entirely clear? I'm talking specifically about the reference to Managed Service Companies. I think a better structure for the second half of the question would be to ask 1. Have you received dividend payments?, 2. If yes, do you act as Director, control the bank accounts etc? If no, explain why you're NOT working through an MSC….

[Bel]

Originally Posted by CrazyMoose

End of Year, P35 Return - Question 6

"A 'Service' company is one in which a worker performs services for a client under a contract between the client and the company. The worker is a shareholder in the company and the company’s income is derived wholly or mainly from the services provided by the shareholder personally."

I answered 'Yes'

Next question...

If 'Yes' to question 6, have you operated the Intermediaries legislation (sometimes known as IR35) or the Managed Service Companies legislation?

I answered 'No'.

A couple of things have been bothering me since submitting the annual return last week.

1. Is this question merely a filtering mechanism for HMRC to "go after" all those that answered 'Yes' and then 'No'.?

Probably, but it's worth remembering that there are thousands of companies that will answer Yes and No. They won't be investigating all of them. Those who had something to hide are likely to answer No, No as a panic measure to escape exposure. If HMRC have any sense at all (tall order, I know!) they will scrutinise the No, Nos before tackling the Yes, Nos.

As long as you exercise due diligence: got expert advice on your contracts, answered Q6 accurately (taking advice from your accountant), have tax enquiry and liability insurance in place, have a good accountant that can handle IR35 and payroll enquiries competently and you've kept good accounting records you've got the best defence possible.

What more can you do?

[CrazyMoose]

Originally Posted by Bel

Probably, but it's worth remembering that there are thousands of companies that will answer Yes and No. They won't be investigating all of them. Those who had something to hide are likely to answer No, No as a panic measure to escape exposure. If HMRC have any sense at all (tall order, I know!) they will scrutinise the No, Nos before tackling the Yes, Nos.

As long as you exercise due diligence: got expert advice on your contracts, answered Q6 accurately (taking advice from your accountant), have tax enquiry and liability insurance in place, have a good accountant that can handle IR35 and payroll enquiries competently and you've kept good accounting records you've got the best defence possible.

What more can you do?

Thanks for the advice Bel. As you say, what more can I do? I've pretty much covered off all of the above except for the IR35 / enquiry insurance - do you really think I need this? I have a full due diligence log of each contract I’ve undertaken for the past 18 months. Signed (IR35 friendly) contract, proof of status (HMRC employment status calculator result with print out and unique reference number), receipted expenses and so on. It still doesn't help me sleep that easy at night though...

[CliveP]

Originally Posted by CrazyMoose

Thanks for the advice Bel. As you say, what more can I do? I've pretty much covered off all of the above except for the IR35 / enquiry insurance - do you really think I need this? I have a full due diligence log of each contract I’ve undertaken for the past 18 months. Signed (IR35 friendly) contract, proof of status (HMRC employment status calculator result with print out and unique reference number), receipted expenses and so on. It still doesn't help me sleep that easy at night though...

Why not? By the sound of things you're probably doing more than 98% of 'outside IR35' contractors in the UK. Yes you should consider some form of legal protection; it's prudent given HMRC's relentless attack on contractors. I get mine via PCG membership - it's rolled in as part of their standard annual fee. Other than that I really don't think you should be worrying too much. The tax officials are targeted on a yield basis. That means they'll be going after the 'low hanging fruit' individuals that don't have a clean audit record and haven't really considered their employment status. Sleep easy CrazyMoose...

[Bel]

Originally Posted by CrazyMoose

Thanks for the advice Bel. As you say, what more can I do? I've pretty much covered off all of the above except for the IR35 / enquiry insurance - do you really think I need this? I have a full due diligence log of each contract I’ve undertaken for the past 18 months. Signed (IR35 friendly) contract, proof of status (HMRC employment status calculator result with print out and unique reference number), receipted expenses and so on. It still doesn't help me sleep that easy at night though...

Yes, like CliveP said, it's always worth taking out tax enquiry and, preferably, liability insurance too. If HMRC investigate your engagements, it could take a long time. Your costs of elicting accountancy support and help (which is very wise) could be prohibitive if the enquiry isn't wrapped up quickly. Furthermore, a successful payroll enquiry won't mean that they won't conduct an IR35 review, which normally follows on. You also need to remember that IR35 investigations are usually conducted with hirer witness testimonials. A poor witness can prolong the matter considerably because they could make your contract look non-compliant, even if it isn't.

Qdos have a very good tax enquiry and liability insurance policy, which is very comprehensive. They also run a freelance club for IR35 contract reviews and generalist advice.

Good insurance is cheap, a sleeping pill could turn out to be very expensive indeed.