Service companies and the year end return

It’s time for employers to complete and file the annual PAYE return (form P35), and for the second year the form asks about the status of the company, causing some confusion and concern.

The form has these 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.

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 might give the Taxman cause for concern as it will not be what he is expecting. Indeed these companies could well be contacted at some point in the future by HMRC.

Businesses who are confident they are not subject to IR35 or the MSC legislation, might therefore wish to answer “no” to both questions 1 and 2 in section 6 of part 3 to the P35 form for 2008/09.

If you are concerned that IR35 could apply to your business please contact us.

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