Contractors’ Questions: Am I a service company, as form P35 asks?
Contractor’s Question: As the director of my own IT company, I have set up a number of contracts with customers stipulating that I must do certain tasks at certain times on their networking systems. Although I‘m not contractually permitted to delegate the work to anyone else on some of the contracts, I do have the right to decide how the work is performed. Also for the work, I’m expected to be available 9-to-5, to complete specific tasks and answer support queries. Partly as a result, I believe that I am inside the IR35 legislation; though I already operate PAYE through the company to pay myself and don't draw dividends.
Given my circumstances, how should I answer the following two ‘service company’ questions on HMRC's P35 Employer Annual Return form, appearing as Question 6, part 3 (checklist) The first question is, Are you a service company?’ and question two is, ‘If "yes", have you operated the Intermediaries legislation (sometimes known as IR35) or the Managed Service Companies legislation?’ What is HMRC's definition of a 'service company'?
Expert’s Answer: You must firstly decide as to whether or not your company is a service company which is defined as being:
- Where an individual performed the services for the clients; AND
- The services were provided under a contract between the client and the service company at which time the individual performing the services was a shareholder; AND
- The service company's income was, at any time during the tax year, derived wholly or mainly from services performed by the shareholder personally.
Whether or not your company is a service company is a matter of fact based on the answer to the above defination. If it is a service company then you need to establish whether or not the IR35 rules apply to your contracts. This involves considering the written contracts and, more importantly, the actual working arrangements of each contract. It is recommended that you seek out professional assistance to enable you to form a creditable opinion.
If it is considered that your company is caught by IR35, then the income to which the rules apply is equivalent to ALL the income received by your service company, less certain deductions. If a salary has been paid that is less than this amount, then the balance is deemed to have been paid to you on the last day of the tax year. You should therefore carry out the deemed payment calculation to arrive at the correct PAYE and Class 1 NICs due, before you answer "yes" to the second part of the question.
The expert was Seb Maley, freelance services manager at Qdos Consulting