Contractors' Questions: How to answer P35's service company question?
Contractor's Question: For Question 6 on the P35 return last year, my previous accountant answered, on my behalf, the first part "Are you a service company?" as "No". But since I changed accountant this year, my new accountant thinks that the first part should be answered as "Yes" and the second part, “Have you operated the Intermediaries legislation or the Managed Service Companies legislation?,” as "No." This negative answer is based on the fact that I am the principal fee-earner of the company and that my contracts are outside IR35.
However, my new accountant did mention that there can be a difference of opinion between accountants in terms of what contractors should indicate in response to this two-part question. Could an impartial accountant please provide what they deem to be the right answer, based on my circumstances? I'm sure other limited company contractors supplying clients through recruitment agencies would find the answer helpful, especially with the P35 deadline of May 19th fast approaching.
Expert’s Answer: The P35 service company question surfaces around this time every year, causing a lot of angst and confusion for freelancers and contractors. On the one hand, as a limited company director, you want to be certain you’re compliant by submitting correct and accurate information to HM Revenue & Customs. And on the other hand, different approaches between accountants to this question do not make finding the ‘right’ answer any easier.
Without an accountant, the best approach is to go straight to the horse’s mouth, HM Revenue & Customs’ rulebook. They’ve published the guide Employer Helpbook E10(2013) where the definition of a service company for the purpose of this question is more clearly defined:
“‘service company’ includes a limited company, a limited liability partnership, or a partnership (but not a sole trader) which provides your personal services to third parties.”
Are you a service company? You must answer “Yes” to this question if:
- an individual performed services (intellectual, manual or a mixture of the two) for a client(s), and
- the services were provided under contract between the client and the service company of which at any time during the tax year, the individual performing the services was a shareholder or partner, and;
- the service company’s income was, at any time during the year, derived wholly or mainly (that is, more than half of it) from the services performed by the shareholders or partners personal
Part 1 of this question should be easy for the majority of contractors or freelancers to answer. In our experience most answer “Yes”, which we believe is correct for limited company freelancers providing their service via personal service companies (PSCs).
One school of thought suggests answering “Yes” puts your head above the parapet for the tax inspectors to come knocking. We believe, answering “No”, when it should be “Yes”, can have more far-reaching consequences.
It’s worth noting that while HMRC will have data to randomly select a group to post a Letter of Enquiry to, the reality is these are small, low risk businesses.
The second part of the question is also easily answered. “Have you operated the Intermediaries legislation (sometimes known as IR35) or the Managed Service Companies legislation?’”
If your accountant operates the Intermediaries legislation, PAYE & NI deductions will be deducted in accordance with the Deemed Payment method. In your case, as you have mentioned that the contract is outside IR35, the answer should be “No.”
For the majority of limited company contractors the answer combination “Yes/No” is the right one. However, if you’re unsure, always check with your accountant.
The Expert was Andrew Halgryn, head of client services at Boox, an accountancy firm specialising in contractors’ tax affairs.