Contractors' Questions: How to answer service company query on RTI form?

Contractor’s Question: As an IT contractor confident of being outside IR35, what’s the most appropriate answer I should give in response to the service company question on the RTI 2013/14 final submission?

The question, which I find unclear, asks:  ‘Are you a service company that has operated the Intermediaries legislation (sometimes known as IR35) or the Managed Service Companies legislation? [Yes/No].’

I have been suggested to put ‘yes’, to reflect the fact that I run a service company, but answering ‘yes’ would mean I operate IR35, when I don’t.

Similarly, answering ‘yes’ would signal to HM Revenue & Customs that I’m caught by the MSC legislation, which doesn’t seem to relate to me at all.

Expert’s Answer: I agree that the wording is not clear. When this question first appeared our accountants spoke to several local HMRC offices for clarification and got different answers, which suggests to me that the local offices were not sure why the question was being asked.

The current guidance from HMRC seems to be “if any of your assignments in the tax year were inside (caught by) IR35 then answer ‘yes.’ If all your assignments were outside IR35 answer ‘no.’”

By answering ‘no’ to the second question, it flags to HMRC that you may have taken dividends. HMRC introduced the question originally in the tax return in order to help it profile PSCs (Personal Service Companies) from a risk perspective. This was then carried over to the RTI submission although it took a different format. I haven’t heard that HMRC has used the information in that way to date, though this was the intention.

I am not sure why the MSC legislation question is there – it seems to serve no purpose since those operating MSCs generally do not know that their company is caught (which is obvious since someone else is “influencing” or “controlling” it).  HMRC seems to agree and it has removed the MSC point on the 2014/15 submission request.

In your case, the MSC legislation will not apply since you are clearly making all the decisions about the running of your company so the answer will still be ‘no.’

A point for contractors generally to consider is that many of the cases where HMRC has successfully used the MSC legislation to collect additional tax have revolved around funds being transferred direct from client or agency to an accountant or service provider, rather than into a company bank account. This makes it easy for HMRC to demonstrate ‘control’ over the PSC by a third party which is a pre-requisite for the MSC legislation to apply.

The expert was Julian Ball, legal director at contractor tax specialists PayStream.

Friday 21st Mar 2014