Q: My client is a consultant who provides services through his own limited company. Should he be entering figures into the box entitled ‘Service Companies’ on TR5?
A: There is understandable confusion here because the Guidance which the Tax Return offers differs somewhat from that provided in respect of Service Companies and guidance given in respect of the end of year questions in the final Full Payment Submission (FPS) or Employment Payment Summary (EPS) of the tax year.
The guidance from HMRC on their Notes (TRG10) which accompanies the tax return runs as follows:
“You worked through a service company if:
- you performed services for a client
- you worked under a contract between the client and a company that you were a shareholder of during the tax year
Do not fill in this box if all the income was employment income.”
However, the RTI Guidance for the Service Company Question which can be found at https://www.gov.uk/guidance/what-payroll-information-to-report-to-hmrc#9 is as follows:
“Only put ‘Yes’ if you’re a service company that’s operated IR35 this year”
There is clearly a conflict here with the tax return guidance making no reference to being caught by IR35 and the end of year question being so specific.
It is probably fair to say that most freelancers fulfil the two requirements set out in TRG10 and our view is that there is no reason to be fearful of completing the ‘Service Companies’ section on the Tax Return; i.e. we have no empirical or anecdotal evidence that contractors have been targeted for enquiry who do enter figures on the return. The same applies to those who responded ‘yes’ to Question 6 on the P35 or the RTI end of year questions. However, it is also evident that there are many companies which on the basis of TRG10 could consider themselves to be Service Companies– sole practitioners providing their services through a limited company, for example – which are clearly not the intended targets for this section of the return.
Nevertheless, we can understand why a freelancer/contractor might not complete this box on the tax return, if for example on the RTI end of year question, the contractor had determined that they were not a service company because despite matching the definition of a service company on the basis of TRG10, they had not answered ‘Yes’ to the RTI question, because they believed their engagements to be ‘not caught’ by IR35 (perhaps as a result of a contract review from Abbey Tax!)
Previously, in the days of the P35 return, Q6 asked: “Are you a Service Company?” to which a ‘No /Yes’ answer was given. The supplementary question was: “If ‘Yes’, have you operated the Intermediaries legislation (sometimes known as IR35) or the Managed Service Companies legislation? No /Yes”. Now, under RTI, there is only the one question and seemingly HMRC are only interested in whether you are operating a service company if have operated IR35. So on the basis of the TRG guidance you could have a service company in the same period that under RTI, you didn’t. No wonder there is confusion!
For many, in the days of the original P35 question, the view was that one should answer “No” to the original ‘Service Company Question’ (even if the answer was ‘No’ to whether IR35 or the MSC legislation applied) on the basis that HMRC would use ‘Yes’ answers to ‘herd’ all the contractors into one field and pick them off one-by-one; although, as noted above, there is no evidence that this was ever the case.
Indeed, we don’t believe that completing the current Service Companies section on the Tax Return changes matters – most of the information relevant to establishing a company’s IR35 status is already available to HMRC (from the company’s accounts and CT return, the Companies House annual return, shareholders’ tax returns etc) although one accepts that the information is not available to HMRC from one single document. Whilst the box on the tax return undoubtedly makes HMRC’s initial information gathering easier, there is still nothing to suggest that completing it results in a higher chance of being investigated for IR35.
Moreover, at a meeting we had with HMRC in February of 2014, HMRC admitted that only about 1,000 people had actually answered the Service Company Question on the P35, and HMRC seemed to suggest that this wasn’t a measure that was used for starting enquiries. As far as we are aware, there is no penalty levied for not answering the question and given that more than 99% of all contractors appear not to have completed this section in previous years, we would have become aware if penalties were being levied because the return was materially ‘incorrect’.
So how the questions on the RTI and Tax Returns are answered are down to individual choice, but whatever one does one needs to be consistent. Nevertheless, what we can categorically state is that whether a contractor does or does not complete this box, it will not affect the insurance position in respect of a fee protection claim.
Author: Paul Mason, National Contractor Manager
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