Kate Cottrell writes:
It’s that time of year again where contractors may need advice on how to answer the questions for P35s (end of year return) and SA100’s (self-assessment return) relating to service companies. HMRC requires employers and individuals to answer questions in relation to service companies at question 6 of the P35 and box 1 page TR4 on the SA100.
P35
There are two parts to the question.
Service companies include companies, partnerships (but not sole traders) and limited liability partnerships. It has to be decided if the business provides services rather than goods to clients. If so, whether more than 50 per cent of the income is derived from services provided in person by the partners or shareholders. A typical personal service company contractor should answer YES to this question.
The second part of the question asks if income has been treated as deemed employment income and tax and NIC deducted under IR35. If any engagements have been inside IR35 and a deemed payment calculation made the answer is YES and if all engagements have been outside IR35 the answer is NO.
INSIDE IR35 = YES/YES – OUTSIDE IR35 = YES/NO
SA100
There is the requirement where the individual is a shareholder in a service company to report in box 1 the dividends derived from the company and salary paid by the company.
Beware
Beware of HMRC penalties and take reasonable care.
Since the advent of HMRC penalties it could be very costly to answer these questions incorrectly or indeed to not answer them at all. Last year HMRC gave an assurance that they would not use the answers to these questions for targeting purposes owing to the confusion experienced by many. This is no longer the case.
If the box on the P35 is ticked to say that IR35 does not apply and it later transpires that it actually did then this is considered to be negligence and penalties apply. Worse still if wilful action is taken when ticking the boxes penalties start at 100 per cent of the tax lost.
Having contracts and working practices reviewed by specialists demonstrates that reasonable care has been taken and protects against penalties.
Kate Cottrell
www.bauerandcottrell.co.uk
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Susie Hughes © Shout99 2010
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