But, in a Catch 22 scenario, although HMRC agrees that the question need not be answered, they haven't told their computer system yet and that does still require an answer. However, if in doubt, says HMRC, answer 'no'.
Question 6 - service companiesThe notorious Question 6 'are you a service company?' and its follow-up 'if so, has it been treated under IR35?' has baffled contractors and their advisers with the Yes/Yes; Yes/No scenario since its introduction. Also of some concern was what would the information be used for and that it was mainly a 'fishing' exercise for IR35 enquiries. (See: IR35 – that service company question - May 2010 - or search on Shout99 for Question 6 P35)
Now Keith Gordon a tax barrister at Atlas Chambers and chartered accountant has boldly gone where no other tax adviser has gone before.
Mr Gordon wrote to HMRC in March, raising questions about the lawfulness of the annual returns (P35s), which employers are required to file. He argued that, under the PAYE regulations, 'that' Question 6 is not one that is required to be answered. Despite this, however, the electronic P35 on the HMRC website cannot be submitted without the question being answered either ‘Yes’ or ‘No’.
"I am very sorry for the delay in letting you have this reply to your letter of 9 March.
"I can confirm that regulation 73 of the income Tax (Pay As You Earn) Regulations 2003 (SI 2003/2682) does not specifically require the completion of question 6 in part 3 of the P35. The question is included on the end-of-year return to support our processing systems, and is intended to facilitate the effective administration of the PAYE system.
"Whilst there is no statutory obligation to complete the question, it is a useful reminder to employers about their obligations when making certain types of payments, and also helps us to deal with these matters more efficiently.
"If employers are unsure about how to respond to these questions we would encourage them to contact our employers helpline in the same way they would with other queries. However, if employers are unsure of their position then they should answer “no” to question 6 of the P35.
"We will shortly be issuing guidance to this effect."
Mr Gordon added this thoughts and interpretation to HMRC's response.
Although contractors will welcome the news that HMRC has confirmed that ‘there is no statutory obligation to complete the question’., the response a little hestitant as Mr Gordon pointed out:.... ‘I can confirm that regulation 73 of the … Regulations … does not specifically require completion of question 6’, leads one to wonder whether there was a requirement elsewhere. However, in the context of the letter, it is clear that no employer is under any legal obligation to answer the question."
He also queried the ambiguity in HMRC's advice to contact them if unsure of their status. Mr Gordon said: "This, however, misses the point. Why should I, or any employer, call HMRC (and wait for someone to answer the telephone) to find out what we probably know already, when the question should not be asked in the first place? If it should not be asked, then it does not need to be answered. If it does not need to be answered, why should anyone waste their time ascertaining how to answer it?"
The solution is possibility in the next sentence, which allows them to answer no if unsure of their position, which although the letter does not precisely say so, could allow employers to answer the question in the negative simply to allow them to proceed with the submission of their P35.
But Mr Gordon asked: "This is still not entirely satisfactory: why should employers be obliged to answer the question simply because HMRC’s software effectively usurps parliamentary sovereignty?"
Mr Gordon said: "HMRC’s response would clearly suggest that all employers may legitimately and without fear answer the question in the negative irrespective of the actual facts of the case.
Nevertheless, while this work-around might be appropriate in the short term, it is totally inappropriate in the long term. I therefore hope that HMRC will seriously consider revising the P35 next year or, at the very least, make it clear that answering it is entirely optional, and ensuring that HMRC’s software respects that."
Keith Gordon is a barrister at Atlas Chambers, a chartered accountant and tax adviser, providing tax advice and litigation support to advisers. He keeps a blog of his activities, including his Question 6 'journey'.
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Susie Hughes © Shout99 2012