IR35: Contractors can leave blank P35’s service company question

That time of year is approaching again when P35s, the Employer’s Annual Return, are due for submission to HM Revenue & Customs, writes Neeta Vaitha of Accountax Consulting, the IR35 and employment status advisory.

P35’s Question 6: Are you a Service Company?

The dilemma faced by many limited company contractors who are genuinely in business on their own account is how to answer the form’s question 6. This states, ‘Are you a Service Company? If Yes, have you operated IR35 or the Managed Service Companies legislation?’ Not surprisingly, HMRC’s guidance notes to which the P35 refers to does not define what a Service Company is, making it more difficult for the taxpayer to understand.

Limited companies can ignore Q6

But as a professional advisor, we are aware of the recent case of Keith Gordon which evidences that a limited company contractor does not need to answer this question.

The landmark case of Keith Gordon

Mr Gordon submitted paper tax returns for three tax years, clearly stating in the white space provided that the question had deliberately been unanswered by him. HMRC processed the tax returns without issuing any penalties for filing incomplete returns; and its officials didn’t raise any enquires relating to them.

Rumours then abounded that HMRC intended to reword Question 6 from 2009, in an attempt to overcome any existing legal defects. This raised uncertainty as to whether HMRC would treat the deliberate act to not answer this question as a failure to provide information in the future; which would lead to penalties unless a reasonable excuse could be demonstrated.

Appeal rulings

As a result, Mr Gordon appealed against this question. The appeal was submitted on the grounds that the question on the tax return could not constitute a ‘taxpayer notice’ under paragraph 1 Schedule 36 Finance Act 2008.

HMRC responded to his appeal stating that they did not consider the 2009 question to constitute a taxpayer’s notice. Unhelpfully, they did not stipulate whether the same applied in regard to the 2010 question.

So a separate appeal was therefore lodged in regard to 2010 on the same grounds. HMRC did not delay in their response but failed to respond. This clearly illustrates the inefficiencies of HMRC’s supposedly ever-improving customer service.

As a result of HMRC’s failures, Mr Gordon appealed to the First-Tier Tribunal. On this occasion, the taxman was quick to respond, stating their agreement that a question on the tax return cold not amount to a taxpayer notice under Schedule 36.

Clarification sought from HMRC, but denied

Mr Gordon asked for clarification that they would make a clear statement in the future should they change their opinion in this regard. HMRC stubbornly refused to provide this clarification, stating that was not part of the appeal or tribunal hearing.

This case was later passed to a different HMRC officer who took a different approach. This clearly demonstrates that HMRC are not consistent with their advice, or are at least singing from different hymn sheets. 

‘No change unless we say so’ - HMRC

The Revenue did confirm that a notice under Section 8 TMA 1970 is a notice to file a return which is different to an information notice, however (under paragraph 1 Schedule 36 Finance Act 2008). The tax authority added that it would not change its position without making a clear statement to that effect in the future.

No penalty for not answering Q6

So, and for now, any obligation to answer P35’s question 6 (which asks ‘Are you a Service Company? If Yes, have you operated IR35 or the Managed Service Companies legislation?)’ does not exist. Failure to answer this question will not result in penalties for filing an incomplete return, which should provide limited company contractors with some assurance. Those in the industry advising that the question should be answered would do well to remember Mr Gordon and follow his example.