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Service company – a question of responsibility

As a contractor, you no longer need to worry about the service company question on personal and employer self-assessment tax returns. HM Revenue & Customs (HMRC) has scrapped this much-maligned question – which was essentially trying to capture the salary and dividend income payments made to the contractor by his or her own limited company.

First introduced in 2008, the question as to whether contractors were operating as personal service companies (PSCs) was designed to help HMRC target those who might fall foul of IR35 and were considered to be working as ‘disguised’ employees. Although the questions have no statutory basis, by electing to not answer, contractors were opening themselves up to further scrutiny.

Provision of contracting services

As of the 2014/15 tax year, the question has been struck off both the SA100 personal employee tax form and the employer’s end of year checklist when making a Final Payment Submission (FPS). It had been a feature of the now defunct P35 form. Contractors, freelancers, interims and consultants working through their own limited company, limited liability partnership or partnership deemed to provide third party services to a client, are often classified as a PSC.

HMRC defines the provision of services as:

  • You performed services (intellectual, manual or a mixture of both) for a client (or clients)
  • The services were provided under a contract between the client(s) and a company of which you were, at any time during the tax year, a shareholder
  • The company’s income was, at any time during the tax year, derived wholly or mainly
    (more than half) from services performed by the shareholders personally.

IR35 status – a shift in responsibility

From April 2017, should the proposed public sector legislation come into force post-consultation, the responsibility for compliance will be the responsibility of the public sector body, agency or third party employer (including consultancies and outsourcing specialists). The closing date for responses following the publication of the ‘Off-payroll working in the public sector: reform of the intermediaries legislation’ document was 18 August.

In other words, despite resistance from engagers, the onus will be on the employer to determine the IR35 status of contractors and report to HMRC, adding a considerable amount of administrative and financial burden given that they will be liable for income tax and National Insurance Contributions (NICs). To avoid any sort of recrimination from HMRC, engagers may well decide to apply IR35 rather than go through the minutiae of each contract.

You could argue that the service company question hasn’t actually been removed; the onus on who needs to establish IR35 status has simply changed. Rather than targeting individuals, it is the engager or hirer who will be bearing the brunt of any HMRC investigations. This could force many contractors to leave and cause a shortage of key skills, leaving many important public sector projects in limbo.

The big question is, does the removal of this question suggest that the sweeping changes afoot in the public sector and the shift of responsibility in determining IR35 status will also apply to contracting in the private sector?

Check your self-assessment tax return deadlines