2007-08 P35: Question 6 – meaning of service company

Question 6 relating to service companies on this year’s for P35 Employers Annual Return has caused considerable confusion, for which we apologise.

Following the introduction of the Managed Service Company legislation with effect from April 2007, it was necessary to change the question on the P35 in order that it relates both to the Managed Service Company legislation and to the Intermediaries legislation (sometimes known as IR35).

What will happen now?

HM Revenue & Customs (HMRC) will not use the answers to Question 6 on the 2007-08 P35 to risk profile individual employers for a compliance review.

If you have already submitted your P35 and think you may have completed Question 6 incorrectly, you do not need to amend it.

If you have not yet submitted your P35, you should complete Question 6 in regard to the guidance below.

Clarification of Question 6

Question 6 is deliberately in two parts. The first question narrows those employers who need to consider whether the second question applies. If the answer to the first question is no, the answer to the second question will similarly be no.

The term service company relates to limited companies, limited liability partnerships and general partnerships within the range of the Intermediaries legislation (IR35) or the Managed Service Company legislation (Chapters 8 or 9 ITEPA, respectively).

The first question should be answered yes if:

• an individual personally performs services for a client and the services are provided not under a contract directly between the client and the worker but under arrangements involving the limited company, limited liability partnership or general partnership (the service company)
• the limited company, limited liability partnership or general partnership’s (the service company) business consists wholly or mainly of providing the services of individuals to clients

The second question should only be answered yes if income has been treated as deemed employment income and PAYE (Pay As You Earn)/National Insurance (NI) deducted in accordance with the Managed Service Company or Intermediaries legislation(IR35).