P35 Compliance For Contractors
It is P35 time again soon for all Professional Contractors andFreelancers. The deadline for submission is 19th May 2009, but the PAYEand National Insurance needs to be paid by 22nd April if you are usingelectronic submission.
As an accountant for Professional Contractors and Freelancers wefile by internet for our clients and this year the HMRC will beapplying an incentive of £75 to each employer who files online.
Last year there was some controversy over Question 6 on the P35 and since then the HMRC have issued it's guidance on completing an filing P35 forms.
It is important to answer these questions correctly, as the new HMRC Penalty regime will apply to these returns.
Question 6 says:-
Are you a Service Company?
No Yes
If 'Yes', have you operated the Intermediaries
legislation (sometimes known as
IR35) or the Managed Service Companies legislation?
No Yes
Rebecca Bennyworth covered this on AccountingWebrecently and having reviewed the current HMRC guidelines we can confirmthe advice in respect of a Professional Contractor or Freelancerworking through a Limited Company.
Q6 Part One - Yes or No ?
For most Professional Contractors and Freelancers the answer will be "Yes". The HMRC guidance says:-
“The first question should be answered yes if:
- an individual performed services (intellectual, manual or a mixture of the two) for a client or clients, and
- the services were provided under a contract between the client andthe company of which, at any time during the tax year, the individualperforming the services was a shareholder or partner, and
- the company’s income was, at any time during the tax year, derivedwholly or mainly (that is, more than half of it) from the servicesperformed by the shareholders or partners personally.”
This means that:-
- even if a substitute was used by the Limited Company to replacetemporarily the Director/Shareholder of a Limited Company then theanswer is still "Yes" according to the guidelines.
- even if the contract(s) between the Limited Company and the EndUser or Staffing Company did not specifically require one person to dothe work, then the answer is still "Yes" according to the guidelines ifin during the 2008-09 Tax Year the practical delivery of the contractan individual was completing the work, and more thna 50% of the incomeof the company was from the shareholders own personal work.
For many Professional Contractors and Freelancers who have receivedadvice and prepared accounts on the basis of "Outside IR35" theconcept of ticking "Yes" to a box that mentions "personally" doing thework for the client causes concern. However the guidance is clear onthis matter, HMRC expect the P35 to say "Yes" where the shareholdersthemselves have provided more than 50% of the income by the work theyhave done themselves.
Q6 Part Two - Yes or No ?
The HMRC guidance states :
If you have deducted PAYE and NICs on deemed employmentpayments under either the Intermediaries legislation (IR35) or theManaged Service Companies legislation in respect of any person shown onthe Return, tick the second box ‘Yes’.
and the guidance also confirms what should be ticked in the event that IR35 applies to the income:-
- In respect of the Intermediaries legislation (IR35) only:
Where an engagement is within the rules but the deemed payment is nil because sufficient amounts of
employment income have been paid, you should also tick the second box ‘Yes’. - If you tick the second box ‘Yes’ but the amount of the deemedemployment payment is provisional, confirm this on a separate sheet andsend it with your P35.
- If you cannot finalise the amounts by 19 May 2009, you will nothave to pay a penalty so long as you send in your Employer AnnualReturn by that date, and you pay all of the PAYE and NICs due inrespect of the deemed payment by 31 January 2010. You will still becharged interest from 19 April 2009 until the PAYE and NICs are paid.
The HMRC guidance is strangely silent on advising taxpayers what todo if they have ticked "Yes" to Question 6 Part 1, and believe that theincome the Limited Company received to be outside IR35, but it isimplied that in these cases the answer to Question 6 Part 2 would be"No".
The conclusion to this is that for Professional Contractors andFreelancers that answer "Yes" to both parts of Question 6 will probablyhave no follow up from HMRC. However it is clear that if HMRC wish toapply a more fosussed compliance regime on Professional Contractors andFreelancers then their data will come from all PAYE employers whocomplete Question 6 Part 1 as "Yes" and Part 2 as "No".
This may concern some people, and I am not going to comment onwhether HMRC should or shouldnt be asking these questions, the factsare that these questions need answering correctly on this years P35,and not answering correctly will cause potential problems.
Professional Contractors and Freelancers who have had their workingconditions and contracts assessed professionally and are satisfied thatIR35 does not apply to them should not be concerned. If HMRC askquestions than satisfactory answers can be given, and a well preparedProfessional Freelancer or Contractor will aslo have evidence tosupport their IR35 assessment.
Those who have not had their contracts assessed or taken appropriateadvice should quickly consider their options, the guidance is clear andcompliance is the best option.
Professional Contractors and Freelancers working confidently outsideIR35 would still benefit from ensuring that they have Tax InvestigationInsurance cover, our services inlcude this as standard, and PCG membersare also covered.