The first part of question 6 on the Employer Annual Return P35 form asks ‘Are you a Service Company?’ Please note that HMRC’s definition of a ‘Service Company’ for the purposes of question 6 includes a limited company, a limited liability partnership or a partnership (but not a sole trader) which provides personal services to third parties.

This 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 contract between the client and the service company of which at any time during the tax year, the individual performing the services was a shareholder or partner, and

- The service company’s income was, at any time during the tax year, derived wholly or mainly (that is, more than half of it) from the services performed by the shareholders or partners personally.

The second part of this question, ‘if ‘yes’, have you operated the Intermediaries legislation (sometimes know as IR35) or the Managed Service Companies legislation?’, should only be answered ‘yes’ if:

 - income has been treated as deemed employment income and PAYE/NICs deducted in accordance with the Managed Service Company or Intermediaries legislation (IR35), or

- an engagement is within the IR35 rules but the deemed payment is nil because sufficient amounts of employment income has been paid.

Further help can be obtained from a HMRC helpsheet and employer guidance on page 77.  Alternatively please contact us at Edwin Smith.