What’s It All About?

By | 3 February 2009

Background

Taxpayers (or their advisers) completing 2007/08 tax returns have been faced with answering the following question, which has not been asked in tax returns for previous years:

“Total amount of any income included anywhere on this Tax Return, derived from the provision of your services through a service company – read page TRG 15 of the guide”.

Space prevents me from quoting the guidance in full (so see the guidance here). It states:

“You should complete this box if you have received any form of income (including employment income and dividends) during the year in question from a company through which you provided your services personally and of which you are a sole or joint shareholder.”

Cause for concern

HMRC have indicated that the purpose of the question is to improve risk assessment of companies within the IR35 or Managed Service Company (MSC) rules. HMRC also stressed that the question is not related to gathering information about owner managed companies more generally.

Whilst HMRC’s statements provided some reassurance that taxpayer responses to the service company question were not to be used for some other purpose (e.g. for the purposes of future ‘income shifting’ legislation), I contacted HMRC and asked:

  • If the service company question is aimed at potential IR35 companies or MSCs, why is the question drafted so widely?; and
  • If the responses to the question are not to be used other than to find IR35 companies and MSCs, would HMRC publicly confirm that the data would not be used for any other purpose, to reassure service company owners who are not IR35 companies or MSCs.

HMRC responded to the first question by saying that they decided on a simple form of words for the question, rather than to attempt to define their target group, which may have resulted in a lengthy, complex question. 

HMRC would not give any assurances on the second question, stating that to permanently restrict risk analysis would be impracticable, and would fetter HMRC’s ability to identify and address wider risk.

The latter statement will be a concern to many owner-managed companies and their advisers. HMRC do not appear to rule out the possibility that the responses to the service company question will be used for purposes other than identifying IR35 companies and MSCs.

Whilst the ‘income shifting’ proposals have been shelved for the time being, one wonders whether the data could be used for that purpose in the future. Alternatively, could the information be used to identify owner-managed companies paying dividends instead of what HMRC consider to be a commercial salary? It is not inconceivable that legislation may one day be introduced to prevent or discourage remuneration planning in owner-managed businesses, which often involves low salaries and high dividends. The service company question on tax returns would of some assistance to HMRC if that was the case.

Is it lawful?

The main professional bodies have made representations to HMRC about the service company question. One of the concerns raised was whether HMRC are entitled to include it on tax returns in the first place. HMRC maintain that they are, on the basis that TMA 1970, s 8 requires a return to be made and delivered “…for the purposes of establishing the amounts in which a person is chargeable to income tax and capital gains tax”. However, is the service company actually required for this purpose? The taxpayer will already be returning details of income from the company on the return, without the need for the service company question.

What concerns me most is that (as far as I am aware) HMRC did not consult with the professional bodies beforehand about the inclusion of the question on the tax return form. Why is this? Could it be that the simply decided to go ahead and do it, based on the old adage of it being easier to “seek forgiveness than ask permission”?

Nevertheless, we appear to be stuck with this question on the tax return. One can merely hope that HMRC will be true to their word, and only use the data gathered for the purposes of tracking down IR35 companies and MSCs.

The above article is reproduced from ‘Practice Update’ (January/February 2009), a tax Newsletter produced by Mark McLaughlin Associates Ltd. See the Newsletters section.