HMRC's new guidance on 'service companies question'

HM Revenue and Customs has apologised for the 'unclear' question about service companies on the self assessment tax return and has issued new guidance.

The vague question relating to whether or not you are a service company and how you operate, had advisers and freelancers in considerable debate as to what it meant and how it should be answered, resulting in professional accountancy bodies asking HMRC for clarification.

Now HMRC has admitted: "We acknowledge that with hindsight the question on the tax return and original guidance were unclear, for which we apologise."

Since concerns were first raised, HMRC has said it has been working closely with representatives of the professional bodies to make the text of the question and the guidance clearer. As a result of that collaboration, HMRC has published:

• clearer guidance in the tax return guide which should be read when completing the 2007-08 Self Assessment tax return and tax returns for future years
  
• revised wording for the service company question, which will first appear on the 2008-09 Self Assessment tax return.

Amended guidance

The amended guidance is reproduced below. HMRC will shortly update the 2007-08 tax return guide (SA150) on the Self Assessment returns part of our website to reflect the new text. The text of the revised question for 2008-09 is also reproduced below for information.

If you have already submitted your 2007-08 Self Assessment return

If you have already submitted your 2007-08 Self Assessment tax return, you do not need to take any action as a result of these changes. There will be no adverse consequences simply because you completed (or left blank) the question in a return filed prior to today's date.

Record keeping

It is not necessary to keep any additional records to determine whether more than half of the company's income was derived from services performed by the shareholders personally. Where the level of income derived from services performed by the shareholders personally is not readily discernable from existing records, best judgement should be used.

Updated guidance for 2007-08 onwards

Service companies

Complete this box if you provided your services through a service company. You provided your services through a service company if:

• you 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(s) and a company of which you were, at any time during the tax year, a shareholder; and the company's income was, at any time during the tax year, derived wholly or mainly (that is, more than half of it) from services performed by the shareholders personally.

Do not complete this box if all the income you derived from the company was employment income.

Example

Services are provided through a service company as described above:

Salary received from the service company (before tax) £15,000

Dividends received from UK companies (including tax credit) £55,000

(from the service company £50,000)

(from a shares portfolio £ 5,000)

Total £70,000

Amount to be entered (excluding the shares portfolio dividends) in the service companies box (box 1 on page TR4)... £65,000

Text of the revised question to be included on the 2008-09 Self Assessment tax return

If you provided your services through a service company (a company which provides your personal services to third parties), enter the total of the dividends (including the tax credit) and salary (before tax was taken off) you withdrew from the company in the tax year.

Guidance on HMRC website.