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The 2011/12 Employer's Annual Return Form P35 season is most definitely upon us - the deadline for filing is 19 May. (See Reminder - Only 1 Month Left to File Employers' Annual Returns).

As with previous years, the Form contains the question "Are you a Service Company?". As many readers will know, this is a deliberately loaded question, and the tax consequences are far-reaching if the answer is "Yes".  It will not apply to a significant proportion of companies (or employers generally) but the issue is highly contentious and many employers may feel that they have been unreasonably 'backed into a corner' by having to deal with the question as a simple "Yes/No" on the Form P35.

Enter Keith Gordon, who is a tax barrister at Atlas Chambers. For those who don't know, Keith has... ..."form" as far as poorly-crafted HMRC forms go - see, for instance Tax Barrister Appeals Against Service Company Question for an idea of for how long this has been running - but note that the story commenced with a similar question on the 2009 personal tax return. In summary, Keith refused to answer the question and adopted a similar position as regards the corresponding question on the Employers' Annual Return. HM Revenue & Customs (HMRC) grudgingly accepted that this non-committal stance was within the taxpayer's rights.

But this year, with almost all employers having to fill their form in online, Keith found that employers were unable to complete the form without answering the Service Company question - the online questionnaire wouldn't proceed without an answer. So, Keith duly wrote to HMRC and suggested that given that it was beyond HMRC's powers to include the question in the form, it was certainly beyond their powers to force an answer to the question. Or, to put it another way, employers could refuse to complete the return and penalties could not be applied as they would have a "reasonable excuse" for not filing their form.

So, HMRC have replied that employers may simply answer "No" to the Service Company Question. As Keith himself put it, 

"It is reassuring that HMRC accept that there is no statutory basis for Question 6 and have given employers a work-around if they choose not to answer it. I hope that the 2013 P35 will not contain the question at all. What is not clear, however, is whether HMRC deliberately sought to exceed their statutory powers by asking the question or whether it was just an embarrassing oversight."

Of course Question 6, as with the Employers' Annual Return Form P35 itself, will not be around for much longer in any event, given that the new Real Time Information system should make end of year forms redundant. One can only hope, for HMRC's sake, that they don't include 'Question 6' in their RTI package as well!