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What is a Service Company?

This is a question which is often asked by HMRC on many of their forms. It is a tricky question because a positive answer implies that the limited company is an intermediary, the sole purpose of which is to provide services to a client by the director of the company who, without the intermediary, would be an employee of that client.

There is no definition given by HMRC of what a service company actually is. However, every time HMRC refers to an intermediary they are likely to define the limited company as a service company.

The legislation covering intermediaries is known as IR35. Where IR35 applies most of the earnings the limited company receives, also known as the ‘Worker’s Attributable Earnings’, are subject to PAYE and NI.

Clearly then answering “Yes” to the question “Is your company a service company?” is likely to mean that some contracts at least may be subject to the IR35 legislation. We can provide a spreadsheet which is designed to work out the cost in terms of PAYE and National Insurance.

If you believe that the contractual relationship your limited company has with a client is that of an employer-employee relationship you should consider very carefully how you answer the question “Is your company a service company?”. The answer is always yes.



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