Composite companies come under Revenue scrutiny

Composite companies have become a popular way of avoiding employment status, especially in the construction industry, so it is no surprise that HM Revenue & Customs (HMRC) has been looking for a way to attack them.

One of the largest composites, with 11,500 workers, is appealing against HMRC's refusal to renew its CIS5 card. This card allows the company to be paid gross by construction industry companies and agencies for which its operatives work. Without the CIS5 card, clients have to deduct 18% tax, which will delay payments to the workers themselves.

A composite company is supposed to provide corporate status without the headaches. There are various forms, but typically subcontractors join and are issued with shares of a unique class. This is necessary so that their dividends are matched to their own earnings. The composite deals with all invoicing, VAT, debt collection, administration and accounting. The subcontractors are paid a salary equal to the personal allowance and they receive the rest of their earnings in the form of dividends, less 19% corporation tax and an administration fee. So the subcontractors benefit from the tax savings, but do not have to go to the trouble of running their own companies.

The arrangement was not free from risk even before the latest attack. The IR35 rules apply to composites in the same way as to one-person companies. If the way the subcontractor works is similar to an employee, the composite will have to account for tax and national insurance on a deemed salary, leaving the subcontractor worse off than if he or she had not joined the composite company in the first place.

In this year's Budget the government repeated its intention to ensure that ‘all individuals and businesses must pay their fair share of NICs and tax, irrespective of legal form’. The introduction of the IR35 rules, the attempt to tax working directors on dividends paid to a non-working spouse using the settlements legislation, the abolition of 0% corporation tax and now the attack on composites are all directed towards this end. We can only expect more of the same.