Working through a composite company is generally regarded as a tax avoidance process. And the Finance Act 2004 means any tax avoidance schemes have, by law, to be reported to HM Revenue and Customs.
The benefits of a composite company, The downsides of a composite company
Added to this, in the March 2006 budget Chancellor Gordon Brown specifically stated that composite companies will be investigated in order to establish their true function – are they genuine limited companies or just setups to avoid tax.
So, by contracting through a composite company you are now highlighting to the taxman that you are avoiding tax and are likely to fall under IR35 legislation. And, with the recent addition of a second HM Revenue and Customs′ specialist office investigating composite companies and their members, chances are extremely high that you will be investigated.
The way a composite company works is that you and lots of other contractors own the equity in the composite company, with varying classes of shares. The company bills your clients and receives your fees on your behalf.
Then you get paid a nominal salary, along with all the other contractors, and pay minimal tax and National Insurance Contributions (NICs). The bulk of your earnings, and those of your fellow shareholding contractors, is paid out as dividends depending on the class of shares you own, with much lower tax liability and no NICs. Clearly, this is something the taxman is not going to be happy about.
Some of the benefits of working through a composite company include:
- Tax efficiency (where this can be proved to be legal)
- Shared costs of administering the composite
- Admin support, eg issuing and chasing invoices
- Tax allowances for business expenses.
Unfortunately, with IR35 and related legislation, working through a composite company has some major downsides:
- To HM Revenue and Customs tax efficiency through a composite = tax avoidance
- You will almost certainly fall under IR35 and have reduced earnings because of IR591
- If a tax case is won against one of your colleagues in the composite company, you all are liable for the back tax plus any penalties
- You personally will fall under the spotlight of HM Revenue and Customs
- Following the Finance Act 2004, your chances of a full-blown HMRC investigation are very high.
So, perhaps working through a composite company is not so advantageous after all.
To speak to one of our tax experts call 0800 434 6402.
