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How does IR35 affect composite companies?

It is an IR35 myth for a contractor to assume that working through a composite company gives protection from IR35. HM Revenue and Customs are quite categorical about this issue.

IR35 - Umbrella Companies v Composite Companies

A composite company, also known as a "managed limited" service, allegedly benefits contractors because they become a shareholder in a "composite" company, along with lots of other contractors. Like using a personal service limited company, the contractor is paid a minimum wage to comply with employment law and then takes most remuneration as expenses and dividends.

However, the same principles apply for using a composite company as for working through an agency or personal service company. It is the nature of the actual contract and whether the standard employed/self-employed questions are answered appropriately that determines whether the contract is covered by IR35 or not.

And if just one of the members of a composite falls foul of IR35 legislation, all of the members could be liable for back-tax and NICs, plus any fines.

Tarpon operates as what is commonly known as an umbrella company. There are clear differences in the approach taken by composite companies versus umbrella companies. A high risk of being affected by IR35 is a major difference for any contractor operating through a composite company!

Umbrella companies employ their contractors and pay tax at source using PAYE. Composite companies still pay most of the member contractors′ incomes through dividends, attracting lower tax and no NICs, with the same risk of IR35 as working through any other kind of intermediary.

The main organisations affected by IR35 are listed below; click on them for further explanations:

To speak to one of our tax experts call 01582 390 000.

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