The truth about Composite Companies

Contractors need to be aware that composite companies and umbrella companies are very different and some providers of composite company schemes deliberately give the impression that they operate umbrella companies. Contractors need to be aware that the two types of schemes are completely different.

In an umbrella company you pay tax and National Insurance Contributions at source through PAYE and operate under a completely legal scheme.

A composite company is part of a tax avoidance scheme and will come under the spotlight of HM Revenue and Customs.

Where are we currently with Composite Companies?

In the Finance Act of 2004 HMRC clearly stated that any tax avoidance schemes have to be reported to HM Revenue and Customs and working through a composite company will be regarded as a tax avoidance process.

In March 2006 the HM Revenue and Customs stated that composite companies will be under the spotlight to determine whether they are genuine limited companies or just schemes to avoid tax

Contractors currently working through a composite company are now increasingly under the spotlight as you are avoiding tax and NI and with the HMRC devoting more resources into investigating composite companies, there is a much greater chance of the contractors tax status being looked into.

How do Composite Companies Work?

The way that a composite company works is that you, along with other contractors that you do not know own the company, each with varying classes of shares. A nominal salary is then paid to yourself and all the other contractors which ensures that you pay minimal tax and national insurance. The rest of the profit and those of your fellow shareholding contractors, is paid out as dividends depending on the class of shares you own, with a much lower tax liability and no National insurance.

This is an issue the HMRC are currently addressing as it falls within their remit to ensure that everyone pays their fair share of tax and national insurance.

Additional Pitfalls

You may find that some operators of composite schemes do not make you aware that additional tax may need to be paid on the dividends as you move into the higher rate tax threshold.

If HMRC investigate your composite scheme and one of the other contractors in your scheme is found to be inside IR35 all the other shareholders are liable for the additional tax due plus any penalties, HMRC see fit to impose.

If you have any concerns regarding the scheme you are on, please contact Accounting Freedom on 01322 319341 or e mail us at info@accountingfreedom.co.uk for a no obligation discussion