Composites face £1bn tax doomsday

The controversial use of composite companies to avoid income tax and national
insurance will be shut down, in a move expected to bring in more than £1bn for
the Treasury.

The companies mean that instead of individuals being employed, they are
treated as being part of a company providing services to their effective
employer, meaning lower tax charges. They are often used by nurses, construction
workers and others on low incomes.

The government this week announced draft rules aiming to force composite
companies to pay PAYE and national insurance for people within the structure.

PBR documents set out a range of criteria applying to individuals within the
companies designed to catch those who were effectively employed, and also
regulating the tax payable by the companies.

Individuals generally receive a small salary and dividend from their
companies. The government attempted to crackdown on the practice a few years ago
by introducing the controversial IR35 rules. But it has declined to use IR35 in
relation to so-called ‘composites’, effectively service companies on a larger
scale, preferring what has been termed a ‘global’ solution to the problem.

Income from shutting the schemes down will be £350m from 2006/07, then £450m
and £250m over the following two years. The government says there are 150 such
companies, with ten of them having the vast majority of workers.

Grant Thornton senior tax partner Mike Warburton said that shutting the
loopholes would hit the poor. ‘The fact is nurses and teachers, who are on a low
income, have been hit here. Brown’s attacking people on low incomes.’

Anne Redston, personal tax committee chair with the CIoT, said it was
important that individuals who run their own companies do not get concerned over
the crackdown, which is aimed at artificial business structures. ‘The aim is to
target composites, not ordinary personal service companies,’ said Redston. ‘It’s
targeted at those using structures provided for them.’

She said it would be a challenge for the government to put together
legislation that would make composites pay PAYE and national insurance for
employees, and those using the structure would be looking for potential

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