Revenue warns composite firms

by John d'Arcy

The Inland Revenue (IR) has issued a fresh warning to so-called composite companies that the payments they describe as dividends are subject to PAYE tax and Class 1 National Insurance (NI) contributions in the same way as any other emoluments.

The advice is spelt out in the IR's August issue of its Tax Bulletin. It confirms that composite companies are covered by the service company tax legislation IR35.

The bulletin says that, regardless of how the composite company is organised, it will need to take account of the service company legislation in the same way as any other service company.

Legislation states that "the service company will have to deduct and account for tax under PAYE and Class 1 NI contributions in respect of that worker on (broadly) all of the money the service company receives from the client in respect of work done for the client by that worker".

The worker is defined as someone who performs services for the purposes of a business carried out by another person - the client - but does so via a service company rather than directly. The worker is also defined as someone who works for the client in such a way that he would be regarded as an employee of the client had he worked for it directly rather than via the service company.

The IR said the service company legislation applies in any situation where the relevant conditions are met and the worker either holds 5% of the shares in the service company or receives payments that "could reasonably be taken to represent remuneration for services provided by the worker to the client".

Composite companies have become increasingly widespread in construction in recent years. The theory has been that tax and NI liabilities could be minimised by making workers nominal shareholders and paying them in share dividends instead of wages.