Rules to stop composites

Firstly, to summarise, this legislation is being introduced in order to curb what the government calls, “widespread non-compliance of IR35” by composite companies. The proposed legislation will mean that as of 6th April 2007, composite companies will no longer be able to pay any form of dividends (bonus, commission, etc - however the different providers describe it) or expenses to contractors using their schemes. This means that if you are in a composite, every penny paid to you will be subject to full PAYE tax and National Insurance Contributions (both Employers and Employees NIC’s).

The Government estimates that this will impact on over 240,000 UK contractors who are currently working via composite company providers.

Changes to your personal tax returns

HMRC are also introducing two new questions to personal tax return forms for tax year 2007-2008:

• Have you received any income (of whatever nature) in return for the provision of your services via a service company?
• If so, how much?

This means that you must declare all income derived from contracting, regardless of the type of Service Company you work through.

Could this be the next step in IR35 self-incrimination?

Debt recovery rules

The new debt recovery rules being considered will allow HMRC to chase any tax debts with the contractor, the composite or personally from the directors of the composite and if that fails they are proposing that your agency or end-client could be held liable for the debt. Therefore, it is highly likely that in the new year your recruitment agency and end-client will be seeking to remove all composite companies from their supply chains in order to prevent any risk of tax bills falling back on them.

Any contractors using the following schemes :

• Composite companies paying dividends, both the single member and multiple member schemes are included.
• Limited Liability Partnerships (recently an increase in the emergence of this type of service has been noted by HMRC)
• Associates of managed schemes i.e. Even if the money is routed and paid to the worker via third or fourth parties the rules will apply.

The common factor, with all the above types of services is that you, "The contractor", are not in control of the company bank account or the general management and are receiving non-taxable income other than genuinely allowable expenses.

If this sounds like your current provider then you will most likely need to examine the options below.

The Government stresses that the rules are being introduced to stop unscrupulous practices by certain providers and will not impact any contractors or service providers such as 3Sixty who operate via their own Limited Companies or compliant PAYE Umbrella Companies.

The legislation is currently still in its initial draft form and the Treasury’s consultation period will be open until 2^nd March 2007. Anyone wishing to submit comments to this consultation can do so.