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What we said in the past

1. Very High Risk of HMRC Investigation

What we said in the past Events and circumstances over the last year point toward a massive crack down by the government, on such operations this year. These are:
1.1 The 2006 Budget speech
The Chancellor specifically stated in the last budget, that Composite Companies would be investigated so as to establish their purpose: are they tax avoidance vehicles or genuine trading entities?
1.2 HMRC Office
A second specialist Revenue Office has recently been set up which has as its task, the investigation of all Composite Companies and their members.
1.3 The Finance Act of 2004
This Act stipulates that it is a legal requirement that all tax avoidance schemes be reported to HMRC. Since Composite schemes are by their nature, tax avoidance schemes, you can be certain that with this enactment, HMRC will have knowledge of their existence, how they operate and who its members are.
This legal requirement was a smart move by HMRC and was introduced to remove the problem it had been facing: tracking down tax avoidance schemes. Previously financial advisers in the business of creating Composite and other such avoidance schemes relied on this problem; namely that HMRC was struggling to keep track of these schemes in what was an ocean awash with them.
In the event of discovery, these advisers relied on their ability to quickly re-emerge under a different name and operate without detection for a lengthy period of time. No more.
Today, these advisers are now under a legal obligation to report their tax avoidance vehicles to HMRC or face massive penalties and fines.
Today it therefore seems ironic that these very schemes used to minimise tax liabilities for its members, now make the job for HMRC very easy by handing over all its members in one foul swoop. Remember this is no coincidence but rather a deliberate HMRC strategy to remove all tax loopholes previously prevalent in the contracting sector.

2. Risk to Contractor Wealth

What we said in the past With a Composite Scheme, the risk to a contractor's wealth comes in many forms:
2.1 Increased IR35 Risk
Operating through a Composite Company places the contractor under IR35 risk. See IR35.
IR35 hinges on one principle: were it not for the existence of the intermediary (i.e. the company through which the contractor operates), would the arrangement between the contractor and the client, be one of employment.
Where a contractor operates through an intermediary that exists and trades in its own right, the IR35 risk to the contractor is reduced on this point. With Composites however, this whole principle as to what they are comes into question. Are they genuine companies or are they schemes simply set up by contractors for the avoidance of tax.
We are certain, which way this will go - Composite Companies will be ruled as avoidance vehicles. This means that those contractors using these schemes increase their own likelihood of getting caught in the IR35 web, which in turn means further personal tax bills and penalties.
2.2 Shared liability
As a shareholder of a Composite Company, all shareholders fall liable for taxation underpayments and penalties incurred against any one contractor using the scheme. In other words, you will be jointly liable if another user of the scheme falls foul of IR35. So if they do not have the money or cannot be found, you could be forking out for someone else.
2.3 So called IR35 Insurance
Beware those schemes claiming that their contractors are automatically insured against an IR35 investigation.
To qualify for genuine IR35 insurance, a contractor would have:
  • to have their contract reviewed by a specialist employment law firm
  • the contract would have to reflect physical reality, and
  • to pay a premium to an FSA recognised Insurance Provider.
If these 3 criteria have not been met, a contractor is not covered against an IR35 investigation. End of story. Since the Composite Company itself is not regulated by the FSA, we can see no way of them underwriting this so called insurance themselves.
It should now come across that the use of a Composite Company in today's contracting environment not only poses a threat to contractors' long-term financial wealth, but also puts them under the HMRC spotlight.