Composite Companies warned by Inland Revenue

A recent Inland Revenue Tax Bulletin includes a section which warns 'composite' companies that the IR35 rules apply to all employees regardless of the type of company they work under.

Composite service companies are common in the IT industry, and are becoming increasingly common in Engineering as contractors look for ways of minimising exposure to IR35. Composite service companies usually employ workers and then supply them to clients for whom they work. Often the clients will be found via employment or recruitment agencies by the contractors themselves rather than via the composite service company.

The Revenue's bulletin describes the typical workings of a composite company:
"The employees of a typical composite service company are normally paid a small wage or salary for the work they do - usually at or slightly above the level of the national minimum wage. However, the employees are also usually shareholders of the composite service company, and each employee will usually hold a different class of shares in that company. So, for example, Employee A will hold class 'A' shares, Employee B will hold class 'B' shares, and so on. The employee's shareholding will then usually entitle him/her to receive dividends based on the amounts received by the composite service company for the services the employee performs for the client's business. These dividends will supplement, often substantially, the small amount the employee is already receiving from the composite service company in wage or salary payments. Dividends may be paid on monthly or even weekly basis in some cases."

However, the Revenue does point out that "regardless of how the composite service company is organised, it will need to consider the 'service company' legislation in exactly the same way that any other service company has to."

In the Bulletin, the Revenue also indicated that they are monitoring compliance with the IR35 rules as part of a general programme for supporting voluntary compliance and for tackling non-compliance.

The tax bulletin can be found at www.inlandrevenue.gov.uk/bulletins/tb60.htm

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