TT89: Composite Pay Schemes

December 22, 2006

The changes to the Construction Industry Scheme (‘CIS’) as outlined in Topical Tips 85 in September are making contracting companies and construction agencies nervous.

This is because the tax implications for such businesses could mean that many individual subcontractors (i.e. those not supplying their services through a limited company) may be more correctly reclassified as employees. The risk of paying PAYE and National Insurance remains with the ’employer’ and this would be on top of the amounts already paid to the subcontractor and at the expense of the ’employer’. The existence of the relevant CIS paperwork will not protect the employer if they are judged to be incorrect in their treatment of the ‘contractor’ as a self-employed CIS individual.

It should be pointed out that this risk has always been present, but from April 2007 the risk is becoming more explicit. The new CIS rules from that date will mean that each monthly return of tax deducted from subcontractors will be accompanied by a declaration to be signed by the employer to the effect that all subcontractors are correctly treated. This makes HMRC’s case easier to pin on the unfortunate employer!

However, this issue of Topical Tips has advice not restricted to the building trade!

Pay contractors through a composite

A composite facility is basically a group of companies, run by a management services company. These composite facilities handle the payment of contractors from many sectors (construction, HGV/LGV driving, medical, I.T. and sales to name but a few) in a tax-efficient way.

The composite facility employs contractors or temporary workers and subcontracts them back, so there is no liability for employer’s National Insurance Contributions, thus saving 12.8%. The contractors do not become directors of any of the companies (only shareholders) and so will not be submerged in paperwork or have corporate responsibilities thrust upon them.

Barnes Roffe Topical Tips:

  • Such composite service companies may be beneficial to certain industries, however they must be carefully considered, as they will not suit all situations.
  • Whilst there are potential cost savings (i.e. National Insurance) composite facilities may be vulnerable to attack from HMRC.
  • In circumstances where the risk of PAYE may apply to contractors formerly on the CIS scheme they might help mitigate the employer’s risk.
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