Government crackdown on tax-evading composite companies

Chancellor Gordon Brown is shaking up the contracting industry in a big way, with the release of a report entitled Tackling managed service companies. The move spells the end for those using composite companies to avoid paying income tax and national insurance.

Under new rules, which could take effect in April 2007, the government will force composite companies to pay PAYE and national insurance payments on all monies, rather than only the minimum wage, before taking the remainder as dividends.

Freelance and contract workers including many in construction and engineering as well as teachers and nurses often use composite companies as ‘middle men’. They become shareholders in these companies, entitling them to dividends, which are exempt from tax and national insurance, so saving thousands of pounds.

The government estimates that there are currently about a quarter of a million workers in about 150 managed service companies. Stopping this perceived abuse of the tax system could net the government £350 million in 2007 and a total of £1.05 billion by 2010.

Freelancers’ trade association, the Professional Contractors Guide (PCG), says it has no objection to the proposal, stating that it is the Chancellor’s prerogative to suggest reforms to opportunities for tax avoidance that offer an unfair advantage.

Steve Brawley, employee relations adviser at the ECA, says: “The ECA has expressed concern for some time about the implications of composite companies for apprenticeship training and the industrial relations framework of the industry.

“The Association notes the proposals in the HM Treasury consultative paper Tackling managed service companies. The paper adopts the principle of a level playing field for wage rates, which is supported by the Association, and it will monitor with interest the progress of the proposals through the legislative process.”