Tony Bingham Composite companies hold out the promise of tax savings for the self-employed, so of course they are popular – just make sure you understand how they work so you don’t provoke the taxman

Blowed if I can fathom what an “umbrella company” is, or for that matter a “composite company” or a “PAYE umbrella” or a “salary-only umbrella” or a “single person company”. Nor in truth am I convinced that my plasterer or bricklayer pals understand what it is to hold a share in their employing company and to declare dividends to themselves in respect of that share. And, since the construction industry heaves with workers (and by that, I mean surveyors, contract managers, and sundry tradesmen, who quietly say they are self-employed), they are game for some of this composite umbrella stuff. Why? Tax advantages are why. But do watch out.

Ever since the year dot there has been a game going on between the taxman and construction industry folk. Lately some clever people have worked out a perfectly pukka way of using the tax rules to benefit the self-employed. Mind you, these clever people might just as well have poked a lion with a stick. The taxman is prowling around and seems irked.

Take first an enterprise called Gabem Management. It has more than 11,000 operatives for which it administers single-person limited companies. Most are in our industry. If you are self-employed, Gabem sets up a “single person company”. Then for a modest £26 a week it manages your SPC so that you are paid the minimum hourly wage of £4.50. It deducts PAYE and NI and expenses; then the balance is paid to you as a dividend on your share ownership. That dividend attracts corporation tax at 19%. All very proper. Mind you, when I explained all this to Mick (Mick has been painting my house for these past 26 years) he said: “Bugger, sounds too complicated to me.”

The taxman in tax department No 1 can’t find a hole in all this. But the boys in department No 2 deal with what is known as the “construction industry scheme”. The stick, which poked the lion, has come back to strike Gabem. It seems that when a customer pays for the operative’s services, the payment is made to Gabem, not the operative. So Gabem, having supplied construction industry services, has to have what you and I know as a CIS card, or certificate. And true enough, Gabem has the CIS 5 card, which means money flows to Gabem without any tax deduction.

But the taxman in department 2 didn’t like being poked with the clever stick and refused to renew Gabem’s CIS 5 card. Instead, it sent a CIS 4. Oh dear, that means 18% would be deducted before sending a cheque to Gabem. Quick as a flash, Gabem went to court, then to the Court of Appeal. But the courts said like it or lump it; now Gabem has to wait until October when its case for renewing its CIS 5 card comes before the special commissioners.

Some clever people have worked out a pukka way of using the tax rules to benefit the self-employed. They might just as well have poked a lion with a stick

Those special commissioners have just decided a similar case, London Recruitment Services vs HM Inspector of Taxes, in which LRS managed to have its CIS 5 card reinstated. But the rules are complicated once CIS cards get caught up in umbrellas.

LRS sets up for each self-employed person a “composite company” and from what I can just about work out, it does almost the same service as Gabem. LRS got poked with the taxman’s stick because it received the money for the work the self-employed persons had done, then paid it to one composite company – called Europay Limited. All was well here because Europay also had a proper CIS certificate and was paid by LRS without the deduction of the 18%. Then the taxman got shirty with Europay and cancelled its certificate. It went bust.

The taxman told LRS that it should always have deducted 18% from Europay because it was a mere agent for the hundreds of operatives also part of “composite companies”, but hardly any of those had CIS certificates. That made LRS liable for the 18% it “failed” to deduct. At the trial, the special commissioners accepted the argument that Europay was not an agent for umpteen composite companies; Europay, it said, was a “principal” not an agent. So it was fine for LRS to pay the gross amount without deducting the 18%. It will be interesting to see if Gabem is able to argue the same way.

So, are you up for your affairs to be managed with an umbrella? Let me give you an important tip. Make absolutely sure first that you really are self-employed. That test is tricky. Then be careful about the sort of “composite” you are offered. Then recognise that the taxman detests being poked with a stick and regards all this as a juicy target. And in any case, as Mick, the painter, said: “Bugger, sounds too complicated for me.”