Industry’s composite companies likely to be early victims of Treasury’s move to end tax avoidance schemes
Chancellor Gordon Brown has signalled a clampdown on tax avoidance schemes in a move that could spell the end for one of construction’s most popular tax loopholes.
In his pre-Budget report, published last Friday, Brown promised that the government would close down tax avoidance schemes, adding that any future legislation would allow retrospective action to be taken on companies that do not comply from now on.
The clampdown could destroy construction’s “composite companies” – firms set up by self-employed workers as a means of avoiding taxation.
Liz Bridge, Construction Confederation taxation director, said that although the overt target of the government’s clampdown was the bonus schemes prevalent in the City, the move would also affect composite companies.
She said: “The government is clearly not content with composite companies, and it’s as if they are gradually tightening a rope around them. PAYE schemes yield large amounts of tax on a regular basis, so it won’t stand for schemes that undermine this.”
Under composite company schemes, workers form a shell company to avoid paying PAYE income tax and Class I national insurance. Instead, they receive the bulk of their pay as dividends, being paid as directors rather than employees. The schemes are not currently classed as illegal.
The government is tightening a rope around composite companies
Liz Bridge, taxation director, Construction Confederation
Bridge said that she was shocked by the harsh nature of the chancellor’s statement: “Its tone is surprisingly unpleasant for a government associated with being mealy-mouthed.”
Bridge said she foresaw a drop in membership of composite companies. She said: “Those already in companies will probably stay there until they are advised otherwise, but it would be very unwise for anyone else to move towards the system.”
The move has been welcomed by unions, which object to composite companies because they reduce the amount of money that goes to the Treasury. This decreases the funds the government can put back into the industry for training and health and safety.
Paul Corby, national officer for construction of M&E union Amicus, said that he had recently sent the Treasury a dossier on tax avoidance in construction.
He said: “We have been urging the treasury to clampdown on tax avoidance for some time. Workers should be employed directly and participate in the appropriate initiatives.”