Gordon Brown is threatening to land a knockout blow on composite companies, which are set up to allow workers to avoid tax. Grant Prior examines the effects of the Revenue's crackdown
A WAVE of panic is sweeping through the industry as fears grow that the Inland Revenue is finally taking action over its long-standing promise to get tough on composite companies.
Chancellor Gordon Brown and his colleagues have been threatening for years to come after firms that help construction professionals, workers and contractors avoid paying full tax and National Insurance contributions.
Now the talk is being backed up by action as market leader Gabem had its CIS5 certificate turned down for renewal by HM Revenue & Customs, which means the firm can no longer be paid gross of tax.
Gabem has launched an appeal against the decision with a hearing pencilled in for next week. And the eyes of the rest of the industry will be on the High Court to see if this case spells the start of a major crackdown by the taxman.
Stripping a firm like Gabem of its CIS5 certificate is a statement of intent by the Revenue and could signal the beginning of the end for composite company providers, which are viewed by the authorities as nothing more than tax avoidance vehicles.
A host of firms offer construction workers and professionals accounting and administration services designed to minimise their tax and NI liabilities (see right).
Removing their eligibility to be paid gross of tax strikes at the very heart of their operations.
One employment expert said: 'Companies like Gabem have thousands of people on their books and usually get paid gross because they are CIS5 holders.
'If that is taken away from them then they get paid net of tax, which obviously causes huge cashf low problems as the amount of cash they get through the door up-front is reduced, with more going to the taxman.'
A director of a leading employment agency said: 'If a company has its CIS5 card withdrawn then we would refuse to pay them. Ou r rule is no CIS, no payment.
'We deal with Gabem and paid them last week because they have a back-up in that they have a CIS4 card, which means they got paid minus an automatic 18 per cent tax deduction.'
The news that the Revenue is cracking down on such firms has delighted the unions, which have campaigned for years against them. Construction union Ucatt general secretary Alan Ritchie said: 'It is just bogus selfemployment in another form and these firms do nothing for the future of the industry.
'It's all about making a quick buck and they hamper the companies that are doing things properly by directly employing people. We need to create a level playing field and the only way to do that is to outlaw these firms. We have been writing letters to the Revenue about composite companies for a long time and it's great news that something is finally being done about them.
'There should be no room for this in the modern-day construction industry. The vast majority of people using their services should be directly employed and this is what we want to see happen. We had a meeting with Gordon Brown last month and this was one of the issues at the top of the agenda.'
Mr Brown signalled his intent to go after composite companies during his latest Budget. He said: 'There is evidence of some agencies, contractors and employers requiring workers to use corporate structures, thereby denying them employment rights as well as avoiding their fair share of tax and National Insurance.'
The crackdown is part of the Government's campaign against bogus self-employment in the industry. But why have composite companies been allowed to operate for so long?
One industry observer said: 'Ideally, the Government wants to see most construction workers directly employed but in the real world people want to keep the tax advantages of being self-employed and the contractors are happy with that because they get a f lexible workforce and save on employers' Nat ional Insu rance.
'To help that happen there sprang up a raft of composite companies, which employed top lawyers and accountants to keep them one step ahead of the law.
'They have been f lourishing for years but now the Government seems to be doing something because the people that are losing out are the ones that have done things properly and put people back on the books.
'They lose work at the moment because it costs more to employ people directly. But if the Revenue goes through with this it might start to even things out.'
Ridding the industry of composite firms would have massive implications for construction.
An employment agency boss said: 'We have a trade and technical division and around 90 per cent of our professional people on the technical side are employed this way through limited companies.
'If they suddenly lost that payment mechanism they would see take-home pay drop by around 20 per cent.
You are talking about thousands of site managers and engineers, who wouldn't stand for that sort of cut.
'Our margins would come under pressure and, if the clients don't pay extra, then you could have people turning their backs on UK construction because the money wouldn't be in it any more.'
The boss of another leading employment agency said: 'We have dealt with these composite companies for years but there has always been the feeling that the Government would stamp on them eventually. The only surprise is that it has taken so long.'
Composite companies - a quick guide Who uses them?
Construction workers and professionals looking to maximise their income and pay as little tax and National Insurance as possible can use the services of a host of firms which act as composite company providers.
What do the composite companies do?
Firms will enrol workers into specially set-up shell companies or establish single person companies for individuals. Wages are then paid into that company rather than directly to the individual.
What is the advantage of that?
Being paid via a limited company means you pay less tax and National Insurance than a PAYE employee. This can boost take-home pay by up to 30 per cent. Being employed directly by a contractor or through an employment agency means workers are liable to pay income tax at 25 or 40 per cent and National Insurance on their full wages. Using a composite company means only part of the money is classed as wages while the rest comes in the form of a dividend, which attracts only 19 per cent corporation tax. Workers can also offset expenses against their tax bill. Contractors also benefit through lower employers' National Insurance contributions and avoiding many direct employment rights.
So why is the Inland Revenue going after these companies?
The Government and Revenue believe many composite companies are simply acting as a cover for bogus self-employment. They believe thousands of workers using these firms should be working directly on the books of contractors or agencies and are hiding behind shell companies to retain the tax and f lexibility advantages of self-employment and to dodge their tax and National Insurance liabilities.
How does the flow of money work?
Labour agencies or contractors pay wages for an individual to the composite company.
The composite company's accountants work out the pay and dividends structure and pay the money into the individual's bank account.
How much do these firms charge for this service?
The standard industry rate is around £25 a week to cover the administration costs.
Who employs individual workers?
They are employees of the composite companies for tax purposes.
What will happen if composite companies are outlawed?
There will be a sea change in employment practices in construction. A core of genuinely self-employed people would remain but thousands would be forced back into direct employment. Labour costs would rise because it costs contractors more to employ people directly.