Industry鈥檚 composite companies likely to be early victims of Treasury鈥檚 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鈥檚 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鈥檚 鈥渃omposite companies鈥� 鈥� 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鈥檚 clampdown was the bonus schemes prevalent in the City, the move would also affect composite companies.

She said: 鈥淭he government is clearly not content with composite companies, and it鈥檚 as if they are gradually tightening a rope around them. PAYE schemes yield large amounts of tax on a regular basis, so it won鈥檛 stand for schemes that undermine this.鈥�

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鈥檚 statement: 鈥淚ts tone is surprisingly unpleasant for a government associated with being mealy-mouthed.鈥�

Bridge said she foresaw a drop in membership of composite companies. She said: 鈥淭hose 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.鈥�

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: 鈥淲e have been urging the treasury to clampdown on tax avoidance for some time. Workers should be employed directly and participate in the appropriate initiatives.鈥�