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Composite service companies exist in a number of different areas of business, including: construction, IT, teaching, medicine and accountancy.
The Revenue said in its IR60 bulletin that such companies would need to consider how IR35 applies to them, regardless of how they are organised.
It added: '[IR35] applies equally whether the service company employs only one or two workers or whether, as a composite service company, it employs many workers.
'In some cases, the number of employees/shareholders in a composite service company exceeds 20. This makes no difference to the applicability or otherwise of the ‘service company’ legislation. The service company legislation will apply in any situation where the relevant conditions are met and the worker either holds five per cent of the shares in the service company or receives payments that ‘could reasonably be taken to represent remuneration for services provided by the worker to the client’.
'We are monitoring compliance with the ‘service company’ legislation as part of our general programme for supporting voluntary compliance and for tackling non-compliance.'
According to the Revenue, composite companies usually employ workers and supply them to clients, sometimes using recruitment agencies. The employees are then paid a small salary for their work by the composite company, usually slightly above the minimum wage. However, the employees are also shareholders of the composite company, and the employee’s shareholding entitles them to receive dividends based on the amounts the company receives for their work.
The Revenue report continues that these dividends will supplement, often substantially, the small amount the employee is already receiving from the composite service company in wage or salary payments. Dividends may be paid on a monthly or weekly basis.
The Independent Computer Contractors (ICC), part of the British Computer Society, called for legislation preventing the use of composite companies for the provision of services when IR35 was first announced in 1999.
The ICC released a statement at the time which specified: 'If this type of corporate entity is to be allowed (with different classes of shareholding), conditions for composite company formation should be rigorously defined and enforced.’
Kevin Miller, tax expert, said: "This only confirms what we have said in Shout99.com seminars for the last couple of years. Composite companies by themselves do not get you out of IR35, even if the individual shareholding is less than five per cent.
"Ultimately, the only real protection is to have properly drawn up contracts and working relationships that clearly meet the case law tests of what is a contract for services - self employment."
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Richard Powell, © Shout99.com 2002
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