Composite company claims

giant, a firm which develops managed solutions for freelancers, has advised freelancers that they are better off operating through a composite company rather than owning their own business.

giant, which operates managed companies or composites on behalf of freelancers, claimed that IT contractors are likely to be financially better off as a shareholder in a third party managed company than operating through their own limited company.

The company explains that a managed or composite company is a limited company administered by a third party, usually a specialist accounting firm.

The announcement from giant, which claims to lead the way in managed services for freelancers said: "A contractor that becomes a shareholder of a managed company may save at least £1,000 annually in IR35 insurance and contract review costs."

giant makes its case by claiming that IR35 insurance can be a costly exercise for freelancers operating alone who want to protect themselves against the cost of professional fees, tax, interest and penalties arising from an Inland Revenue investigation into their status.

According to giant, limited company contractors have to buy IR35 insurance for the entire tax year and pay for an average of two contract reviews annually (which it estimates costs between £200 and £300 for an IR35 contract review). If their contract straddles a change of tax year they will also be required to purchase cover for an additional tax year.

Matthew Brown, Managing Director, of giant group plc, said: "Managed companies can offer cheaper insurance because the volume spreads the risks for the insurer allowing it to provide an exceptionally high level of cover at a much cheaper rate.

"Recent high profile IR35 cases demonstrate the Inland Revenue’s determination to target contractors.

"All contractors appear at risk of falling foul of an Inland Revenue investigation into their employment status but insurance can provide them with all the financial benefits of passing IR35 without any financial risk."

The most recent high profile case has been the failed High Court Appeal in the Gordon Stutchbury (Synaptek case) which some experts believe should never have gone that far, as overall there was more to lose than there was to gain.

giant and PCG giant's announcement comes within days of the Professional Contractors Group (PCG) issuing a newsletter that it was pleased to announce that giant was one of its three new affiliate suppliers of members' services which cover a range of valuable business and financial services.

This move by the PCG to develop closer ties with specialist commercial groups is a change for the trade association. The PCG's website says that As a group it (PCG) is independent of any ties to either agencies or any of the specialist contracting accountants. While these other groups have contributed to the debate their interests and loyalties are inevitably divided as they seek solutions which protect their commercial interests - interests which are not always the same as those of contractors themselves.

The announcement of the tie-up with giant in PCG's newsletter contains the same description of services provided by giant as its own press statement about freelancers using managed companies rather than their individual businesses.

Both announcements said: giant group was founded in 1992. giant leads the way in developing managed services for freelancers. It has two fully interactive managed payroll services, giant powerhouse and giant strongbox. They provide freelancers with higher take home pay due to generous expense allowances and tax-efficient payment methods; daily payrolls; personal web-based portals; inclusive business insurance; money-back service guarantees; and personal client service managers. In addition, giant powerhouse offers free contract reviews and exclusive insurance against the risks of failing IR35.

What it means for freelancers?

Operating within a composite is one of several methods which freelancers can use when structuring their operating procedures.

Other methods include:

• operating as your own limited company;
  
• being a PAYE agency employee;
  
• being part of an umbrella company;
  
• being a self-employed sole trader.

There are advantages and disadvantages to all methods. Freelancers should ensure that they have taken expert advice on which option is suitable for them and are fully aware of all the possible pit-falls which could lie ahead.

UKTECH's IR35 expert, Kevin Miller, FCA, said: "Buying some insurances and contract reviews could cost freelancers £1,000 or more, but there are other comprehensive products on the market for considerably less. However, freelancers need to bear in mind that the tax liability cover referred to by giant was usually dependent on passing a contract status review. This might be made more difficult because there was a risk that using a composite or 'managed solution' could significantly weaken the freelancer's 'in business on their own account' credentials, which remain an important factor in the freelancer's overall status assessment. Given that many agency contracts are, at best, borderline self employment, the 'in business on your own account' factors can be crucial in supporting the freelancer's status as self employed and outside IR35.

"Losing this element of the status 'picture' could mean that the freelancer is more likely to be judged to be caught by IR35 under the contract reviews. Hence using such managed services or a composite might cost the freelancer a great deal in additional taxes that might not be covered by insurance policies. This is in addition to the actual costs of using the managed service, which could absorb most if not all of the savings on insurance and contract review costs.

"Finally, I have some concerns that, while there might be reduced insurance costs initially, because the risk was spread over a larger pool of freelancers, the insurers might find that their claims experience is adversely skewed. This could happen because, while the pool is larger, it could be made up of freelancers who share a similar risk profile (for example, a preponderance of new freelancers with little business history or background) and who are all relying on the same managed service and contract review system. This could leave the insurers more exposed to claims with adverse effects on future costs or on the insurer's attitude to accepting claims. Time will tell."