Composite structure

[BoredBloke]

But that is a different matter. I know it is an artificial structure to maximise the take home. The point I was making was how two organisations who both have shareholders (who may be employees of the company) are treated differently. The fact that one is allowed to distribute its profits to its shareholders and the other isn't.

[Darren@UptonAccountants]

I think the easiest distinction is that the employee in EDS (of which there will be comparatively few that hold shares) will benefit from the success of the Company as a whole. Also, comparatively little of the income will be paid via dividends.

Contrast this with composite employee who gets most of their income in dividends, who's dividend is directly related to what he/she brings in, and who cannot profit from the success of the Company as a whole.

Blimey Simon, cracking definition! Which text book did that come from!

[tim123]

"I also think that Tony's analogy between an EDS employee buying an EDS share or two, and someone working through an MSC, is so ridiculously stupid that I cannot believe a businessman might think that they are the same"

I never said they were the same. A share is a share is a share and it gives rise to a percentage of the organisations profits. The point I was trying to make is why is the employee of one organisatoin allowed to buy a share and benefit from it while the employee of another is not.

I think the answer is self evident.

But for those who can't see it, it's because:

One of the shareholders has 100% influence over how much of the company's money is going to be distributed as a dividend, and the other shareholder has 0.000001%[1] influence over how much of the company's money is going to be distributed as a dividend.

tim

[1] I've probably missed out a few zeros

[IR35 Avoider]

Does that matter if the shares held reflect the contractors rate. All the money from the work done by various contractors would go into a central account and paid out in line with the share ownership.

The IR35 legislation was designed to catch us and not the EDS person, and the distinction (in law) is whether or not what you get is highly correlated with what you bring in. The EDS employee will continue to get salary and dividends even while he's on gardening leaving for a year. And if for a limited period (say 6 months) he brings in £4000 per day instead of his usual £1000, he may well get nothing extra in his pay packet for doing so. This is complete different from a contractor who gets what he brings in less a rake-off for corporation tax and expenses (which include the accountant/scheme organisers cut.)

[VectraMan]

Dividends are capitalism's reward for investing capital that is needed for a commercial enterprise. Companies are the way to organise this enterprise, and shares in the company represent the capital that was invested.

Put in capital that is needed for a business; get back a share of the profits.

If, like mine, your Ltd Co does not need any capital to run its business, it would be dishonest to pay dividends on the so-called capital, when the capital did not make the profit in the first place. In such a case it is not Dividend Return on Capital Invested, it is merely disbursement of money earned by work, to the person who did that work, i.e. Wages.

Seems to me that distinction is based on the need for startup capital for equipment etc., i.e. manufacturing. What if I was to spend 6 months developing a software product, and drawing no salary whilst I was doing it? I could setup a distribution deal with a publisher meaning no capital investment was required to start selling the product. Am I still not entitled to dividends, or does the time equate to capital investment? I'm sure people would agree the latter.

Is that very different from what I'm doing now, which is working for a salary of approximately one quarter of what I'd expect for doing the same role as an employee? I'm only investing that capital because I want the business to succeed.

If money earned as a contractor is equivalent to wages, then it follows that you'd pay that money to yourself as you earnt it and would only pay whilst you were working. If you plan ahead and hold back money so that you can continue to pay yourself a salary and any other business costs into the future even if there's no work, then that's being in business, and any extra money that the business makes beyond what is required to cover the costs is called profit.

[BoredBloke]

Tim, the point I was making was a simple one. That we now have two companies who both have shareholders (possibly their own employees) One can pay a dividend to their share holders and one cannot. I'm not interested in if they are an artificial means of maximising the take home pay or how ethical/fair they were. What I'm saying is that in each case, each company has shareholders. It now looks like the govt want to determine that under their view of the world, some companies (the ones they approve of) are allowed to distribute profits to their shareholders while others cannot. While the target here may or may not be the right one, what is to stop them extending this to other companies they disapprove of.

[tim123]

Tony,

The point I am making is a simple one.

I think that you are deliberately not seeing the, very significant difference, between these companies in order to make a political point.

tim

[BoredBloke]

No I'm not! I'm not interested in MSC's as such as I don't use them. The point I was making was to do with how the govt can dictate what can be done with a share. The way I understood things, a share was a share and it entitled you to certain things. One of these was a share in the profits from the company concerned. If they can instantly decide that MSC shares can only distribute profits subject to PAYE and NIC, then they can do this to anyother company which they don't approve of.

[expat]

No I'm not! I'm not interested in MSC's as such as I don't use them. The point I was making was to do with how the govt can dictate what can be done with a share. The way I understood things, a share was a share and it entitled you to certain things. One of these was a share in the profits from the company concerned. If they can instantly decide that MSC shares can only distribute profits subject to PAYE and NIC, then they can do this to anyother company which they don't approve of.

Yeah, well I do have a political point to make. The government wants us to be employed, so they won't let us be self-employed, but it's harder to stop us becoming Ltd Cos so they just make it as if we weren't.

Instead of stopping us from being self-employed, and forcing us to become Ltd (if we don't want to be employed), they should do the opposite: put up barriers to being Ltd, but let us be self-employed. then there would be no dividends.