SELF EMPLOYMENT

HC Deb 08 July 1986 vol 101 cc218-28

`(1) No person shall be subjected to tax under Schedule E of the Income and Corporation Taxes Act 1970, where that person is employed otherwise than under a contract of employment and notice to that effect has been submitted to Her Majesty's Inspector of Taxes. (2) In any determination of employment or self-employment status hereunder submission of such notice shall be conclusive evidence of self-employed status save where General Commissioners or Special Commissioners, on application by Her Majesty's Inspector of Taxes, shall determine that the taxpayer is an employee. (3) No such determination by General Commissioners or Special Commissioners shall be made unless:

1. (a) the taxpayer gains earnings from one single employer under one contract of employment only; and
2. (b) such a contract of employment is evidenced in writing; and
3. (c) the taxpayer has the right under his contract of employment to be reimbursed with authorised out of pocket expenses.'—[Mr. Watts.]

Brought up, and read the First time.

7 pm

Mr. John Watts (Slough)

I beg to move, That the clause be read a Second time.

You will recognise the pedigree of the new clause, Mr. Speaker, because of its marked similarity to the Right to be Self-Employed Bill introduced by my hon. Friend the Member for Stirling (Mr. Forsyth) under the ten minutes rule on 4 February this year. Your will recall that the Bill received its First Reading by a majority of 174 to 125, which shows the widespread concern in the House about the need to clarify the status of the self-employed and, indeed, the need to encourage the further growth of self-employment.

There has been a welcome development in that area. Since 1970 the numbers of self-employed have increased by 700,000 to a new total in excess of 2.5 million, or one in 10 of the employed population—the highest level for 60 years. That growth has been encouraged by various measures promoted by the Government, notably the enterprise allowance. It has also been helped by the reduction in national insurance contributions for the self-

I believe that the growth of self-employment also reflects a substantial change in attitude and a far greater willingness to create a job for oneself. Earlier, the hon. Member for Sedgefield (Mr. Blair) referred to many of his constituents using redundancy money to set up their own businesses. Those people are the new self-employed —those who go out and make jobs for themselves if nobody else will make a job for them.

Further growth of self-employment is obstructed unnecessarily by the arcane way in which income tax operates, and, in particular, by the difficulty that the self-employed can face in establishing their self-employed status. The new clause seeks to provide a simple mechanism whereby self-employed status can be established. Subsection (1) states that schedule E would not apply to anyone where that person is employed otherwise than under a contract of employment and notice to that effect has been submitted to Her Majesty's Inspector of Taxes. The procedure for the self-employed person is simple. He has merely to notify Her Majesty's inspector of taxes that he is self-employed. If we were to leave it at that, I acknowledge that the procedure could be open to abuse. People who were not self-employed might claim that status in the belief that it would confer on them certain advantages. Therefore, subsection (2) makes the notice given to Her Majesty's inspector of taxes conclusive evidence of self-employed status, unless the inspector makes an application to the general commissioners or special commissioners, and, on the inspector's application, they determine that the taxpayer is not self-employed, but an employee. We have the balance there.

The self-employed person can make a claim to be self-employed and notify the Inland Revenue that that is so, but the Inland Revenue has the opportunity to challenge that if it does not believe the assertion to be in accordance with the facts. The matter is determined conclusively by the commissioners. It is right that there should be that independent adjudication where there is a dispute between the Inland Revenue and the taxpayer.

Subsection (3) seeks to define an employee as a taxpayer who gains earnings from one single employer under one contract of employment only". That contract must be evidenced in writing, and the taxpayer must be entitled under his contract of employment to be reimbursed … out of pocket expenses. It is just possible that the definition of "employee" embodied in the new clause is not perfect and that further refinements would be needed before the scheme that I have outlined could operate without giving rise to a serious risk of abuse. I am sure that if there is any imperfection in the definition in the new clause, when my right hon. Friend the Financial Secretary replies to the debate, he will be quick to draw it to my attention and to suggest a constructive way in which that problem can be overcome.

I hope that there will be general recognition of the need for a method, such as I have proposed, whereby a taxpayer can establish his status as a self-employed person. At present there is no clearance procedure. There have been cases in my constituency — no doubt other hon. Members can cite similar instances in their constituencies —where taxpayers have carried out work as subcontractors for local businesses in the belief, common to the taxpayer and the company, that they were entitled to be treated as self-employed. Then, some time after the event —perhaps when those arrangements have subsisted for a year, 18 months or two years—along comes the Inland Revenue, saying, "No, you are not self-employed. You are an employee, and we will treat you as an employee from the time when you first started to treat yourself as self-employed."

It is not satisfactory that matters should reach that stage. Such problems would be resolved if the new clause, or something similar to it which was based on its underlying principles, were embodied in our tax law. Thus, taxpayers could establish their right to be treated as self-employed by a simple means of notification. The onus would be upon the Inland Revenue to challenge that claim if it seemed unjustified. Ultimately the status would be determined by the independent commissioners. That seems to me to be a good scheme.

Even if the precise form of the new clause does not commend itself to my right hon. Friend, I am sure that, as a staunch supporter of the enterprise culture, the principle will appeal to him.

Mr. Patrick Thompson (Norwich, North)

I am grateful for the chance to speak in support of new clause 11.

As a Member of Parliament in Norwich, I am continually called upon to help or advise small business men or people who aspire to run a business of one sort or another. In every case, the person is confused by our system of income tax legislation and value added tax legislation. Indeed, in our local newspaper during the past 24 hours an Inland Revenue official was quoted as saying, "You cannot expect the system to be fair," or words to that effect. I hope that that is not a correct report, but that is what was said in the paper.

I know of cases of people being forced to operate PAYE in unsuitable circumstances. That is the very point that is addressed by new clause 11. I can best illustrate it by quoting from two letters that concern a constituency case. The first is a letter from Her Majesty's inspector of taxes in Norwich, dated 7 March. He says: Dear Sir I refer to our previous correspondence concerning the agency operated by yourself. It is my opinion"— note the word "opinion"— "that this agency is caught"— note the use of the word "caught" "under Finance (No. 2) Act 1975 Section 38 and as such all the earnings of the relief workers provided by the agency are chargeable under Schedule E. In that case, I had already been in correspondence with my constituent. Not surprisingly, he was distressed by the outcome. He wrote me a letter from which I shall quote briefly because it illustrates perfectly the need for new clause 11. He starts by saying: If you remember my problem concerning my HGV relief driving service with the DHSS and now the Inland Revenue, I have now been given a date to start a PAYE system which I cannot do, as I have no regular work from the companies I deal with. This means that myself and about eight self employed men will now be unemployed. He went on to say: I feel very sad to think that I built this business up from nothing to finding work for 9 men and be closed down with the people who should be helping me find work. He went on to make complimentary remarks regarding the Prime Minister's belief that people should be able to build up their own businesses and thrive in this way. In conclusion, he states: One of these DHSS inspectors told me they would rather see men unemployed than working through my Agency. The reason being that they are losing revenue for these men and there are too many self-employed men having a go on their own. That case illustrates perfectly the need for new clause 11 and the reason why I supported the ten-minute Bill introduced by my hon. Friend the Member for Stirling (Mr. Forsyth).

I should like to quote from a letter from my right hon. Friend the Secretary of State for Transport when he was the Financial Secretary to the Treasury: For example, I am advised that it is at least arguable that the definition in your Bill"— that is the ten-minute Bill— "would treat as 'self-employed' the 100,000 or so school teachers marking examination papers. I can comment on this because I was a school teacher and was marking examination papers during the time that the change was made from self-employed status or schedule D to schedule E status. It seemed at that time to be a move in the wrong direction. Nothing that has occurred since has made me change my opinion. It is just another example of our extolling the virtues of people doing their own thing while the Inland Revenue, under its masters at the Treasury, do exactly the opposite.

It is time that the Government took on board the fact that what is happening on the ground does not always follow the rhetoric that we put forward, and it is time that we did something about that. There is too much bureaucracy and the system must be simplified for the benefit and expansion of small business, and the employment of people—which is what we all want—as well as bringing about a general decrease in irritation among the business community, especially those running small businesses.

There seems to be an order of batting in these matters. At the top of the tree and most favoured are the well-established business men, advised by accountants who make the maximum, obviously legal, use of the available allowances. Second, and quite a long way behind, come those who are on PAYE and who feel burdened by the fact that there is no way in which they can claim for allowable expenses. Teachers are right when they say it is almost impossible for them to claim any type of sensible allowable expense. They have a just grievance. Finally, right at the bottom of the tree—this is the point of new clause 11— are those who are trying to start up on their own, such as the man from whose letter I have quoted. He was trying to establish himself and take on casual work in the hope that it would lead to something better, like the building worker who operates on the 715, if he is lucky enough to get one and is able to overcome all the difficulties.

For the people in the third of my classifications the situation is almost intolerable. The Government should seriously consider the new clause and the Bill which preceded and inspired it. It is no good saying that this is a problem that we can address at some other time. It is at the root of what the Government are proposing, and we must do something about it as soon as possible.

With our present system of tax and social security, we are strangling the goose that will lay the golden egg. Priority should be given to this clause. It is even more urgent than tax cuts. Something must be done to remove the stranglehold of the complexity of the regulations as well as to cut taxation. I support new clause 11 with examples taken from my constituency, and I hope that it will find favour with my right hon. Friend the Financial Secretary to the Treasury.

7.15 pm

Mr. Michael Forsyth (Stirling)

I thank my hon. Friend the Member for Slough (Mr. Watts) for tabling the new clause. It is of fundamental importance and I believe that there is support from both sides of the House for the spirit behind it. Indeed, the ten-minute Bill received support from all parties.

Although the Government have had remarkable success in creating conditions for the growth of selfemployement, we must recognise that they started from a low base. There is considerably more scope for its development. Although my right hon. Friend the Financial Secretary to the Treasury may argue that at the moment every worker has the right to be self-employed, in practice, it is a heavily qualified right. There is considerable uncertainty about where the courts will draw the line between employment and self-employment. The uncertainty is compounded by what is clearly a direct interest on the part of the Inland Revenue to minimise the numbers of self-employed taxpayers. The considerable resources which are available to the Revenue to act on the conduct of appeals adds to the risks for self-employment both for the worker and for the client.

My right hon. Friend will no doubt be concerned about the costs of implementing the new clause. If there were a substantial expansion in the numbers of self-employed, which all of us on this side of the House would welcome, no doubt he would have to consider the financial implications. Certainly there would be a reduction in the national insurance revenue. That reduction would almost be matched by a reduction in liabilities on the fund. An increase in the numbers of self-employed would mean that there were fewer people claiming benefits. On the supply side, more efficient work patterns would undoubtedly increase economic performance and general tax revenue.

Many of the additional expenses which would be allowed under schedule D, such as advertising, secretarial assistance and professional fees, would represent additional taxable income in other taxpayers' hands. My hon. Friend may feel that this new clause is not as well drafted as it might be, but I hope that he can say that he will try to meet its spirit by establishing a clear definition of self-employment for all tax, national insurance and employment law purposes. That would go a long way to dispelling any remaining suspicions there might be — they come from unexpected quarters, the National Federation of Self-Employed and Small Businesses, the Institute of Directors and the Confederation of British Industry—that the Government are not as committed to encouraging self-employment as they profess to be.

I believe that the new clause would do an immense amount to reduce the burdens on business both for the self-employed and, depending on one's perspective, the employer's clients. Much uncertainty has resulted in people being reclassified from the status of self-employed to employed. It has also resulted in employers finding themselves liable for national insurance contributions and tax which they had no reason to suspect they would have to meet. In one case that resulted in substantial financial difficulties and premises had to be sold to meet financial obligations. The new clause will enable the tax position to be determined simply and immediately at the time of contract. It would reduce the risk to businesses of incurring costs in arguing their position with the commissioners.

My hon. Friend the Member for Norwich, North (Mr. Thompson) mentioned examination markers. I have also been in correspondence with my hon. Friend the Minister and his predecessor. It emerged that the 100,000 examiners who were reclassified from schedule D to schedule E could not be regarded as small business men in business on their own account, so the Revenue was justified in singling out that group. Had those examination markers bothered to read the leaflet "Employed or Self Employed" produced by the Department, and had they answered the questions which help one to decide whether one is employed or self-employed, they would have found that they fitted the criteria for the self-employed more closely than those for the employed. Of the seven questions to which an employee would tend to answer yes, examination markers would definitely answer no to five of them and might answer no to the questions about the right to substitute, depending on the contract, and about working wholly or mainly for one employer, depending on the number of boards worked for and the relative duration and size of contracts.

I also understand that, in determining whether those examiners were to be reclassified, the Inland Revenue had to consider the contractual arrangement case by case, and that in some cases the matter could be resolved only by reference to the wording of university statutes under which the particular examining board was established. The tax status of the examiners was far from clear, and their case highlights the limitations of leaflet IR56 which the Department produced to make the position clear.

I suspect that the background to this has nothing to do with employment status and everything to do with ensuring that earnings are declared and taxed. I am sure that my hon. Friend the Minister would not argue that examination markers may not have declared their earnings which is why it is necessary to relassify them, because that has nothing to do with the appropriate tax status for their earnings.

There is a clear need to change the burden of proof. At present tax inspectors can make arbitrary decisions about whether one is self-employed, and the literature from the Department leaves room for doubt. If we could change the burden of proof so that the onus was on the inspector to argue that the individual was not entitled to self-employed status, it would be a major step forward.

If we could make it easier for people to be self-employed, we would at a stroke achieve much of what the Government say they want to achieve in unburdening businesses. When employers take on people to carry out functions as self-employed people under contract, they do not add to their turnover, which means that they may not be required to register for VAT, and that the number of their employees who must be covered by health and safety at work regulations, employment protection and all the other burdens which add to employers costs will not increase. It would enable employers to provide employment at a lower price without depressing wage levels.

In short, as my hon. Friend the Member for Norwich, North pointed out, it enables us to put into practice and to establish the conditions to create the enterprise culture, the standing on one's own two feet and the entrepreneurial zeal which is so much a part of the—I hesitate to use the word "rhetoric" — philosophy and objectives of the Government. Although my hon. Friend the Minister may not be able to accept the new clause tonight, I hope that he will assure us that he will do everything possible and that he recognises the genuine problem which requires his attention.

Mr. Hanley

I wish briefly to support the amendment in the light of the cases of some of my constituents. A large number of people in my constituency are employed in the film, television and radio industries. During the past four years many have come to me, not only because I am a Member of Parliament, but because I am a chartered accountant and may understand their tax affairs on a free basis—many of them could not afford professional help — when they have found themselves arbitrarily reclassified as being in schedule E. That has often caused great hardship to them and their families. Moreover, in many cases reclassification has been so arbitrary as to be almost illogical.

On 4 February my hon. Friend the Member for Stirling (Mr. Forsyth) mentioned that more than 7,000 self-employed taxpayers engaged in those industries between 1979 and 1983 were reclassified as schedule E, and that a further 100,000 people engaged in part-time or occasional employment were also reclassified by the Inland Revenue during that period. No one would defend those who abuse the schedule D system by trying to pretend that they are self-employed when they are employed. However, artists and technicians based at an umbrella studio used by different production companies—perhaps even one after the other—often work for separate companies and there is no guarantee of continued employment from one company to another. They are hired by film companies although they happen to work within one building. Those people have been shabbily treated. It is greatly desirable that the Inland Revenue should use a little more discretion in reclassifying individuals as schedule E, particularly because of its sudden financial effect on family life.

The Inland Revenue is tightening up on certain individuals who have paid tax under schedule D to such an extent that it is being increasingly grossly unfair. It is claiming that expenses cannot be proven for past years and, clearly, they often cannot be proven when the expenses were estimates. It is imposing back taxes and heavy penalties, and some of my constituents have suffered the loss of large sums as a result. Therefore, I ask my hon. Friend the Minister to consider whether he is being fair to self-employed people.

Mr. Norman Lamont

I was extremely interested to hear the speeches of my hon. Friends the Members for Slough (Mr. Watts) and for Stirling (Mr. Forsyth) because one of my first tasks as Financial Secretary to the Treasury was to read the file of letters which my hon. Friend the Member for Stirling had written on this subject. My hon. Friends have fought a doughty campaign with the Right to be Self Employed Bill and the Finance Bill. I certainly recognise, particularly from the speech of my hon. Friend the Member for Norwich, North (Mr. Thompson), that there are some genuine anxieties about the classification of the self-employed. I hope that I shall not shock my hon. Friends by declaring immediately that, although I was extremely intrigued by their correspondence, I remained unconvinced by it, which is why I was looking forward greatly to the debate. I wondered whether I would be persuaded by them, but I am not.

My hon. Friend the Member for Norwich, North made some powerful points and I do not doubt that he represented a genuine sense of grievance. In view of what he and my hon. Friend the Member for Richmond and Barnes (Mr. Hanley) said, I undertake to look at certain matters. I shall certainly wish to consider the implications of the cases that have been mentioned, as well as the general principles outlined by my hon. Friends.

7.30 pm

Under the new clause, the individual could, by simple notification, elect to be self-employed. That of itself would be sufficient to establish self-employed status unless the commissioners determined that the individual was an employee. As drafted, the clause would determine status only for tax purposes, although I understand that the intention is that, once self-employed status had been elected, other matters, such as national insurance contributions, would be affected. Similarly, as a self-employed person, the individual would give up entitlement to unemployment benefit and the earnings-related additions to other benefits, and of course he would no longer he covered by legislation on employment protection or health and safety at work.

In principle, it is right that people should be able to choose to be self-employed. I do not take issue with that principle. The clause is not, however, about choosing self-employment; it is about choosing self-employed status for tax and other purposes, even though in reality the engagement in question may have all the attributes of employment.

I am sympathetic to what my hon. Friends have said, but I am puzzled as to why they should wish to go so far and to give a choice almost regardless of any objective test. I am certainly prepared to look at the working of the system and at individual cases, but I am surprised that my hon. Friends should wish there to be a choice regardless of any test of objective considerations. I would not say that the test is wonderful or that it has been perfectly administered, but I am surprised at the lengths to which my hon. Friends take their argument.

It is already open to both parties to any engagement to arrange the terms so as to make the engagement one of self-employment rather than employment. Whether self-employment is achieved in a particular case will then depend upon the specific terms of the working relationship of that engagement. When in doubt, the Inland Revenue on the tax side and DHSS on the national insurance contributions side look to established case law for guidance. The courts have laid down a number of criteria, and the Revenue—as my hon. Friend the Member for Stirling acknowledged—has produced a leaflet, intended only as general guidance. However, the key question that it poses is whether the individual is in business on his own account.

The Government are committed to the growth of self-employment, and we have done much to encourage people in that direction. My hon. Friend the Member for Slough pointed out that since we took office in 1979 the number of self-employed people has risen by well over a third from 1.9 million to 2.6 million. We are extremely pleased to see that growth continuing. We welcome measures that will increase genuine self-employment. However, I do not believe that the present proposal is precisely targeted on that. I think that the main effect of the new clause would be to enable a large number of ordinary employees simply to change their status for tax and other purposes without necessarily changing their present work pattern in any way, or taking risks. Moreover, if enough people elected to change their status, there could be a heavy cost in reduced tax and national insurance contributions. My hon. Friend the Member for Stirling considers that the reduced liabilities in terms of reduced entitlements to benefit would offset that effect. I do not believe that would be so. Many people, even if they did not qualify for national insurance benefit, would still be entitled to supplementary benefit.

Not everyone who was able, under the clause, to elect for self-employed status would necessarily do so. As I have just mentioned, there would be some disadvantages to consider. However, the cost in reduced national insurance contributions could be very substantial.

Would the benefits arising from the proposal justify the cost? I do not believe so. The clause would allow virtually anyone—for example, a civil servant—to achieve self-employed status. I do not believe that much would be achieved by that in terms of increasing employment, strengthening the enterprise culture or encouraging risk taking.

Mr. Watts

I am willing to concede that the new clause may be widely drafted and would allow too easy access to self-employed status, but I cannot see how a civil servant could take such status under the new clause. When he applied to the commissioners, they would surely find that he was a taxpayer who gains earnings from one single employer under one contract of employment only; and (b) such a contract of employment is evidenced in writing; and (c) the taxpayer has the right under his contract of employment to be reimbursed with authorised out of pocket expenses. If the commissioners so found, the civil servant could not claim to be self-employed.

Mr. Lamont

I hope that I am not caricaturing my hon. Friend's argument. It is certainly not my intention to do so. However, I was advised that such is the effect of the new clause.

Mr. Patrick Thompson

indicated dissent.

Mr. Lamont

My hon. Friend the Member for Norwich, North shakes his head. I can only say that having read the letters written by my hon. Friend the Member for Stirling, I did not think that that view was a caricature.

I emphasise that I wish to meet some of the genuine problems and anxieties that have been identified. However, I could not accept the new clause as drafted. I believe that, as drafted, it will have the effect that I have described.

Mr. Michael Forsyth

My right hon. Friend is caricaturing the new clause to some extent. We are trying to establish the principle that one can elect to be self-employed and that it is for the tax inspector to show why one should not be. At present, the individual has to go capin-hand to the tax inspector, who makes an arbitrary decision. My hon. Friend says that the criteria are clear and that there is plenty of case law. For the average small business man— let alone the average tax inspector —the situation is by no means clear. Some extraordinarily diverse decisions have been made. We are asking for clearly defined criteria. At present we have none. Recourse to case law is the basis of the present uncertainty.

Mr. Lamont

I certainly do not wish to caricature the new clause, but I firmly believe that it would go rather further than I now understand my hon. Friends would intend. I do not say that there are no other matters that we could consider. I do not say that the application of the present law causes no grievances to which we should address our minds. However, the new clause goes too far. It would make possible a cosmetic adjustment to self-employment rather than promote the real growth in self-employment that we all want. We want a framework that will easily and properly allow a genuine growth in self-employment. What we do not want — and this is the effect of the amendment — is a system which would merely allow people to be reclassified when, on objective standards, they were not self-employed. That is the effect of the new clause.

I stress that I have heard what my hon. Friends have said about how the present system operates. I am new to considering the issues raised here, but I undertake to look seriously at them. However, new as I am, I could not accept the new clause as drafted. I hope that, on the basis of what I have said, my hon. Friends will withdraw the motion. My hon. Friends the Members for Stirling and for Slough are great campaigners. I have no doubt that the campaign will go on, and who knows who might be converted.

Mr. Watts

I do not wish to push to a vote a new clause which might open the floodgates. It is not our intention to do that. I take some comfort from what my right hon. Friend has said, particularly about looking at some of the problems that have been highlighted. Perhaps when we come to the Finance Bill next year we shall have a go with something rather more tightly drafted. We might even see the skill of the Treasury draftsmen with the Government coming forward with amendments to the law to meet some of the objectives that we have described.

I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.