HC Deb 19 April 1994 vol 241 cc746-53

'.—(1) After section 203B of the Taxes Act 1988 (which is inserted by section 125 above) there shall be inserted—

"PAYE: employee of non-UK employer.

203BB.—(1) This subsection applies where—

  1. (a) an employee during any period works for a person ("the relevant person") who is not his employer;
  2. (b) any payment of, or on account of, assessable income of the employee in respect of work done in that period is made by a person who is the employer or an intermediary of the employer;
  3. (c) PAYE regulations do not apply to the person making the payment or, if he makes the payment as an intermediary of the employer, the employer; and
  4. (d) income tax is not deducted or accounted for in accordance with the regulations by the person making the payment or, if he makes the payment as an intermediary of the employer, the employer.

(2) Where subsection (1) above applies, the relevant person shall be treated, for the purposes of PAYE regulations, as making a payment of the assessable income of the employee of an amount equal to the amount determined in accordance with subsection (3) below.

(3) The amount referred to is—

  1. (a) if the amount of the payment actually made is an amount to which the recipient is entitled after deduction of any income tax, the aggregate of the amount of that payment and the amount of any income tax due; and
  2. (b) in any other case, the amount of the payment actually made.

(4) In this section and sections 203BC and 203BD "work", in relation to an employee, means the performance of any duties of the office or employment of the employee and any reference to his working shall be construed accordingly.

(5) Subsections (3) and (4) of section 203B apply for the purposes of this section as they apply for the purposes of that section.

"PAYE: employee non-resident, etc.

203BC.—(1) This section applies in relation to an employee in a year of assessment only if—

  1. (a) he is not resident or, if resident, not ordinarily resident in the United Kingdom; and
  2. (b) he works or will work in the United Kingdom and also works or is likely to work outside the United Kingdom.

(2) Where in relation to any year of assessment it appears to an officer of the Board that—

  1. (a) some of the income of an employee to whom this section applies is assessable to income tax under Case II of Schedule E, but
  2. (b) an as yet unascertainable proportion of the income may prove not to be assessable,
the officer may, on an application made by the appropriate person, give a direction for determining a proportion of any payment made in that year of, or on account of, income of the employee which shall be treated for the purposes of PAYE regulations as a payment of assessable income of the employee.

(3) In this section "the appropriate person" means—

  1. (a) the person designated by the employer for the purposes of this section; or
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  2. (b) if no person is so designated, the employer.

(4) An application for a direction under subsection (2) above shall provide such information as is available and is relevant to the giving of the direction.

(5) A direction under subsection (2) above—

  1. (a) shall specify the employee to whom and the year of assessment to which it relates;
  2. (b) shall be given by notice to the appropriate person; and
  3. (c) may be withdrawn by notice to the appropriate person from a date specified in the notice.

(6) The date so specified may not be earlier than thirty days from the date on which the notice of the withdrawal is given.

(7) Where—

  1. (a) a direction under subsection (2) above has effect in relation to an employee to whom this section applies, and
  2. (b) a payment of, or on account of, the income of the employee is made in the year of assessment to which the direction relates,
the proportion of the payment determined in accordance with the direction shall be treated for the purposes of PAYE regulations as a payment of assessable income of the employee.

(8) Where in any year of assessment—

  1. (a) no direction under subsection (2) above has effect in relation to an employee to whom this section applies, and
  2. (b) any payment is made of, or on account of, the income of the employee, the entire payment shall be treated for the purposes of PAYE regulations as a payment of assessable income of the employee.

(9) Subsections (7) and (8) above are without prejudice to—

  1. (a) any assessment in respect of the income of the employee in question; and
  2. (b) any right to repayment of income tax overpaid and any obligation to pay income tax underpaid.

"PAYE: mobile UK workforce.

203BD.—(1) This subsection applies where it appears to the Board that—

  1. (a) a person ("the relevant person") has entered into or is likely to enter into an agreement that employees of another person ("the contractor") shall in any period work for, but not as employees of, the relevant person;
  2. (b) payments of, or on account of, assessable income of the employees in respect of work done in that period are likely to be made by or on behalf of the contractor; and
  3. (c) PAYE regulations would apply on the making of such payments but it is likely that income tax will not be deducted or accounted for in accordance with the regulations.

(2) Where subsection (1) above applies, the Board may give a direction that, if—

  1. (a) any employees of the contractor work in any period for, but not as employees of, the relevant person, and
  2. (b) any payment is made by the relevant person in respect of work done by the employees in that period,
income tax shall be deducted in accordance with the provisions of this section by the relevant person on making that payment.

(3) A direction under subsection (2) above—

  1. (a) shall specify the relevant person and the contractor to whom it relates;
  2. (b) shall be given by notice to the relevant person; and
  3. (c) may at any time be withdrawn by notice to the relevant person.

(4) The Board shall take such steps as are reasonably practicable to ensure that the contractor is supplied with a copy of any notice given under subsection (3) above which relates to him.

(5) Where—

  1. (a) a direction under subsection (2) above has effect, and
  2. (b) any employees of the contractor specified in the direction work for, but not as employees of, the relevant person so specified,
income tax shall, subject to and in accordance with PAYE regulations, be deducted by the relevant person on making any payment in respect of that work as if so much of the payment as is attributable to work done by each employee were a payment of assessable income of that employee.".' —[Mr. Dorrell.]

Brought up, and read the First time.

3.42 pm
The Financial Secretary to the Treasury (Mr. Stephen Dorrell)

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

Madam Speaker

With this it will be convenient to discuss also the following: Government new clause 9—PAYE regulations: past cases.

Government amendments Nos. 3 to 12.

Mr. Dorrell

The clause creates no new liabilities to tax. It contains provisions that will remove doubts that had arisen about the Inland Revenue's ability to collect tax under PAYE in certain circumstances.

The objective of new clause 9 is to put beyond any doubt the legal basis of the operation of PAYE in those circumstances in past years, following a recent court decision in the House of Lords.

New clause 8 has three objectives. First, it has been suggested that employers do not need to operate PAYE on the emoluments of employees or directors who come to work in the United Kingdom from overseas, if the exact proportion of their salaries and other payments that will be taxable is uncertain at the moment at which they are paid. The argument is that, when a payment of salary is made, the taxable proportion of it cannot always be ascertained precisely until later, usually after the end of the tax year, when the overall proportion of overseas and United Kingdom duties can be determined. It has been suggested that in such circumstances PAYE should not be operated on any part of the employee's salary, but that tax should be collected direct from the employee after the end of the tax year.

Clearly that would have unacceptable cash flow consequences for the Exchequer, possibly running into hundreds of millions of pounds, as well as a potential long-term loss of tax where the individual concerned has returned to his home abroad.

Mr. Geoffrey Hoon (Ashfield)

Will the Financial Secretary be explaining to the House the precise circumstances which have caused the new clause to be necessary? Will he be giving an explanation of the implication of the House of Lords decision so that we may all understand why the Government must bring forward the new clause at this stage?

Mr. Dorrell

As I told the House, the House of Lords, in the case of the Commissioners of Inland Revenue v. Herd, ruled that there was doubt about the right of the Inland Revenue to collect tax under PAYE where the proportion of an individual's remuneration taxable under United Kingdom law and the proportion taxable under foreign law was uncertain at the moment at which the payment was made. That state of affairs removed the power of the Inland Revenue to collect tax under PAYE. The House will recognise that that is not a sensible basis on which to proceed, and the purpose of new clause 8 is to remedy that situation and to put the law, in the classic phrase, back in the position in which it was always thought to have been.

The effect of new clause 8 is therefore to provide in the new section 203BC of the Income and Corporation Taxes Act 1988 that PAYE may continue to be applied in future to the emoluments of employees and directors who are either not resident or not ordinarily resident in the UK. New clause 8 also provides two further provisions: the new sections 203BB and 203BD, which replace an anti-avoidance provision currently provided in secondary legislation and which applies where an employee or a director is paid by someone other than the person for whom he or she works on a day-to-day basis. In such circumstances, the current PAYE regulations require the person for whom the employee works, rather than the person who pays them, to account for tax under PAYE.

The validity of the current regulation has never been formally challenged, but when the operation of PAYE on the emoluments of employees and others coming from overseas to work in the UK was being considered, and in the light of the recent court case to which I referred, we thought that it would be sensible to put beyond doubt the power of the Revenue to collect PAYE in the respect of those individuals. That is the effect of the new sections 203BB and BD provided in the rest of new clause 8.

New clause 9, as I have already said, confirmed the past year's validity of the regulation and the new sections which replace that regulation and ensure that the tax that has been collected through PAYE for years past was legitimately collected.

Mr. Nicholas Brown (Newcastle upon Tyne, East)

The Government clearly have a duty to protect the interests of the Inland Revenue and, for our part, Labour Members do not quarrel with that. As I understand the position as the Financial Secretary has stated it to the House, although the new clauses may seem complex, their purpose is to state the law as it was always understood to be.

It is not unusual in Finance Bills for Labour Members, even on Report, to make either a pre-emptive strike on future decisions of the courts or to clarify for the courts the Government's original intention in legislating. I understand that the threat of loss of revenue could be quite substantial, so I am sure that the Government are right to act in that way.

As the Financial Secretary has explained to the House, the principal concern seems to be with those who are either foreign nationals or who receive some substantial proportion of their total earnings from sources abroad. Therefore, there is some doubt as to the employers' liability to deduct PAYE from their earnings in Britain. It is certainly my view that there should be no such doubt and that the Government are proceeding in the right way.

However, I wish to raise a separate concern with the Financial Secretary that has been put to me and some of my hon. and right hon. Friends by the National Farmers Union of Scotland. It is worried that the enactment that we are considering will affect its responsibility to administer payments and remunerations to gang labour employed on estates in Scotland. My understanding of the situation—frankly, I am not a specialist in the area—is that, at the moment, the gang master is responsible for the deduction of tax and national insurance, not the farmer. The NFU's fear is that responsibility is being transferred to it. It does not necessarily follow from the Financial Secretary's explanation that that is the position. I hope that he will be able to tell the House what the position is as it pertains to gangs working on agricultural projects, especially as the law applies in Scotland.

Mr. James Paice (Cambridgeshire, South-East)

As the hon. Member for Newcastle upon Tyne, East (Mr. Brown) has said, this is not a matter for Scotland alone. The role of gang masters in agriculture, and especially in large-scale horticulture, is well known, particularly in the area of the fens in East Anglia up into Lincolnshire. In my constituency, and that of my hon. Friend the Member for Cambridgeshire, North-East (Mr. Moss), many growers use gang masters as a means of harvesting and packaging their crops. Only three years ago there was a voluntary agreement between the Inland Revenue and the industry to try to overcome the problems that are caused by a few gang masters who have not been presenting the necessary payments to the Revenue.

The great majority of gang masters are respectable individuals who run their businesses in all the ways in which we would wish them to do so. In so doing they fulfil their obligations. A few of them have been failing to do that and the voluntary agreement was targeted at them.

It was with considerable concern that growers in my constituency, and the NFU, found the new clause on the amendment paper. They saw it as a sledgehammer to crack a nut—in other words, a large piece of extra legislation to deal with a small problem. No one is pretending that there is not a problem in a few instances, but I am concerned that the Inland Revenue should not now seek to make all farmers and growers who use gang masters responsible for the tax and insurance liabilities of the people who happen to work on their premises, carrying out work related to their businesses.

It must be emphasised that farmers and growers do not employ the people who are brought to their premises by gang masters. They are not in charge of their day-to-day immediate work. They have no control over their terms and conditions. Such matters are decided by the gang master, who enters into a contract with the farmer to have a particular job of work carried out on the farm or the holding.

My hon. Friend the Financial Secretary said that the clause does not contain any new powers. He implied that the provision would not be used extremely rigorously. I note that "may" is used in terms of the proposed powers. I should like my hon. Friend's assurance that the Revenue will not turn to every farmer and grower who uses gang masters and tell them that they must be responsible for all the PAYE paperwork for every person who works on their land.

We are not talking about two or three people. In my constituency, there are growers who, through gang masters, may have several hundred people working on their land at any one time. To make the individual farmer or grower responsible would be a mammoth imposition, especially at this time of year, which is the beginning of the growing and harvesting season. To introduce such a burden now on farmers and growers would be something that they could well do without, particularly when they are facing immense competition from Spain in respect of several horticultural crops.

I urge my hon. Friend the Financial Secretary to assure me and those of my hon. Friends who have considerable constituency interests in this context that he will not allow the Inland Revenue to use the powers in the clause to bear upon the great majority of gang masters who carry out their obligations as we would wish. I trust that the farmers and growers who use gang masters will continue as they have in the past, with a voluntary arrangement whereby the gang master fulfils his obligations and provides the necessary returns to the Revenue.

Mr. A. J. Beith (Berwick-upon-Tweed)

There is concern about the part of the new clause to which reference has been made. I have received representations from the National Farmers Union, as has my hon. Friend the Member for North Cornwall (Mr. Tyler) and my hon. and learned Friend the Member for Fife, North-East (Mr. Campbell). In practical terms, a farmer or grower would be put in a difficult position because not only might a large number of people be brought on to his farm by a gang master during a season when there are crops to be gathered, but they may be there for only one or two days in the week and then they will be on someone else's premises. The farmer or grower may start the week with 30 people working on his farm; after a couple of days, only half of them are still there and half have gone somewhere else. A few more people are brought in again when there is a bit more work to be finished.

The flexibility of the gang system is the reason why farmers use it. It enables them to get the job done without carrying on their permanent staff a number of employees for which it would be impossible for the farm income to provide. Farmers simply cannot operate in that way. Given the competitive environment to which the hon. Member for Cambridgeshire, South-East (Mr. Paice) referred with produce from other countries, growers must find whatever ways they can to harvest their crops efficiently.

If farmers and growers are faced with having to make pay-as-you-earn returns for all sorts of individuals who are on their farms for only two or three days in the entire year and who are not under their direction or control, whom they do not know, whose home address they do not know and whose previous employment record they do not know, it is an incredible burden to put on them.

The Government are supposed to be engaged in deregulation and reducing the burdens on small business. The burden which the provision will present to small business is considerable. At present, it is not clear—it may become clearer later—how many farmers and growers will face this daunting problem; it will depend on how many occasions the Revenue decides to make a direction that a particular grower or farmer must fill in a return. It is not clear whether it is intended to be a general practice or whether it is a power that will be brought into play in exceptional circumstances when it is perceived that a particular gang master has not been doing his PAYE returns properly and not accounting for the people whom he is employing. There is a world of difference between those two. At present, farmers and growers simply do not know whether they will be landed with the power or whether it will be an exceptional and rarely used power. I hope that it is the latter, and that the Minister can give us that assurance.

The gang system is open to abuse not only with regard to taxation but in other ways as well; it can work to the detriment of those who are employed in it. However, it is a necessary part of the way in which harvesting takes place. Every attempt is being made by all those concerned to find a way of resolving the specific tax difficulty satisfactorily.

It has come as a great shock to those concerned that the Government have tabled on Report a new clause on a complex matter while discussions were supposed to be still taking place. So far as I am aware, the provisions in the new clause have not been the subject of consultation with those to whom the Government were talking. I do not see the point of that. The Government rightly engage in discussions with all the organisations. But suddenly, like a rabbit out of a hat, they produce the new clause, and slap it on the amendment paper, and take it at a stage when it cannot be the subject of any further discussion or amendment later. That simply does not make sense. If the Government were that determined to press ahead, why did they not table the new clause in Committee? At least we could have had some reflection on the matter and perhaps come back on Report with any necessary modification.

It seems that the Government are failing the precepts that they set themselves for the consideration of such tax measures. They are at risk of imposing a serious burden on a great number of small businesses in a sector of agriculture which is not doing well financially and where incomes have fallen seriously recently. I ask the Minister to rethink what the Government are doing with the new provision. They have even included it in a new clause which contains so many other provisions that are necessary —or which the Minister said were necessary. That makes it difficult to vote against the provision because in doing so we will be voting against other anti-avoidance provisions which are probably generally felt to be desirable.

The Minister has put the farming industry in a most unfair position by asking it to accept the change without proper consultation and with all the detrimental effects that it will have on farmers and growers, who have enough problems without having to account for the PAYE returns of people who may be on their farms for only a couple of days or one week of the year.

Mr. John Home Robertson (East Lothian)

I am grateful to my hon. Friend the Member for Newcastle upon Tyne, East (Mr. Brown) for raising the concerns expressed by the National Farmers Union of Scotland on this issue. I stress that I hold absolutely no brief for the gang masters of this world. I am concerned about the obvious abuses which existed in the agriculture industry in the past, and which may well still exist, where casual employees are ruthlessly exploited by gang masters. However, the fruit and vegetable growing industry in the east of Scotland is important, and the only way in which it can function is by taking advantage of casual labour. If the Government are having difficulty collecting PAYE and national insurance contributions from that sector of the economy, they should address themselves to those who are directly responsible for employing the work force. They should not be trying to get other businesses to do that work for them.

I understand that there is an agricultural compliance unit at the Inland Revenue which is actively seeking information about the way in which gangs operate. I would strongly support any efforts by the Treasury and the Inland Revenue to regulate that rather marginal sector of the rural economy because there is a need for proper protection for people who work in that sector. Seriously, it would not make sense to require individual farmers to become personally liable for paying the national insurance contributions and PAYE in respect of people whom they were not directly employing. It would set a silly precedent and I hope that that is not what the Minister intends to do.

4 pm

Mr. Dorrell

I can certainly give the House an assurance that it is not our intention to create in the new clause an obligation which does not already exist within the piece of secondary legislation to which I referred in my opening remarks. I remind the House that I said that the purpose of new sections 203BB and 203BD—we are now talking about 203BD—is to replace the provisions in the secondary legislation. The legitimacy of that legislation is at least questioned by the House of Lords ruling in the Herd case.

The purpose of the clauses is to replace an existing piece of secondary legislation. I can certainly assure the House that the fact that the powers are now being put into primary legislation has no bearing at all on the assurances which have always been given, or those which are currently in force, by the Inland Revenue about how the powers which hitherto have been provided for by secondary legislation would be used.

I must tell the hon. Member for East Lothian (Mr. Home Robertson) that it is not part of our purpose to provide as a normal state of affairs that a farmer should be required to provide for PAYE for labour employed by a gang master. It is clearly true that the primary responsibility for applying PAYE to members of a gang rests on the gang master, not on the farmer who employs the gang. That is a form of anti-avoidance provision which is already in the secondary legislation and the checks for the farmer are, I suggest to the House, improved by writing it into primary legislation in a number of respects.

First, I draw the attention of the House to subsection (1)(c) of section 203BD which makes it clear that the power can be used only where it is likely that income tax will not be deducted or accounted for in accordance with the regulations. Therefore, the board of the Inland Revenue must first satisfy itself. that there is a serious risk of avoidance activity or of a lack of enforcement activity in the circumstances.

There are two new safeguards which are not provided in the current secondary legislation. First, the person who is using the workers' services—the farmer—will be required to deduct tax only from payments which he actually makes to the employer of the workers. Secondly, new legislation requires the board of the Inland Revenue to issue a written direction so that the parties involved are clear about their responsibilities.

I hope that the House will accept that this is a clarification of an existing piece of secondary legislation which is under threat as a result of the Herd case. We have taken the opportunity to write in additional safeguards, and it is an important piece of anti-avoidance legislation.

Question put and agreed to.

Clause read a Second time, and added to the Bill.

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