HC Deb 17 May 1999 vol 331 cc729-46

`. After section 4 of the Contributions and Benefits Act there shall be inserted—

"Earnings of workers supplied by service companies etc

4A—(1) Regulations may make provision for securing that where—

  1. (a) an individual ("the worker") in any specified circumstances personally performs, or is under an obligation personally to perform, services for the purposes of a business carried on by another person ("the client"), and
  2. (b) the performance of those services by the worker is (within the meaning of the regulations) referable to a contract between the client and a third party,
relevant payments or benefits are, to the specified extent, to be treated for the purposes of the applicable provisions of this Act as earnings paid to the worker in respect of an employed earner's employment of his (where they would not be such earnings apart from the regulations).

(2) Subsection (1) above applies—

  1. (a) whether or not the client is a person with whom the worker holds any office or employment; and
  2. (b) whether or not there is any contract between the third party and the worker.

(3) Regulations under this section may, in particular, make provision—

  1. (a) for the worker to be treated for the purposes of the applicable provisions of this Act, in relation to relevant payments or benefits, as employed in employed earner's employment by the client;
  2. (b) for the client to be treated for those purposes as the secondary contributor in respect of any earnings which are treated as paid to the worker in connection with relevant payments or benefits;
  3. (c) for determining—
    1. (i) any deductions to be made, and
    2. (ii) in other respects the manner and basis in and on which the amount of earnings that the worker is to be treated as having been paid for any period is to be calculated or estimated, in connection with relevant payments or benefits;
  4. (d) for apportioning payments or benefits of any specified description, in such manner or on such basis as may be specified, for the purpose of determining the part of any such payment or benefit which is to be treated as a relevant payment or benefit for the purposes of the regulations;
  5. (e) for disregarding for the purposes of the applicable provisions of this Act, in relation to relevant payments or benefits, an employed earner's employment in which the worker is employed (whether by the third party or otherwise) to perform the services in question;
  6. (f) for otherwise securing that a double liability to pay any amount by way of a contribution of any description does not arise in relation to a particular payment or benefit or (as the case may be) a particular part of a payment or benefit;
  7. (g) for securing that, to the specified extent, two or more connected persons (within the meaning of section 839 of the Income and Corporation Taxes Act 1988) are treated as a single person for any purposes of the regulations;
  8. (h) (without prejudice to paragraph (g) above) for securing that a contract made with a person other than the client is to be treated for any such purposes as made with the client;
  9. (i) for excluding or modifying the application of the regulations in relation to such cases, or payments or benefits of such description, as may be specified.

(4) Regulations under this section may make provision for securing that, in applying any provisions of the regulations, any term of a contract or other arrangement which appears to be of a description specified in the regulations is to be disregarded.

(5) Any regulations made in pursuance of subsection (3)(i) above may be framed by reference to—

  1. (a) any certification procedure which may be established by the Treasury for the purposes of that provision, or
  2. (b) such certification procedure established by the Inland Revenue as may be specified;
and any regulations made in pursuance of section 2(2) above or section 7(2) below may also be framed by reference to any certification procedure such as is mentioned in paragraph (a) or (b) above.

(6) In this section—

"the applicable provisions of this Act" means this Part of this Act and Parts II to V below;

"business" includes any activity carried on—

  1. (a) by a government department or public or local authority (in the United Kingdom or elsewhere), or
  2. (b) by a body corporate, unincorporated body or partnership;

"relevant payments or benefits" means payments or benefits of any specified description made or provided (whether to the third party or the worker or otherwise) in connection with the performance by the worker of the services in question;

"specified" means prescribed by or determined in accordance with regulations under this section;

"third party" includes—

  1. (a) any person with whom the worker holds any office or employment, and
  2. (b) any body corporate, unincorporated body or partnership of which the worker is a member.

(7) Any reference in this section to the performance by the worker of any services includes a reference to any such obligation of his to perform them as is mentioned in subsection (1)(a) above.

(8) Regulations under this section shall be made by the Treasury with the concurrence of the Secretary of State.

(9) If, on any modification of the statutory provisions relating to income tax it appears to the Treasury to be expedient to modify any of the preceding provisions of this section for the purpose of assimilating the law relating to income tax and the law relating to contributions under this Part of this Act, the Treasury may with the concurrence of the Secretary of State by order make such modifications of the preceding provisions of this section as the Treasury think appropriate for that purpose."'.—[Mr. Timms.]

Brought up, and read the First time.

9 pm

Mr. Timms

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

Mr. Deputy Speaker (Sir Alan Haselhurst)

With this, it will be convenient to discuss the following: Government new clause 16—Earnings of workers supplied by service companies etc: Northern Ireland.

Government amendments Nos. 108, 109, 111, 112, 107 and 110.

Mr. Timms

Where businesses hire workers through an intermediary, such as a service company, rather than employing them directly, it is possible to disguise what would otherwise be treated as employment. In that way, they can reduce the national insurance that they would otherwise pay, or even eliminate it entirely. That is clearly wrong.

The service companies are given an unfair advantage over businesses who have their staff on the payroll, and there is a growing loss of revenue to the national insurance fund, which has to be made good by workers and employers who pay their fair share. There are around 50,000 service companies, and their numbers are increasing.

That is why, in his Budget statement this year, my right hon. Friend the Chancellor of the Exchequer announced that he would close the loophole, and that the national insurance and tax rules would be changed from April 2000. New clause 15, and the amendments that go

with it, will make the necessary change to national insurance legislation. The clause gives the Inland Revenue the powers to make sure that those who disguise employment will pay the same contributions as if they employed their workers direct. New clause 16 provides the same powers for Northern Ireland.

Parallel changes will be made to tax law in next year's Finance Act to ensure that businesses will also be required to operate pay-as-you-earn. However, we need to ensure that the appropriate revenue is collected with the least burden to business. In April, the Inland Revenue sent draft guidance on how the proposal will work to all who had expressed interest in the Budget announcement and to their representative associations. The Revenue will shortly meet representatives of those bodies. Their feedback will be valuable in finalising the regulations that result from this clause.

In the meantime, I will explain how we intend the power to work. The new clause will allow the Revenue to draw up tests, set out in regulations, which it can use to examine the relationship between a business and a hired worker. The key element of the test will be the degree of control the employer has over the worker. This uses the control test already successfully used to determine whether an employment agency should be treated as the employer for the purposes of liability to pay class 1 N1Cs.

The question to be asked is: Has the employer ongoing control over what tasks the worker does or how they are carried out? If the answer is yes, the arrangement will be caught by the new rules and any earnings will be subject to class 1 contributions. Alternatively, where a worker is engaged to complete a job and has total control over the manner in which the task is undertaken and the way in which it is achieved, the relationship will be outside the scope of the new rules.

It may be helpful if I give two examples illustrating the scope of these new rules. First, a doctor comes to work in the United Kingdom for two years. She is engaged by a hospital through a UK service company. The consultant in charge directs the doctor as to what work she should do, has ultimate clinical responsibility for the patients and can supervise the doctor in the performance of her duties. This arrangement should be caught by the new rules. Responsibility for paying class 1 NICs and introducing PAYE would lie with the hospital.

In the second example, an information technology engineer employed by a medium-sized manufacturing company decides to go it alone, leaving employment to set up his own IT consultancy. A few weeks later, the former employer engages the consultant to undertake a millennium bug health check on all the computer company's systems. The consultant negotiates a fixed fee providing a specified service to a pre-determined deadline. The company has no on-going right of control over exactly what is done by the consultant or how it is done. The new rules will not apply in that case.

The measure is intended to remove a significant fiscal disadvantage faced by businesses that employ their workers directly. The clause will ensure that where a worker is engaged by a business through a third party, such as a service company, and that relationship has the characteristics of employment, any payments made by

the business to the third party for the worker's services will be regarded as the worker's earnings for national insurance purposes.

Mr. Christopher Chope (Christchurch)

In the first example, would the hospital be responsible for sickness pay for that worker in the event that he or she fell sick?

Mr. Timms

The hospital will certainly be responsible for paying national insurance for the worker. My assumption is that the answer to the hon. Gentleman's question is yes. If, on further reflection, that turns out not to be the case, I will return to the matter.

The new clause is not intended to remove the benefits that many businesses derive from the use of employment agencies for a supply of labour. Demands for workers can fluctuate, depending on the order book. Employment agencies have a crucial role in helping business cover such fluctuations.

Under existing legislation, the agency that supplies the worker, and not the client, is liable for any tax and national insurance payable on the worker's earnings. The worker is regarded as an employee of the agency, which must set up a pay-as-you-earn arrangement and ensure that the necessary class 1 contributions are deducted for any earnings, as well as paying those secondary class 1 contributions as an employer. We have no wish to reverse that arrangement and the clause will not do so.

Indeed, subsection (3) allows exemptions from the provision to deal with that issue. For example, if the worker is regarded for income tax purposes as employed by a "certified" agency, and the services are performed by the worker in the course of that employment, the clause does not bite. A business need seek confirmation only that a worker is supplied from a certified agency to be assured that it is not liable for any tax and national insurance on that worker' s earnings.

The Inland Revenue will be responsible for running the certification scheme.

Mr. Desmond Swayne (New Forest, West)

What confidence can the House have that the regulations will work in the way in which the Minister described, given that new clause 15 (9) states that any change to income tax provisions may trigger the complete rewriting of the new clause?

Mr. Timms

We need to ensure that the tax and national insurance rules are in line. The subsection to which the hon. Gentleman referred would allow us to ensure that the two are absolutely aligned. The reduction of burdens on business, and ensuring that we have one system rather than two for businesses to deal with, have been our objectives in changing the way in which national insurance is administered.

The essence of the certification scheme is that the agency that supplies the worker will take responsibility for setting up pay-as-you-earn arrangements and paying class 1 national insurance contributions for all the workers on its books. As well as established agencies, other providers of labour are likely to wish to seek certification through the new Inland Revenue scheme.

I have already mentioned that similar provisions are being introduced in the next Finance Bill. It is crucial that from next April both tax and national insurance be aligned on this issue; otherwise business will face the burden of operating two systems.

Mrs. Browning

Will the Minister clarify one of his examples? He mentioned that one test of whether someone was under the control of the contracting company or organisation was that it set out exactly the work to be done, which was carried out entirely according to its criteria. Let us suppose that a company carried out a series of short-term contracts in any one financial year—perhaps, two, three, four or five weeks at a time. Realistically, it could be expected to carry out only one contract at a time, but in the course of a year several contracting companies might be used. I should have thought that although the worker concerned might be conforming with the stipulations of a contract, if he or she worked for a variety of employers, for want of a better word, in one financial year, a good case could be made with the Inland Revenue under existing rules. Does this rule affect every case or apply only when employees can prove within a financial year that they have worked for a series of people?

Mr. Timms

The judgment would need to be made for each separate employment. Where one person works for a series of different employers, the judgment would need to be made about each employment. If it was a series of contracts with a single employer, I think that it would be necessary to consider the whole period of work and judge the nature of the relationship over that time.

We need to ensure fair treatment for those engaged directly and those engaged on otherwise equivalent but indirect terms.

Sir Robert Smith

New clause 15 gives power to make regulations. Has the Minister published the draft regulations so that we can judge whether he needs the powers? If they do not make sense, there is no point in having the powers.

Mr. Timms

There is no question but that we need the powers. This is a serious loophole. [HON. MEMBERS: "Ah."] The Conservative party was never interested in loopholes and did nothing to plug them. This loophole needs plugging. Large sums of money are at stake, so we need the power.

We have not published the regulations yet, but there will be extensive discussion between the Inland Revenue, those who responded to the document and representative organisations. We need extensive discussions to ensure that the regulations are framed correctly and to avoid difficulties. There will be a meeting shortly to take that process forward. We need to stop the increasing drain on the national insurance fund by people who disguise the nature of their employment. The growth of such avoidance requires Government action both to ensure fairness, so that those who employ people directly are not disadvantaged as sometimes happens now, and to halt the loss of revenue.

My answer to the hon. Member for Christchurch (Mr. Chope) was wrong. For a doctor supplied by a service company, the arrangements for paying statutory

sick or maternity pay, where the worker is paid by a certified agency, remain unchanged. The agency will be responsible for such payments.

Mr. Andrew Tyrie (Chichester)

The Minister said that the Government were plugging a loophole of nearly half a billion pounds. It is a cheek to call that a loophole. What is the Government's estimate of the employment consequences of raising that sum in revenue? What reduction in employment will result from that increase in taxation?

Mr. Timms

Did the hon. Gentleman say half a million? The sum involved is much greater.

Mr. Tyrie

I said half a billion; it is £475 million.

Mr. Timms

I do not think that the sum is quite so large. In the long term, we anticipate additional revenue to the national insurance fund of around £200 million. I do not believe that adverse employment results from people obeying the law and behaving properly. That is what we want to ensure. Companies are damaged by this abuse because they are disadvantaged. We want a level playing field and our measures will achieve that.

Mr. John Burnett (Torridge and West Devon)

Will the Minister give way?

Mr. Timms

I shall give way one more time.

9.15 pm
Mr. Burnett

Are the Government proposing the lifting of the veil of incorporation while the existing tests of whether the contract is one of service or for services will still apply? Is that basically what the Government are doing in the new clause?

Mr. Timms

We are sticking with the existing tests. However, I am describing a rather new circumstance where people are avoiding national insurance payments through establishing service companies. That is the loophole that we will block.

Mr. Duncan Smith

Has the Minister carried out a cost-benefit analysis within the Department? If so, will he publish it so it is available to us all? Secondly, what estimate has been made of what it will cost to enforce the Government's proposals on the businesses to which he is referring?

Mr. Timms

We have certainly considered the additional revenue that will be gained to the national insurance fund. In the long term, it will run to £216 million a year. The cost to the Inland Revenue of this and of the parallel income tax measure will be £175,000 in the current year and £55,000 a year in the long term.

Our proposals meet the aims that I have set out. They will ensure that the correct national insurance contributions are paid. I urge the House to support the new clause.

Mrs. Lait

I have been horrified by the Minister's contribution and by the lack of clarity in his thinking

when responding to my hon. Friends' questions. The hon. Gentleman has demonstrated a complete inability to answer sensibly any of the questions put to him. It is another example of desperation and of the Government requiring any amendments to be introduced now to try to ensure that a later debate, which causes the Government embarrassment, is put off for as long as possible. In effect, they are saying, "Let us bang anything we can think of into the Bill without thinking through the consequences." The new clause is a classic example of not thinking through the consequences.

The measure was foreshadowed in the Budget, as the Minister said. It produced an instant reaction from people who have their own service companies. Indeed, I referred to it in the Finance Bill on Second Reading. Consultation is still taking place. That is palpably clear from the Minister's inability to answer any questions. The Inland Revenue press release, which was put out at the time of the Budget, stated that the Inland Revenue will over the next few months be working with representative bodies on aspects of the practical application of the new rules and on the production of guidance. It is clear that none of that has hit the Minister yet. There is absolute confusion everywhere as to what precisely the Minister is trying to do.

The Minister said that he thought that 50,000 people would be affected by the Government's proposal. I understand that it will affect 50,000 people in London alone, and 80,000 in the United Kingdom. The impracticalities of what he is proposing are emerging. What seemed to be a fairly simple new clause, although we do not agree with it, has been widened to include what appears to be an attack on the construction industry and the way in which it supplies workers to companies. I shall be happy if the Minister is prepared to tell me that I am wrong.

It seems that there will be an attack on the health service by increasing the cost of employment to the NHS. The Minister quoted an overseas doctor. Originally, if I heard him aright, he talked about a doctor employed by a service company, which was then changed on advice to an employment agency. The overseas doctor suddenly became someone who was an employee of the NHS, as opposed to someone who was contracting his services to the health service as an independent contractor.

It is interesting that the Minister's example involved an overseas doctor. In so far as anyone has been able to make any sense of what the Revenue is proposing, it seems that the circumstances in which people try to dodge tax—we do not condone anyone behaving illegally and evading taxation—are mainly when they take their earnings overseas at the end of a contract.

Miss McIntosh

Public sector workers are not the only ones who will be affected. The many businesses that run IT services and which are, by definition, consultancy services will also be affected. I have just signed out a letter to a constituent in the Vale of York who is deeply concerned about the measure. The details of it were buried in an Inland Revenue press release—IR35. Is it standard practice for such detail to be announced in a press release that we cannot debate on the Floor of the House?

Mrs. Lait

It is certainly standard practice on the part of the Government for such information to be buried in press releases. That produced an instant response. My hon. Friend was not the only person who received irate e-mails within 24 hours of the measure being announced. I, too, had an irate constituent.

The industries most affected are the modern industries that provide the UK with its flexible work force who make us competitive in the rest of the world. Information technology is just one of those industries. To ensure that we remain competitive in world conditions, industries contract out various projects. To use their skills most effectively, many people are taking the sensible decision to leave a company's employment and to act as a consultant to a range of bodies.

If the Minister is suggesting that people who set up a consultancy company and work on contract for several employers should be treated as employees of those companies, the complaints that we have received from many people who have their own service companies are justified. We must make sure that the proposal is defeated.

If a person's right to set up his own service company is taken away and he cannot contract out his skills, not only will our businesses become less competitive, but modern and flexible work patterns will disappear, and we will return to the old Labour-controlled labour situation that it took us 18 years to get rid of.

Mr. Graham Brady (Altrincham and Sale, West)

I have received many letters from concerned constituents. Many of those companies may work expressly for one client for a certain period, which may be quite long. They may then work for a series of other clients for short periods. I find it impossible to see how the Government envisage devising a test that will establish whether the business is a bona fide consultancy business, and how the test will take account of long periods with a single client. My hon. Friend may wish to pursue the matter further.

Mrs. Lait

My hon. Friend highlights another of the practical problems that clearly have not been thought through by the Government. My constituent works to precisely that pattern and has been out of work for only 10 weeks in the past five or six years. He has a private limited company. It is a simple company consisting of himself, one director and a company secretary. He uses a limited company because that is the only type that agencies and large corporate firms will deal with. That is necessary to protect all concerned in the event of an error at a client's site. That is one of the difficulties that the Government have failed to consider.

Money that goes into the company of my constituent, Andrew Jarrod, is paid as pay-as-you-earn. He says: twice yearly I pay dividends if there is money remaining. My accountant manages my PAYE, and advises me on tax rights and wrongs. Since the company was set up (over 5 years ago) I have had six separate contracts for entirely unrelated large companies which have ranged from 6 weeks to 2 years. All contracts have been for 6 months or less and those that have continued longer were always through extensions that had to be negotiated. All contracts have a 1 month get-out clause which the client can invoke at any time. The problem is that, in trying to get rid of such service companies, the Government have come slap-bang up against the potential for litigation between a large company and an individual, quite apart from the fact that people who are running such companies properly will provide for themselves the national insurance and national insurance-equivalent benefits that the Government are so keen to get their hands on. They will also provide their own health insurance and pension scheme. They take pressure off state provision; they do not apply pressure by not contributing to the full, because most of them are paying their share.

We have found that the consultation has not been in any way extensive and has been based on a knee-jerk reaction from the Government.

Mr. Duncan Smith

What consultation?

Mrs. Lait

Indeed, and the new clause does not match the Government's own definition of what is good regulation. It is not transparent, there has not been full consultation and there has been no indication of any preparedness to accept alternatives—and there are alternatives.

For instance, the 3 Sixty group, which has been working on behalf of many of those service companies, has come up with at least three alternatives, any one of which would achieve what I am sure the Government want to achieve. First, they could adopt a minimum salary level based on a percentage of the total contract value. Secondly, as happens in Ireland, expenses could be allowed, as now, and all remaining moneys could be paid as a salary, but with employees' national insurance only. Thirdly, salary level could be based on the multiple of the Government's minimum wage, which I should have thought was a subject dear to their heart. There are other options and they should be considered, instead of using this scatter-gun, blanket approach which has clearly distressed many people and taken their minds off the businesses that they should be running to earn the money that pays the taxes that keep the Government going.

The new clause shows that the Government have not thought through, and are not prepared to consult on, fundamental changes affecting a lot of people who are making this country effective, competitive and up to date. Those people should be able to develop the skills that would make modern projects a byword for and the watchword of this country—an objective that I should have thought the Government would want to proceed with—but the Government are adopting an old-fashioned, old Labour approach that will close down opportunity. That reflects the Government's arrogance and there are no guarantees that people who want to run their businesses in such a way can continue to do so.

I ask again: why the rush, why no consultation and why does such a wide-ranging measure have to be included in the Bill? Conservative Members—and, clearly, the Minister—are unable to understand that.

9.30 pm
Mr. Andrew Miller (Ellesmere Port and Neston)

I have listened to some of the most extraordinary speeches and interventions from Conservative Members that I have ever heard in this place. The Conservative party seems to be in favour of lump labour, which is an extraordinary diversion.

May I answer an important point raised by the hon. Member for West Aberdeenshire and Kincardine (Sir Robert Smith)? I have read Inland Revenue 35 carefully and I do not believe that this matter was hidden away. As the hon. Member for Beckenham (Mrs. Lait) acknowledged, it was foreshadowed in the Budget. That leads to the explanation that seems to have been supported by the 3 Sixty group, which the hon. Lady prayed in aid in her speech. The group says: It is currently possible for a permanent employee to leave a company on a Friday to return on Monday doing exactly the same job but indirectly engaged as a 'consultant', paying reduced tax and national insurance. Nobody in the House could defend such a practice. The 3 Sixty group and the Public Contractors Association do not seek to do so. I am sure that the hon. Member for West Aberdeenshire and Kincardine will acknowledge that that practice cannot be right.

Where we have difficulties, and my hon. Friend the Minister may be in a position to clarify this point, is with the relationship between the new clauses and the consultation process that is going on as part of Inland Revenue 35. Subsection (1) of new clause 15 says: Regulations may make provision for all the things that are set out thereafter. I seek guidance from the Minister, but that seems to pave the way to producing such regulations as described in the new clause, subject to the outcome of the Inland Revenue's consultations.

My hon. Friend the Minister says that there will be extensive discussions on this matter. That is important, because there are fine divisions between the employment situations that hon. Members have described, which would fall one side of the regulations or the other. I am sure that no one in the House would seek to defend the extreme situation that I described—at least, I presume not. Looking round the Chamber, I see no one seeking to do so.

What is needed to satisfy the concerns being expressed by the Public Contractors Association is an assurance—I appreciate that this relates to subsequent matters that are in the hands of Inland Revenue officials—that the certification scheme that will emerge will be based on the widest possible consultation.

Sir Robert Smith

My concern is that the Government often provide draft regulations to justify the wording of a clause and to show that such powers are needed. If, after consultation, it transpires that the Government are going down the wrong road, the wrong powers will have been given them. Sadly, it is not an extremely effective process for modifying regulations.

Mr. Miller

The hon. Gentleman makes an interesting point, but I understand from the several thousand responses to the web site to which the hon. Member for Beckenham referred that there has been a wide debate, particularly within the IT sector, on this point. The 3 Sixty group and others are concerned that the Inland Revenue are not accepting any invitations to seminars and have suggested group approaches. The Revenue needs to consult all relevant bodies, including people like the Public Contractors Association. The building industry is notorious for bypassing regulations. Some years ago under the previous Administration, I found it extremely difficult to find a plasterer who would provide so much as a VAT receipt. I wonder whether that has changed. Clearly, we cannot countenance allowing people to continue to behave in that manner.

Having said that, I believe that careful consideration must be given to some parts of the building industry. The effect of the draft regulations on a partnership in my constituency—one partner lives in the constituency of my right hon. Friend the Member for Birkenhead (Mr. Field) and the other lives in mine—may be that it would not be able to tender for work. I know that is not the Government's intention. That company is perfectly legitimate, and my right hon. Friend and I have spoken to both partners.

I appreciate that my hon. Friend the Minister is not able to answer for the Revenue, but will he confirm my understanding of the importance in the new clause of the simple word "may"? I urge him to ask his hon. Friends in the Treasury to pass on to the Revenue the concerns that are being expressed not about the principle—because all hon. Members must accept the principle—but about the details that could emerge if the wrong interpretation is put on an extremely well-meaning clause.

Mr. Eric Forth (Bromley and Chislehurst)

I come to this debate not as a member of the Committee that has considered the Bill, but as a mere Back Bencher, so I am handicapped. However, I am fortunate in that only today, I received from a constituent some material that suggests that he is outraged at what the Government are doing. It may help the Committee if I were to share with hon. Members some of what my constituent had to say. It is highly pertinent, and it gives the game away, given what the Minister said about consultation.

I received this fax a few hours ago, so it is hot off the press. It says: To introduce ourselves I am Deputy Chairman of"— X plc— and we are a major employer in Bromley, with a turnover of £200 million. Both the company and my home address are in your constituency. Although I am concerned about the above Bill, I am also concerned about the erosion of our democracy. Those are not my words: they are the words of my constituent, who is the deputy chairman of a company with a turnover of £200 million.

What my constituent goes on to say is apposite to the background to the new clause: On the 9th March 1999 in the Chancellor's budget statement it was announced that changes were to be introduced to counter avoidance in the area of personal service provision. This document … was introduced under the title of IR35. He has sent me a copy of that document, which I may or may not have cause to share with hon. Members in a moment. Crucially, he goes on to say: In this document the Inland Revenue announced they would be working with representative bodies who were interested in contributing to reforms in this area. We as a company and the industry sector under which we operate were happy to enter into debate and affect the outcome in a democratic way. However, I have heard today that on Friday 14th May 1999 an amendment was made to the Welfare Reform and Pensions Bill, which implied that the Inland Revenue had already reached its conclusions without any meaningful discussions having taken place. If you are in the House this afternoon"— if I am in the House; I ask you!— when the bill is discussed I would be most grateful if you could raise this question and let me know the outcome. There is an immediate opportunity for the Minister, when he replies to the debate, to let my constituent in Bromley know just what the devil is going on.

My constituent has given me a copy of the Inland Revenue press release; his letter to the Inland Revenue dated 12 March; a copy of the amendments to the Bill—the new clause that we are now discussing—and various notes. His letter of 12 March was to Elaine Carey of the personal tax division of the Inland Revenue in new wing, Somerset house. He wrote that he wanted to engage in the consultation process, stating: I would welcome the opportunity to work with you to reduce avoidance but as you state 'minimise the impact of these changes on ordinary businesses'. I hope it will be of mutual benefit. Here we have a problem. It would appear that real people in real businesses were conned into believing that they were going to engage in some sort of consultation with the Government, and have been shocked to find that the Government are attempting—rather typically—to slip into this important Bill a crucial new clause, with no notice and, certainly, no consultation.

I suspect that the Minister will say what he said earlier: that the consultation will be on the regulations. He is falling back on the argument—the very flimsy argument—that if we nod through the important principles that lie behind the new clause, people in business need not worry, because they will be involved in a process of consultation on the regulations. The principles will be settled now, with hardly any debate, with no notice and with no opportunity for real consultation. Having led business to believe two or three months ago that there would be consultation, the Government hold out the prospect of consultation on the regulations.

You and I know, Madam Speaker, that the real opportunity for proper debate, amendment and so on arises in the early stages of legislation. Once legislation has been set in terms of new clauses such as this, opportunities for consultation on the regulations will be—I will not say zero, but they will certainly be minimal. Moreover, there will be no opportunity to amend the regulations, which will be presented on a take it or leave it basis. This is the challenge that faces the Minister this evening: how will he satisfy my constituent that there will be any realistic opportunity for people in business to have a proper say in the process?

Certainly people in business will be affected by the outcome, whatever it is. The Minister must tell us in much more detail what exactly he is offering the business community in terms of real consultation and real dialogue, rather than the con trick that has been perpetrated so far and the disgraceful conduct in which the Government have engaged tonight by attempting to slip through on the q.t. a wide-reaching measure that they introduced just a few days ago.

That is the first point that I wished to raise. It gives the Minister an opportunity, which I hope he will take, to respond in some detail to the concern expressed by my constituent—who, I suspect, speaks for many other people, not just in Bromley but throughout the country. My hon. Friend the Member for Vale of York (Miss McIntosh) hinted that she had constituents who felt the same, as did my hon. Friend the Member for Beckenham (Mrs. Lait). I would not be surprised if a good many of my hon. Friends—who I hope will catch your eye in due course, Madam Speaker—had a similar tale to tell.

Mr. Bercow

My right hon. Friend makes a powerful point. Does he agree that, as the Government have admitted via the Secretary of State that they have "not got it right on regulation", the least that they can do is make an absolute commitment to establishing a minimum period—preferably three months, better still six—in which consultation could take place? If they are not prepared to give such a commitment, obviously they cannot be taken seriously.

Mr. Forth

My hon. Friend makes a typically helpful suggestion, but does he believe, or expect me to believe, that such a commitment would mean anything at all?

Mr. Bercow


Mr. Forth

The problem is that the indications given just a few weeks ago that there would be a proper consultation process have already been brushed aside in the most arrogant way by the Government, who are now attempting to rush the measure through without any proper debate or consultation. That raises an important question, to which we must know the answer.

9.45 pm

The Minister said that some 50,000 service companies were involved—that was his estimate. It would be helpful if we knew not just the number of companies, but the number of employees, on the best estimates of the Department. It strikes me that the provisions could have a serious effect on employment, but the Minister claimed that any effect would be minimal. He seems to be trying to have it both ways. He said that some £200 million of additional revenue would result from the new clause—that was his estimate—and, in almost the same breath, went on to say that there would be no damage to business whatever. That is the sort of business logic that we have come to expect from the Government. They extract money from business, but expect no adverse effect.

Regardless of the merits of the case, it is naivety at best, and deception at worst, for the Government to say that they are going to extract—by stealth—yet another large amount of money from business, without any adverse effect on those businesses and, therefore, on employment. That cannot be right.

Therefore, when the Minister replies to this short debate, I hope that he will tell us what the adverse employment consequences are likely to be. There cannot be none. He cannot extract money from business and expect that to have no effect whatever. As the companies involved are mainly small, although the one in my constituency is not small, with a turnover of £200 million, I should like to know the number of employees involved, not just the number of companies. There are bound to be consequences for such businesses. We are entitled to a

proper explanation from the Minister about those employee numbers and the impact of his proposals on employment.

Those are my preliminary observations; now I have some questions about the details of new clause 15, which contains some significant measures. I am not well versed in the arcane aspects of this part of the law, so I view this new clause as a layman, as a Back Bencher is entitled to do. Equally, I am entitled to look for some proper explanations from the Minister as to what the devil he is talking about in that new clause.

Let me pick some elements of that measure more or less at random to illustrate my point. My eye lit upon subsection (3)(a), for example, which I am struggling to make sense of. I will read it out just for the sake of clarity: for the worker to be treated for the purposes of the applicable provisions of this Act, in relation to relevant payments or benefits, as employed in employed earner's employment by the client". What on earth does that mean? It must mean something. We are entitled to an explanation of what it means because subsection (3) states: Regulations under this section may, in particular, make provision for certain arrangements. Therefore, the new clause offers the possibility of regulations being made for the purpose that I quoted in paragraph (a).

Mr. Swayne


Mr. Forth

Ah. My hon. Friend is going to help me.

Mr. Swayne

Well, I do not want to answer on behalf of the Minister, but my right hon. Friend may have missed the point because it matters not what the detail of the new clause is. The substance is in subsection (9), which says that, whatever happens, whatever has been said, it will be rewritten when the Government see fit to do so.

Mr. Forth

I am grateful to my hon. Friend, but he is trying to rush my contribution a little; I cannot think why. I will come to that subsection in a little while, but I do not want the House to be deprived of the opportunity to deliberate on some of the other subsections and paragraphs because they are equally impenetrable.

Surely, one of the important things that we have to do, particularly when considering a new clause of such scope, which has been introduced so recently and with so little time for people to consider it, is to give proper consideration to some of its detail—not all of it—to give the Minister an opportunity to explain his thinking. He should explain the possible impact of the different measures on the very businesses of which he is talking.

Mr. Burns

Does my right hon. Friend agree that, because of the way in which the Government have short-circuited the consultation process on the regulations, the provisions are even more significant than they appear? Is he aware that the new clause also does not state whether the regulations will be passed by the affirmative or negative procedure, or whether—if the latter procedure is used—the Government will try to slip regulations through the House by stealth? Given what Labour Members said about the negative procedure when they were in opposition, is not my right hon. Friend disturbed at the possible use of another method of slipping regulations through?

Mr. Forth

My hon. Friend is right. In a moment, we shall deal with subsections (8) and (9), which—as he rightly identified—give us no indication of the procedural framework within which the regulations will be introduced. The procedural framework may seem to the public to be a matter of little importance, but, as he and I know, it may be of the greatest importance, as it will determine the opportunities that the House may or may not be afforded to consider the regulations properly. Nevertheless, I shall deal with that matter in a moment, as I do not want to pre-empt our consideration of the new clause. We should quickly consider one or two other matters, to clear our minds before proceeding any further.

According to subsection 3(i) regulations may make provision for excluding or modifying the application of the regulations in relation to such cases, or payments or benefits of such description, as may be specified. Already, we are being asked to sign an entirely blank cheque, and to allow for the possibility that the regulations may exclude or modify their application to such cases, or payments or benefits of such description, as may be specified. Although that tells us absolutely nothing, it has the rather sinister implication that the provision may be extended in any direction, for any purpose, at any time.

I truly believe that the Minister owes the House a proper explanation of why such a broad a provision had to be included in the Bill, and of the types of scenarios that the Government had in mind when drafting that very important provision. We are owed that explanation of paragraph (i), otherwise we shall be party to signing a legislative blank cheque, which allows the Government and their officials to do absolutely anything. Such latitude cannot be right or necessary.

Subsection (4) goes on to state: Regulations under this section may make provision for securing that, in applying any provisions of the regulations, any term of a contract or other arrangements which appears to be of a description specified in the regulations is to be disregarded. That is the other side of the coin. Apparently—if am I reading the subsection correctly—the Government also want to have a reverse or cancelled blank cheque, to allow any terms and arrangements made heretofore to be disregarded.

Mr. Brady

I fear that my right hon. Friend may be misreading subsection (4), which has a considerably worse implication than that which he described. It will, in fact, set aside the terms of a contract freely entered into by the parties to an agreement. The legislation is therefore seeking to interfere in a matter that has been freely agreed under normal contract law procedures.

Mr. Forth

I do hope that my hon. Friend is wrong. He is not often wrong, but I hope that he may be in this case. I hope that he will seek to catch your eye, Madam Speaker, to expand on the point. If he is right about that point, it is an even more shocking indictment of new clause 15. It was bad enough that the new clause provided simply an open-ended and undefined possibility of reversing previous terms and arrangements. If my hon. Friend is right, the subsection is worse than I feared. It appears to give unlimited power, under regulations, for any term of a contract to be disregarded. As I reread the subsection with my hon. Friend's guidance, I become ever more convinced that he is right, in which case we need even more explanation from the Minister.

As my thinking on the issue develops, I am beginning to regard the new clause as much more sinister than even my hon. Friends have suggested so far. It is taking on ever wider ramifications, with ever more powers that are less and less specified. I wonder whether there is any limit to the possible effects and impact on business that might flow from the new clause and the regulations that will underpin it, with or without consultation. That is another issue that the Minister must explain.

I am sure that some of my hon. Friends will want to dwell on subsection (6) in detail, so I shall pass over it and, for the sake of brevity, I shall skip quickly to subsection (8). It says:

Regulations under this section shall be made by the Treasury with the concurrence of the Secretary of State. The whole game is almost entirely given away. This is yet another Treasury matter. We do not often have that set out for us in black and white and in such unequivocal terms, but it says so here. If my reading of the subsection is correct—I hope to get the agreement of my hon. Friend the Member for Altrincham and Sale, West (Mr. Brady) on it—it says that the Treasury will make the regulations, with the concurrence of the Secretary of State. The Treasury is very kind and generous to allow some consultation with the Secretary of State—uncharacteristically so—but concurrence is all that it will be. Or does the subsection mean that the Treasury will not be allowed to act without the explicit agreement of the Secretary of State? Is that what "concurrence" means? I should like the Minister to clarify that when he winds up this little debate. Will the Treasury merely consult the Secretary of State but have the final word, or does the word "concurrence" mean—this is a crucial difference—that the explicit agreement of the Secretary of State will be required before the Treasury can impose what it wants by regulation?

We are dealing with the relationship between Departments after the consultation process has taken place—if there is one—when we are ready for the regulations under the section to be made, apparently driven by the Treasury, not the Department. I am grateful to the Minister for showing his hand in the drafting of the new clause. The Treasury will decide. The Secretary of State's role is not properly defined. We ought to know a lot more about that.

The main point that I wanted to make in my few remarks was on subsection (9). The new clause was already worrying, but it now gets a lot more worrying. To put the matter on the record and for the benefit of the House, I shall read the subsection. It says: If, on any modification of the statutory provisions relating to income tax it appears to the Treasury to be expedient to modify any of the preceding provisions of this section for the purpose of assimilating the law relating to income tax and the law relating to contributions under this Part of this Act, the Treasury may with the concurrence of the Secretary of State by order make such modifications of the preceding provisions of this section as the Treasury think appropriate for that purpose. Surely that is the mother and father of all Henry VIII clauses.

Mr. Duncan Smith

My right hon. Friend has been here longer than I have and knows more about such issues. Does he agree that subsection (9) is very wide ranging—it is the widest ranging provision that I have seen in legislation—empowering the Treasury to do anything that it wants at any time with only the concurrence of another Minister? Does he find that remarkable?

Mr. Forth

It is not just remarkable. It is appalling and insulting to the House of Commons that we should have—