PROVISION OF SERVICES THROUGH INTERMEDIARY

HC Deb 03 May 2000 vol 349 cc183-220

Question proposed, That the clause stand part of the Bill.

Mr. Ottaway

This debate is about IR35 and its introduction. The Government entered office in 1997 on the back of a clear general election victory. They had the support of almost every age group, both sexes, the professional classes and, most important, the business sector. In my judgment, the influence of the business sector played a crucial role in the Labour party's victory. The small business man and the self-employed had much to look forward to. After all, the Labour party's business manifesto said: A new Labour Government will give Britain's entrepreneurs and small businesses the backing they deserve. What do they get in response? They get IR35.

Not content with raising the burden of taxation on business by £5 billion a year, a £5 billion regulatory burden, a complete revamp of double taxation relief costing billions and imposing national insurance contributions on share options, the Government now want to clobber the heart of Britain's high-tech industry with IR35 at a cost of £900 million a year, which is a heck of a lot for Britain's self-employed to pay.

Mr. Michael Fabricant (Lichfield)

My hon. Friend is perhaps falling into the trap of at least giving credence to the idea that it was the Labour Government's idea to introduce IR35. Is he aware that the Treasury suggested that IR35, or its equivalent, be introduced in the early 1980s, in the late 1980s and then the early 1990s, but the idea was rejected three times by Conservative Chancellors of the Exchequer? They knew the effect that it would have on high-technology companies in the United Kingdom.

Mr. Ottaway

My hon. Friend is right. We opposed IR35 because of its impact on the flexibility and operations of labour markets, and I shall make that point later.

At least the leopard does not change its spots. In the 1960s, the Labour party nearly brought the economy to its knees and, in the 1970s, it tried to tax the service sector into oblivion. Now in the 1990s, as the high-tech era lifts off, it wants to hit those who make such a large input to the sector's success.

Not content with treating the self-employed with contempt, the Government do it with offence. They accuse Britain's entrepreneurs of "disguised employment" as though they were somehow cheating. The Government fail to recognise that the world is changing. Labour patterns and methods of doing business are changing. Highly skilled staff no longer stay with employers for long periods. We have an increasingly mobile work force and trying to tax them in such a way will inevitably lead to difficulties.

For decades, the self-employed have worked through service intermediaries. They form a business with themselves as its main asset.

Mr. Michael Clapham (Barnsley, West and Penistone)

Is the hon. Gentleman suggesting that an employee of an intermediary who works for a client and is under the control of a client and therefore engages as an ordinary employee would engage, should have benefits over and above those available to the employees of the client?

Mr. Ottaway

I am grateful for that intervention. I am certainly not suggesting that and, what is more, it would not be the case. As I shall shortly point out, the self-employed caught by IR35 will still be worse off in terms of the benefits that they receive.

The self-employed work through intermediaries not, as the Government would have us believe, to avoid national insurance contributions, but primarily because it is the most sensible way to arrange their affairs. It helps with the establishment of offices at home, with the purchase of specialised equipment to carry out their job and with travel and accommodation expenses. The Government, with a complete lack of vision, accuse such people as though they were somehow cheating the public. The very opposite is true. Contractors do not get such a good deal; they often do not receive such good benefits as the employed personnel with whom they work.

If I can have the attention of the hon. Member for Barnsley, West and Penistone (Mr. Clapham) for a second, the Inland Revenue has confirmed that, even under IR35 and despite paying class 1 contributions, the self-employed will still not be entitled to rights such as sick pay and holiday pay and, what is worse, they will not be entitled to unemployment benefit when they are not contracted. In short, it is pain without gain.

The national insurance element is being dealt with by delegated legislation shortly to be taken in Committee and against which the Conservative party has prayed in early-day motion 657. The other half of the Government's attack are the rules subjecting intermediaries to schedule E taxation. They are contained in schedule 12 and will be introduced by the clause that we are debating.

Mr. Geraint Davies

Will the hon. Gentleman give way?

Mr. Ottaway

No, I will not.

In simple terms, the rules governing the employed—

5.45 pm

Mr. Dale Campbell-Savours (Workington)

On a point of order, Mr. Martin. We have just heard a remarkable response from the hon. Member for Croydon, South (Mr. Ottaway). In Committee on the Floor of the House, we give way.

The First Deputy Chairman of Ways and Means (Mr. Michael J. Martin)

Giving way is—[Interruption.] Perhaps the hon. Member for Workington (Mr. Campbell-Savours) will listen to my response. He might learn something. Giving way is up to the individual Member. It is not for the Chair to decide whether a Member should give way.

Mr. Ottaway

I recognise the courtesies to which the hon. Member for Workington (Mr. Campbell-Savours) refers. I would give way to 658 Members. It happens that in the past the hon. Member for Croydon, Central (Mr. Davies) has intervened with offence. As a result, I will not be giving way to him.

I shall continue with the debate, and the important subject of IR35, which will attack many people.

Mr. Bercow

Will my hon. Friend consider adding to his list of Members to whom he does not intend at any stage to give way the hon. Member for Workington (Mr. Campbell-Savours), who has just had the chutzpah to accuse the Opposition of defending tax dodging? He has therefore subjected 60,000 hard-working IT professionals to a calumny.

The First Deputy Chairman

Order. The hon. Member for Croydon, South (Mr. Ottaway) was doing all right before the interventions.

Mr. Ottaway

I am grateful to my hon. Friend the Member for Buckingham (Mr. Bercow). I would certainly give way to the hon. Member for Workington (Mr. Campbell-Savours). We do not agree with him on this side of the Chamber, but we treat him with respect.

I shall return to IR35. In simple terms, the rules governing the employed and the self-employed are being changed. The self-employed person who looks as though he might be employed will be treated as employed, and will have to pay tax and national insurance contributions as an employee, not as a self-employed person. Expenses incurred in running a business will be taxed as income, and a mere 5 per cent. of turnover will be allowed as a genuine business deduction. That is not taxation of Britain's self-employed; it is discrimination against Britain's upwardly mobile work force. Those who will feel it hardest will be the high-tech sector, which is the sharp end of British industry. They are the people whom Britain can least afford to lose.

I shall quote from the Electronic Telegraph. A software engineer at an aerospace-related corporation preferred to remain anonymous because his contract is not yet completed. When it is, he plans to work with a German partner, or possibly an Italian. He said: The Government is creating a brain drain like the one that happened in the 60s. Software is a peculiar thing which has produced a good income for Britain and lots of spin-offs but lots of other countries like Germany are not very good at it. He thinks that they will become good at it, and so take trade away from Britain, in addition to the tax loss from losing high-income experts.

Another example is Mr. Steven Weaver, who says that he is ashamed to say that I voted for this business hostile Government…I have no wish to remain in a country that punishes enterprise instead of encouraging it. My company turned down six months' further work in the UK implementing e-commerce systems for our major telecommunications company, entirely because of IR35.

At the general election, Alan McRae was a Labour voter. He said: I spent three months and about £50,000 of my company money to try to develop a marketable item of hardware. IR35 will stop this kind of enterprise. Under the new rules, I could not afford to work here. My outgoings in travel and living costs will be swallowed up in two months under the 5pc ruling for expenses. So he moved. In his case, the total take to the Government is now zero.

I shall take another example. Would Laetitia Caster, the model chosen to represent the symbol of the French Republic, La Marianne, have come to the United Kingdom if she had known about IR35? She almost certainly works through a personal service company, and she ran away from France to avoid 54 per cent. tax, but found that she would have to pay 52.2 per cent. tax here. It comes as no surprise to find that when she arrived and saw what was going on, she quickly announced that she would not be resident in the UK for tax purposes.

Mr. Beard

Can the hon. Gentleman suggest a motive for people to leave full-time employment and set up a personal service company other than tax evasion?

Mr. Ottaway

The hon. Gentleman must consider the complexities of the issue. Many of the self-employed incur expenditure on the tools of their trade, particularly in the high-tech sector when they buy computer equipment. Under the self-employed rules, that expenditure is tax deductible, but under IR35 it is not. Many people therefore prefer to be self-employed so that they can at least count expenditure on the tools of their trade as tax deductible.

Mr. Desmond Swayne (New Forest, West)

I worked in the industry, and for most people it is not a question of giving up employment because most jobs are project-driven and contract staff are required, so more often than not full-time employment is not an option.

Mr. Ottaway

My hon. Friend is right. As I was saying earlier, we have a mobile work force, and work patterns are changing. Fewer people are employed as regular staff for a long period. Individuals move frequently and are subject to a wide variety of circumstances.

Mr. Beard

I understand the point that people who are employed on a casual basis may have a greater reward than those who are employed on a regular basis, but that should be given in their salary or payment. Why should it be given through the tax system?

Mr. Ottaway

It is not a reward. Any business is entitled to tax deductions for its operations, such as capital allowances for large corporations. The Government are saying that if people are caught by the IR35 rules, their expenditure cannot be tax deductible, particularly if it is more than 5 per cent. That is perfectly straightforward.

Mr. Campbell-Savours

There is one simple point that I cannot understand. Why should people want to relieve themselves of tax liability when the United Kingdom has some of the lowest income taxes in the whole of the developed world? Even the Tories kept telling us that in the last Parliament, and taxes are lower now.

Mr. Ottaway

The hon. Gentleman misunderstands me: people are not trying to relieve themselves of taxes; they simply do not want to be taxed on the turnover of their business.

Mr. Campbell-Savours

Some people say that it is tax evasion.

Mr. Ottaway

It is not evasion; that is illegal.

Mr. Campbell-Savours

It is avoidance.

Mr. Ottaway

Avoidance is a much better word.

Mr. Fabricant

I am grateful to my hon. Friend for giving way because I am conscious that he has faced a barrage of interventions. He mentioned tax relief on the purchase of equipment, but he should also make it clear that if the clause is passed, IR35 will mean that people will be unable to claim tax deductions for expenditure on travel and accommodation when they go out to seek work but are unsuccessful. That is a disincentive to go out and seek work.

Mr. Ottaway

My hon. Friend is right, although he should be careful to note that the Inland Revenue has issued guidelines about what is self-employment and what is employment. As far as I can tell, the old rules are being changed, although how that interacts with case law is not yet apparent. Perhaps we shall explore that in the Standing Committee. The point applies to people who are caught by IR35 because they are considered to be employed.

The Government say that the self-employed have nothing to fear from IR35, but how do we know whether someone is genuinely self-employed? As I said, the Government's guidelines will tell us, but those guidelines are applied by the Inland Revenue, which finds out who is self-employed by checking every single case. That is not means-testing, it is a witch hunt. Every person who thinks that, according to the Government's guidelines, he may be self-employed has the right to ask the Inland Revenue for verification.

The Inland Revenue has let it be known, however, through leaks, that if someone is unsure whether they are self-employed, it will almost certainly tell them that they are employed. That means that a subjective judgment is made by the official considering the case. In two test cases put forward by the Professional Contractors Association, the two people in question were doing the same job, and one was told that he was employed and subject to IR35, and the other was told that he was self-employed and therefore not subject to it.

What sort of encouragement to British industry is that? Someone may invest in equipment only to find that no tax relief is available. The uncertainty will be devastating to the high-tech sector, and it is no wonder that people are up in arms about IR35 and fleeing abroad. It is no wonder that Australia abandoned a similar scheme because of its complexities and the difficulty of introducing it.

Mr. Edward Davey

I have been listening carefully to the hon. Gentleman and agree with almost every word. Does he agree that it is absurd to introduce a system that requires small businesses to check every contract with the Inland Revenue? Is not that bureaucracy gone mad?

Mr. Ottaway

The hon. Gentleman is right. When, only a few weeks ago, the Australians realised how complex their scheme, which was very similar, would be, they abandoned it.

Concerns have been expressed not only by the industry and Members on both sides of the Committee but by the Minister for Small Business and E-Commerce. She went to the United States to try to woo ex-pats back to this country, but considering the chaos that IR35 is about to cause, who in their right mind would want to return? It is not only Conservative Members who are saying that the Paymaster General is wrong, but her fellow Ministers. As usual, however, she refuses to listen.

The good news is that part of the Government have got the message. They announced yesterday that the time taken to process work permit renewals is to be cut to three months to help Britain to compete for overseas specialists in areas such as information technology. The Department for Education and Employment press release said: The processing time for work permit renewals is to be slashed by up to three months following the introduction of a new renewal system…by the Education and Employment Secretary David Blunkett. The move, together with new measures arising from the work permit review, will particularly help IT employers to address skills shortages. It continued: The modernisation measures include: a fast-track work permit route for employers in recognised shortage sectors, such as IT.

The press release's notes to editors said: Examples of occupations on the fast-track applications route are included in Annex A. That annexe includes analyst programmers, software engineers, database specialists and IT managers. Part of the Government has got the message that there is a shortage of IT staff. The press release also said: We are listening to the needs of employers, and we are giving them what they need. I only hope that the message gets through to the Treasury.

Mr. Davey

Will the hon. Gentleman speculate on whether that is an example of joined-up government or shambolic government?

Mr. Ottaway

It is completely disjointed government. I hope that the Paymaster General will address the issue. Chamber debating banter aside, this is a serious issue because one Department is pushing a programme that is in complete opposition to what the Treasury is doing.

Germany is seeking to recruit IT workers from India. The United States is introducing a high-tech Act, which will come into effect on 1 October. That will allow the US to increase the number of visas for IT consultants coming to the country by 200,000 over three years. I hope that the Paymaster General will get the message that there is a shortage of IT workers around the world. Yet the Treasury, in its obsession about so-called fair taxation, is driving IT specialists out of the country as fast as other Departments are trying to woo them in, and believe me, they have plenty of places to go.

6 pm

We now have a battle between Departments and between nations. We have the case of Mr. Richard Marriott, who says that, although the Government claim to favour small business, they are pouring weedkiller on the seed-bed of enterprise. He is a specialist computer consultant and is moving to New Jersey to avoid IR35. Stuart Ranson, a programming consultant, was worried when Labour came to power, but returned from an overseas contract none the less. Now, they have finally driven me away— says the programming consultant, now in Holland. He adds: It was totally as a result of IR35 and the uncertainty. I object to being taxed at 52 per cent. and being called a tax cheat. I cannot save any money in my company for the times when I don't get work and the 5 per cent. expenses allowance doesn't go anywhere near to covering the cost of hardware, training, accounting and legal expenses.

Dawn Primarolo

Before the hon. Gentleman digs himself into an almighty hole, I thought I might mention that, in the United States of America, IR35 rules are in force: someone earning £55,000 gross will have net earnings of £37,000, but, of course, has to pay health costs. There are also service company rules in the Netherlands: someone earning £55,000 will take home £29,000.

Mr. Ottaway

The hon. Lady thinks that that is a reason to introduce IR35, but that is entirely in opposition to the vision of the Conservatives. If those are the conditions in the Netherlands and the United States, why does she not abandon the measure and so get IT consultants to come here and meet the requirements of the Department for Education and Employment?

Mr. Campbell-Savours

Did the hon. Gentleman already know what my hon. Friend the Paymaster General has just told him?

Mr. Ottaway

I shall be candid: no, I did not. However, the point is that we live in a competitive economy and we have to compete against other countries. It has been recognised that there is a shortage of IT consultants in this country, and we are going to have a problem unless we can attract more of them here. Introducing IR35 is not the way to do that.

Mr. Beard

Is the gist of the hon. Gentleman's case that there is a shortage of computer industry workers, some of whom have gone abroad, so we should try to attract them back by making tax dodging easier?

Mr. Ottaway

I am merely saying that we should leave the tax system as it has been since it was started, not introduce the new measure. That is not to make tax dodging easier.

The Government must reassess their attitude to professional contractors in this country. They do not recognise that the use of freelance contractors provides businesses with skills that are not available in-house. They do not recognise that many contractors became freelances as the result of experiencing redundancy in their middle years and realising that they stood little chance of regaining permanent employment because of changes in working practice and age barriers. They do not realise that a limited company provides the only reasonable way in which to compensate for contractors' lack of job security.

We support the Government in their objective of achieving fair taxation, but a system of taxation must be workable and the Government must be aware of its consequences. However, there are plenty of flaws in the Bill. Let us take the case of a professional musician who plays at a recording session in the morning, does a solo at a memorial service at lunchtime, rehearses in the afternoon with a group of friends with whom he occasionally fulfils engagements, and performs in the evening with his main employer, the orchestra with which he has a regular contract. The system is simply not workable in such cases: is the Revenue going to insist that four separate contracts apply? For Ministers to defend such a ragbag of nonsense is bare-faced cheek and lacks credibility.

One need only read a little further into the legislation to discover an even bigger nonsense. Paragraph 4 of schedule 12 extends the legislation to partnerships where the worker, as an individual or in combination with relatives, is entitled to 60 per cent. or more of the profits of the partnership. Its definition of relative refers to "husband or wife" and some other relatives. However, paragraph 21(4) states: For the purposes of this Schedule a man and a woman living together as husband and wife are treated as if they were married to each other. We have a double first. Hon. Members will have noted that the legislation does not apply, for example, to homosexual couples. We know that the Government are hostile to marriage, but that is the first time that common law relationships between a man and woman have been recognised in the tax system, and the first time that homosexuality has been treated as an exception under legislation. The Government must state whether that is intended or an oversight.

It is clear that the measure has been introduced in a rush. As I said, the Conservative Government rejected it several times as unworkable and liable to erode Britain's competitive position and to destroy labour market flexibility, but the current Government clearly do not have the vision to recognise the implications. IR35 is a turnover tax which creates uncertainty. It is being introduced with minimum consultation, and those representations that were made have been ignored.

We should ask whether it will produce the revenue that the Revenue expects or hopes for. A leading computer specialist, Gurcharanjit Sian, told the Electronic Telegraph: IR35 will cause the biggest brain drain since the 1970s when Labour taxed the rich until the pips squeak. Because of the large scale emigration, the estimates of extra tax revenue will also be wrong. The amount of tax my business and I paid last year was enough to finance a couple of Minister's salaries with some change left over for servicing a Jaguar. This year the amount of tax I pay will be nil. His emigration will mean that we lose his e-commerce expertise to another country. In addition, he is recruiting 100 Britons with similar expertise who have been hit by the same rules because they have similar businesses; they will go abroad with him. Mr. Sian adds: We have no British car industry left due to old Labour. Tomorrow there is a danger we will have no British e-commerce industry left either, due to new Labour.

I conclude with the arguments advanced by Mr. Alan Broke, a former president of the Chartered Institute of Taxation. In last year's Hardman lecture, he suggested: most complexities come about when politicians depart from the objective of raising enough revenue to cope with their spending and insert measures that have nothing to do with raising revenue but everything to do with trying to engineer social change. All the evidence suggests that tax systems are spectacularly unsuccessful at doing this. However, that does not deter politicians from trying. I could not have put it better myself.

The legislation is muddled. The measure breaches Labour's manifesto commitments, it is a bureaucratic nightmare, it erodes Britain's competitiveness, it will lead to a brain drain and it will not raise the revenue that the Government hopes for. The Government should delay implementation to give them time to reconsider the damage they are causing. That is why we shall vote against the clause tonight.

Mr. Edward Davey

I associate the Liberal Democrats with many of the remarks made by the hon. Member for Croydon, South (Mr. Ottaway). We shall vote against the provision because it is extremely pernicious and damaging to British industry's long-term wealth creating sector—the e-commerce sector. The Government came to power saying that they would champion the knowledge economy, and we have heard many speeches and read many publications in which they have said that they want to back the knowledge economy, the IT industry and e-commerce. However, the measure goes in precisely the opposite direction; it is a huge own goal for which our economy will pay dearly if the Government do not take the opportunity to change their mind.

I could recount the saga of the shambles that the Government have created, but I shall not detain the House for too long exploring every detail. When the Chancellor of the Exchequer made the initial announcement in the 1999 Budget, the system was even dafter than the current proposals. We had an accreditation system, which would have placed responsibility on the client in various contractual relationships.

The system was a nightmare and belatedly, in September, the Government were forced to do a U-turn on many of the original proposals. That U-turn was forced on them as a result not only of lobbying by the industry but of hard work, particularly by my hon. Friend the Member for Twickenham (Dr. Cable), whom I congratulate. He worked very hard with Members on both sides of the House in lobbying the Treasury to back down.

Unfortunately, in its announcement of 23 September, the Treasury failed to go far enough. It has helped some groups in the IT industry. It has helped the large companies and larger partnerships which earn millions of pounds a year, but it has not helped the small business or contractor or the sole trader. In failing to help the small business, the Treasury has again misunderstood the nature of the new economy and how the IT sector works.

The IT industry is very competitive and innovative, and relies on the small business—the one, two and three-person business—to generate the drive forward. Technology changes the parameters of the industry every three months; every month, there is a change. One cannot rely on larger companies and partnerships to remain on top of that. One needs the small business and the one-person contractor to provide the innovation and drive behind the new business. In failing to understand that, the Government have shown their ignorance of the way that the economy of this country and of the developed world is going.

Mr. Beard

I am following the hon. Gentleman's argument, but I do not understand why he seems to believe that someone who is employed in a major company in a particular role should be able to leave to set up a personal service company—for all sorts of reasons; perhaps for some of those that have been mentioned—and enjoy tax or national insurance privileges as a result. Surely the hon. Gentleman is arguing that there should be neutrality on either side of the boundary.

Mr. Davey

The hon. Gentleman raises the issue of whether there is tax avoidance and abuse of the system. I think that all parties agree that some abuse has occurred. The question is how we stamp out that avoidance while allowing genuine contractors to go about their legitimate business and provide the country's wealth. If he looked at some of the correspondence that I have received, he would see that many businesses in my constituency—and, I imagine, in his—will be caught by the proposal. The Government are using a sledge hammer to crack a nut. There is no doubt that they know that but are failing to act. One must question their motives.

Mr. Campbell-Savours

Is it not true that the Liberals' desire to raise the higher rate of tax by 10p would have exactly the same effect?

Mr. Davey

I am more than happy to confirm that that is our policy, because we have just debated it under the previous clause, but it would not by any means have the same impact. [Interruption.] The hon. Gentleman asked me a question; he should have the decency to listen to the answer. Many of the people who are writing to me earn far less than the £100,000 threshold at which the Liberal Democrats want to impose a 50p top tax rate. Many of them earn £30,000 or £40,000. They work in genuine small businesses and have modest incomes. The hon. Gentleman's party want to shove an extra 10 or 20 per cent. tax on to people who are struggling to make a living.

Mr. Fabricant

Are the Government not targeting the very people whom we need in this country—those who are not risk-averse, those who comprise the enterprise culture and those who work in high-tech sunrise industries? They are the very people whom we should not be driving abroad.

6.15 pm

Mr. Davey

The hon. Gentleman is absolutely right; I agree with everything that he has said.

If we are to oppose the proposal constructively, we must debate how we would tackle the abuse that we agree has occurred—the "Friday evening, Monday morning" abuse to which the hon. Member for Bexleyheath and Crayford (Mr. Beard) rightly referred. The Liberal Democrats believe that that abuse could be tackled without hitting the legitimate contractor. One could consider past contractual relationships between employees of a personal service company and its main or sole clients; we could target that abuse and hone in on it to stop it. That is the approach that we recommend, but not the one in the schedule that the clause will implement.

Mr. Rammell

Will the hon. Gentleman give way?

Mr. Davey

I shall give way in a second; I wish to make the following key point.

A survey of small contractors by the Professional Contractors Group, which represents the people targeted by the clause, showed that the main client of 4 per cent. of its members is the former employer. So it seems that not only have the Government overestimated the abuse, but their measure is totally inadequate to capture the people whom they say they want to stop.

Mr. Rammell

I heard the hon. Gentleman say that it would be wrong to criticise the proposition without offering an alternative. I then heard him say that he would hone in on abuse. Will he enlighten the Committee by telling us exactly what he means by that, or was the phrase simply vacuous?

Mr. Davey

I am more than happy to do so; in fact I just did. Before the hon. Gentleman intervened, I talked about the past contractual relationship between an employee of a personal service company and its main or sole client, which constitutes the abuse that the Government said they wanted to tackle. The PCG has come up with more detailed tax proposals that would stop the abuse about which the Government say they are concerned without hitting legitimate business. If the hon. Gentleman is concerned about the people in his constituency who will be hit—they may have voted for him—he should be criticising the Government and asking them to think again, just as in Australia, where the Government proposed a similar provision but realised that it would harm the new economy.

The far east and the Pacific rim are very competitive. Those countries realise that they must retain home-grown, skilled IT workers in order to develop businesses. Fortunately, the Australian Treasurer had the wisdom to back down. When the Australian Government changed their proposals, the Treasurer said: Originally the proposals aimed to set up a system whereby people who are really employees couldn't pretend that they were contractors and walk out of the PAYE system, but you had to protect genuine contractors who really are in business. And what we are trying to do here— by the change— is protect genuine contractors. That is what our Government should be doing, and that is what we are arguing for.

Mr. Quentin Davies (Grantham and Stamford)

The hon. Gentleman quoted the figure of 4 per cent. of contractors whose principal customer is a former full-time employer. Does he agree that for many of those contractors, the relationship will have changed at the initiative of the former employer? Those people will have been made redundant. The employer will have decided that he could no longer bear that individual as a fixed cost, but could do so as a variable cost. In other words, the individual who is pushed into being a contractor bears the economic risks of his activity in a way that he previously did not. It is perfectly right and economically rational that such people should be taxed on that basis, as self-employed.

Mr. Davey

Although I agree with the thrust of the hon. Gentleman's point, in opposing the clause we must be careful not to give succour to employers who go down such a route. I agree with some of what the Government say about the Friday evening, Monday morning practice being wrong. Far fewer employers use it than the Government are trying to make out; none the less, we must not give succour to people who behave in such an appalling way. We are against such abuse of the tax system. We are in favour of a different approach, which does not discriminate against small companies. The Government will be taken to the courts because of this measure, and rightly so. I do not know whether the Conservatives are pleased that it will be under European legislation that the Government are criticised in the courts—

Mr. Bercow

Ends and means.

Mr. Davey

It seems that some on the Conservative Benches want to have their cake and eat it. We will not let them do that.

The Professional Contractors Group will seek a judicial review, because it believes that the Government's proposals represent anti-competitive measures that discriminate against small businesses, which are the bedrock of the economy. The measures favour the big boys, and that must be wrong.

Mr. Bercow

I strongly agree with the hon. Gentleman's comments about discrimination against small firms. Should we not therefore be told by the Paymaster General whether, against all the evidence with which she will have been provided, she believes that the 5 per cent. expenses limit is, on average, adequate to cover accountancy, computer and training costs, or whether she knows perfectly well that it is not adequate, but that she does not care because the figure has been plucked arbitrarily out of the air, as a capricious means by which to raise taxes?

Mr. Davey

The hon. Gentleman is right. The Government must justify the 5 per cent. figure, and I fear that they will be unable to do so. We pointed out to the Paymaster General that the figure does not represent the training cost that must be borne by contractors in the industry. They often find that within six months their skills are obsolete, because the industry changes so much. They will be out of business unless they spend heavily on investment in their skills.

In response to that argument, the Government say that employees must fund their own training costs. The Government clearly fail to see the difference and the issue that we are trying to highlight. A self-employed business man or woman trying to build up his or her business needs to make that investment. In the new economy—the knowledge economy—such an investment in training and knowledge is comparable to an investment in machinery and plant in the old economy. If the Government fail to realise that, they will damage the cornerstone of the country's future wealth.

The discrimination against small companies is of particular concern to Liberal Democrats. The Government have granted various exemptions to larger companies, which smaller companies will not enjoy. With such a bureaucratic system, as the hon. Member for Croydon, South described it, the compliance costs will be much higher for small companies. The Government are reinforcing the existing anti-small business features of the tax system. Small businesses already have higher compliance costs than larger companies. Again, the Government seem to be favouring the big boys.

As for who will be caught by IR35 and who will not, the key issue is the definition of self-employment. No doubt we will debate that in detail in Committee. The Government need to realise that, in the knowledge economy, self-employment is inevitably a more difficult concept to pin down.

In the case of physical goods—say, rabbit hutches—it is easy to prove that one is a sole trader manufacturing rabbit hutches and selling them on. A sole trader running a shop can show that he has premises from which he sells his wares. However, if the goods and services that one is providing are in one's head, and those are provided to a number of clients, of course that will be more difficult to prove under the old rules fashioned two centuries ago.

When the Minister replies to the debate, will she tell us of any case dealt with by the courts in which they have defined for the knowledge economy the criteria that constitute self-employment? Whereas there are a host of cases that define self-employment in many other industries, there is no such case law for the new economy and the IT sector. The Government and the Inland Revenue have to make it up as they go along. That leads to huge uncertainty and will result in people facing penal tax rates, which they should not have to do.

Mr. Gerald Bermingham (St. Helens, South)

I have been listening to the hon. Gentleman with great care, and I declare an interest as a practising lawyer. I have many clients; I have no single client. I am self-employed. I can offset the costs of going to my place of employment, and the costs of my chambers—what I have to pay towards the bill. I cannot offset anything else, except perhaps the odd course. What is the difference between me and someone in the IT sector? [Interruption.]

Mr. Davey

There are many differences. If the hon. Gentleman looks at the details, he will see that the costs that self-employed people in many businesses can offset against their profits are much greater than those that he mentioned.

Mr. Bercow

Does the hon. Gentleman agree that, as one of my hon. Friends lucidly observed from a sedentary position, one important distinction between the two individuals is that whereas there is no obvious shortage of lawyers, there is an obvious and worrying shortage of IT professionals?

Mr. Davey

The hon. Gentleman makes a good point.

I shall take head on one of the charges made by the Minister on Second Reading and in another forum—

Mr. Campbell-Savours

rose—

Mr. Davey

No, I will not give way.

The Minister made a comparison between an employed nurse and a self-employed IT consultant. That is like trying to compare apples with pears. A more correct comparison would involve a nurse working from a nursing agency. The Minister would find that under tax law, that nurse is seen as self-employed and would thus be subject to exactly the same tax rules as the self-employed IT contractor.

If the Minister makes the precise and fair comparison, she will find that the people who are complaining about the legislation are on the side of nurses and teachers. We argue that employees in the private sector and the public sector should be on the same tax system, and that the self-employed who work in the public sector and in the private sector should also be on the same tax system.

That is the basis of our argument, and the Minister must not try to confuse it. I refer her to a case—Clark v. Oxfordshire Health Authority 1998—in which the Court of Appeal ruled that a nurse working for a nursing bank was indeed self-employed for tax purposes. Let us not have false arguments from the Treasury Bench tonight, please.

A self-employed person—a nurse or an IT contractor—is subject to a different tax and benefits system from those who are employed. That is a straight fact, which the Government should acknowledge. The self-employed are liable to corporation tax if they make real profits, and they will not get the benefits that employed people get. The distinction between being employed and being self-employed is crucial and of long standing in our taxation system.

The Government are trying to change that through a hidden tax increase. It will be more damaging to the economy in the longer term than any of the other tax increases that they have tried to impose, because it will damage the key sector of the future British economy.

Mr. Frank Doran (Aberdeen, Central)

The attack that we have heard from the two Opposition Front Benches is familiar to all of us who have been following the matter. The Liberal Democrat spokesman was a little more sensitive to what the Government are attempting to do, but we have just heard a recitation of all the claims made by the Professional Contractors Group, which most of us received in our mail bag, without any attempt at analysis or proper examination of the system.

If the Government pursue their agenda to introduce a fair tax system, which we all support, and business taxes are progressively reduced to become the lowest in Europe, loopholes need to be closed. I support totally the principle behind the Government's aim, but I shall deal in detail with one aspect of the process that causes me concern in my constituency.

6.30 pm

Most of the debate on the issue so far in the Chamber and earlier has concentrated on the IT industry. That is developing into a global industry, and the reality of any global industry is that people will go where the work is. It is nonsense to suggest that hordes of IT specialists will uproot themselves and their families to go to other countries on the assumption that those countries do not charge tax. The hon. Member for Croydon, South (Mr. Ottaway) appeared not to be aware that such countries have similar legislation in place. People will go where the work is, and it is clear that much of the work is in Britain, which is spearheading a lot of development.

Mr. Ottaway

I should clarify that the quotes that I gave were not from people who have not gone or may be going, but from people who have gone.

Mr. Doran

I am questioning whether the Government's proposals are the sole reason for their going.

During the past 14 months since the Chancellor made his announcement, I have received a substantial mailbag on the issue. My hon. Friends the Members for Aberdeen, North (Mr. Savidge) and for Aberdeen, South (Miss Begg) and I organised two meetings in our constituencies to meet contractors affected. More than 180 people attended and we had full and frank discussions. [Interruption.] They were useful discussions. Those meetings brought to my attention the problem that I am about to raise and clarified a number of issues for me, making me even more supportive of the Government's position.

The comments that have been made to me fall into two categories. There are the honest contractors who say, "Yes, this has been going on for years. We wondered when you would catch up with us," and there are the others who mouth the sort of comments that we have heard from the Opposition Front-Bench spokesman. We need a little reality and balance.

I want to concentrate on a particular issue. I want to talk not about the IT industry, but about the oil industry. Aberdeen is the centre of the European offshore oil industry. As most hon. Members will know, oil is a global industry. It is also a volatile industry. For example, in 1985–86 there was a substantial downturn in the industry and the oil price went down from about $32 a barrel to $9 almost overnight. About 50,000 jobs were lost, but, because they were spread throughout the country, there was not quite the outcry that we have seen with other large-scale industrial closures or job losses. However, Aberdeen was seriously affected.

The oil industry responded quickly, altering the basis on which work was carried out in Aberdeen. I cannot give percentages because each company varies, but a large proportion of people now employed in the oil industry are contracted. The industry uses them to provide flexibility for the bad times. For example, at the beginning of last year, when the oil price virtually halved overnight from about $20 a barrel down to $9 or $10, the redundancies were almost invisible because contractors were simply shaken out of the industry. Their contracts were terminated. All the contractors who stayed, from the large contractors employing hundreds, sometimes thousands, of people, down to the one-man bands that we have talked about tonight, were forced to take substantial cuts, some as high as 20 per cent., which were imposed by the oil companies across the board with no questions asked. That was the requirement if people wanted to keep a contract. Contracts are written in a way that ensures that oil companies have the power to do that. It gives the oil industry flexibility and that is the price that people who work in the oil industry have to pay.

The oil industry is international. I am used to seeing in my surgery people who have just come back from contracts abroad—from Kazakhstan, the Gulf of Mexico, Australia and Indo-China. They work all around the world. We already have a global industry, and people are used to moving around in it. The oil industry is a mature industry. Some people say that it is in decline; it is, but it is a slow decline. However, it is clear that its future will depend on the sort of contracting arrangements that we have debated tonight.

One of the issues that came up at the meetings that I had with contractors in my constituency was employment status. The hon. Member for Kingston and Surbiton (Mr. Davey) talked about employment aspects. One of my concerns about the Government's proposals is that there is a suggestion in the legislation that there is an element of choice. Unfortunately, in my constituency, employees who are contracted by the oil industry do not have a choice. There is a chain of employment, and contractors are employed in the industry only through employment agencies, many of which specialise in the sort of skills that are needed offshore. Those employment agencies provide employees, either for the main contractors who provide the services directly to the oil industry or for the oil companies themselves, but usually for large contracting companies.

When I discussed the issue with the oil industry and the employment agencies in my constituency, I asked why it was a requirement that employees who worked as contractors should establish companies. Only companies are accepted. All are forced to form personal service companies to provide the contracting skills that the oil industry wants. The simple reason is that the Income and Corporation Taxes Act 1988 places a liability on employers to pick up the tab for any failure on the part of an employee to pay national insurance or PAYE contributions. The oil industry, the contractors who work for the oil industry, and the employment agencies that are the direct line of employment for my constituents who work as contractors in the oil industry, are not prepared to take that risk, so my constituents are forced to form companies.

In discussions with my constituents, collectively and privately, many have made it clear to me that their choice would be, first, obviously, to have a proper job with proper pay, paying PAYE and national insurance contributions like everyone else. That option is denied to them because of the nature of the oil industry. Their second option would be to be self-employed without the hassle of running a personal service company and having to make returns and employ accountants, and to obtain the reliefs to which they would be entitled as self-employed people. However, the system does not allow for that because the employing companies are not prepared to take the risk.

My concern is that service companies in my constituency have no choice. Many see the advantage of self-employed status, but because of the effect of the 1988 Act, that option is not available to them. Therefore, while reiterating that I support the aims and principles of the legislation, I ask the Minister to consider that point.

Sir Nicholas Lyell (North-East Bedfordshire)

In the past three years, there has rarely been a subject like this on which so many thoughtful and intelligent constituents have come to see me to discuss matters so deeply. Ever since the IR35 proposal was put forward by the Government, I have been visited by a series of constituents, mostly working in the IT industry, who are deeply concerned about the proposals and whose fears have not so far been assuaged by the answers that I have received from the Minister.

The net point made by the Chief Secretary is that nobody will be caught by IR35 who would not be deemed to be an employee under existing employment law. That is stated in the letters that I have received in reply to the many letters that I have sent on behalf of constituents. However, my constituents are not satisfied that that is the case and, unless the Minister can satisfy the House that it is, the proposals should be removed. That is why I support the Opposition's proposal to delete clause 59.

The contractors in the IT sector who come to visit me make the point that they in no way seek to avoid tax; they seek to provide services to an industry that demands flexibility in a way that enables them and their employers—I do not use the word strictly, but those who use their services—to operate in the most effective manner. They point out that they always take a reasonable salary from their service companies, and that those service companies pay the usual tax and insurance on salaries. They say that they have no knowledge of the system whereby someone is an employee on Friday and self-employed on Monday morning. One of those who came see me is an experienced chartered accountant, who acts for many people in the IT sector. He, too, has never come across the Friday evening, Monday morning syndrome, that is part of the Government's case.

Contractors point out that they either work for several companies that use their services, or for one company at a time, for periods that are not easy to predict. That requires the flexibility to be able to move out of a particular sort of employment and take the risk of seeking new employment. As I said earlier, the contractors use service companies, which means that they pay tax and national insurance. Those companies are similar to the examples, such as that of the nurse, that Ministers cite when pushing their case. It was rightly pointed out that an agency nurse would make a better comparison.

The contractors stressed the unreasonableness of the 5 per cent. expenses limit. I should like to know whether the Paymaster General intends to stick to that. I am not sure whether she is catching my remarks. If we consider the costs of accountancy, purchasing and maintaining computers, and training, it is unrealistic to expect them to be met on 5 per cent. The Government should take note of that. One contractor said that his training costs regularly totalled £2,000 a year.

It is not fair to treat those who work for a service company simply as employees. They are treated as employees without the benefits that ordinary employees receive. If the contractors whom we are considering were employed, an employer would pay his share of their national insurance contributions. if they were made redundant, they would receive redundancy payments. They do not receive such payments under the system that they use. If they were unemployed, they would receive jobseeker's allowance and the benefits attendant on that. As employees of their companies, they have to forgo those benefits. The Government therefore do not treat like as like.

The Government claim that the proposals are tax neutral. For the reasons that I outlined, they are not. In an artificial way, a specialised IT provider will pay more tax than if he were an employee. The proposals are not, therefore, tax neutral.

Mr. Bercow

Does my right hon. and learned Friend agree that, if the proposals turn out to be tax neutral, it will be the consequence not of a deliberate Government policy decision, but of several contractors ceasing to trade and thus not paying tax?

Sir Nicholas Lyell

My hon. Friend makes a good point. It leads to a point that many hon. Members have made and to which the Government would do well to pay heed. People are voting with their feet and leaving the country or seriously considering doing so. That is damaging to the country, and will lead to a reduction in the Government's tax take. Hon. Members of all parties have heard highly intelligent constituents, who plainly pay a fair proportion of their income in taxation, express revulsion at the Government's proposals. That would not happen unless there was a serious reason for it.

6.45 pm

Although in the past six months the Government have been pigheaded and refused to give ground, there is a chink of light. The letters that we receive from Ministers encourage people to discuss the matter with their tax inspectors to ascertain whether they can find a way through. Perhaps that means that the Government do not want to be seen to back down, but are giving a nod and a wink to tax inspectors.

The proposals have caused genuine anxiety to a highly intelligent and undoubtedly modern sector in the business community, which the country badly needs. The Government use the expression "modernisation" so often that it makes many of us feel ill. They ought to reconsider the proposals carefully. Unless they are satisfied that those proposals will not do the damage that my constituents fear, they should revise them.

Mr. Fabricant

The Government propose the measure for only one reason: not to close loopholes but to raise money for the Treasury. The clause is not tax neutral; it will raise £900 million. As I said earlier, it will raise that money from the companies, organisations and people whom we need to keep in this country. We need people who are not risk averse, who work in skilled high-tech, sunrise industries and know about computers. Unlike the Prime Minister, who, as a stunt, tried to show that he knew all about e-commerce, but failed to find the "T" for "Tony" on the keyboard, we are considering people who know how to generate not only software for computer companies but income for the nation.

The Paymaster General simply does not care. I sent her 11 plastic bags, which contained more than 3,500 names of people who said that although they were not experts in tax, they were experts in computers and their companies. They said that they would leave the country or, even worse, remain in the country but invoice from abroad and thus deprive the Revenue of money if this nasty clause were passed.

Mr. Barry Gardiner (Brent, North)

Is the hon. Gentleman trying to undermine the arguments of Conservative Front-Bench Members? He pointed out that the Government will raise £900 million in revenue through the measure. However, Conservative Front-Bench Members argued that the very 350,000 people to whom he referred, and others, would leave the country and that the money would not be raised. Does the hon. Gentleman intend to undermine Conservative Front-Bench Members, or does he simply fail to understand their arguments?

Mr. Fabricant

The hon. Gentleman would have made a good intervention if he had kept to the point. I realise that he is only a new boy, but, in future, if he wants to make a killer point, he should make it short. Rambling on a bit gives one time to think.

Mr. Gardiner

Answer the question.

Mr. Fabricant

I shall answer. The hon. Gentleman is an opera singer and clearly creative. His mind wandered during my introduction. I mentioned earlier in an intervention that the figure of £900 million came from the Red Book, which makes a prediction. Perhaps the hon. Gentleman has recently appeared in the Chamber, or perhaps only his body has been present while his mind has been elsewhere, but as my right hon. and learned Friend the Member for North-East Bedfordshire (Sir N. Lyell) and others, including me, said, the Government probably will not raise the money because people will go out of business or go abroad.

The Government cannot claim ignorance because people have gone to see the Paymaster General. She has not always been in a particularly listening mood, but people have talked to her and she has not responded.

Mr. Bercow

Is my hon. Friend aware that my constituent Mr. Mark Gillis, a software consultant, has just ceased to trade? At the beginning of April, I wrote to Treasury Ministers on his behalf. The Paymaster General signed a reply dated 26 April, which she appears not to have read and which shows no acknowledgement of the fact that that individual is one of her first victims.

Mr. Fabricant

Mr. Mark Gillis may be one of the first, but I am sure that he is the first of many—[Interruption.] This is no laughing matter. He is one of the very people we need if this country is to succeed in the 21st century.

Mr. Bercow

This is no laughing matter for Conservative Members or, in fairness, for Liberal Democrat Members. Does my hon. Friend agree that it is disgraceful that Labour Back Benchers find it hilarious that someone has ceased to trade, losing an invaluable business? Such is their intelligence.

Mr. Fabricant

Such is Labour Back Benchers' understanding of business. Those who have spoken are barristers, solicitors or social workers. Those are all great careers in themselves, but such people are risk averse.

Mr. Bermingham

You are joking.

Mr. Fabricant

Perhaps not barristers. I exclude the hon. Gentleman from that remark, although I shall refer to a couple of inaccurate points that he made earlier. The Labour party is unfamiliar with what business men—even small business men—have to endure. If one is to be taxed at a particular level, there must be a benefit.

Mr. Beard

Labour Members' derision had nothing to do with a person going bankrupt. It was prompted by the absurdity of attributing going out of business to legislation that has not yet been passed.

Mr. Fabricant

As we say in the Chamber, the hon. Gentleman makes his point in his own way, and his own way is interesting indeed.

Mr. Bercow

I am grateful to my hon. Friend for giving way again as he has given me the opportunity to elucidate for the benefit of the hon. Member for Bexleyheath and Crayford (Mr. Beard). Does my hon. Friend understand that my constituent Mr. Mark Gillis is ceasing to trade now because he has the capacity to see ahead? He is aware beyond doubt that he will be clobbered by the Government's proposals and that remaining in business will not be worth his while. He is giving up the struggle against the Treasury leviathan.

Mr. Fabricant

Either way, it is interesting to speculate: will Mr. Mark Gillis choose to stay in this country and claim from the state as unemployed or will he become an opportunity cost by going abroad to trade, thus reducing this country's status? That effect will be magnified many thousands of times as the high-technology and software writing position of rival countries improves.

IR35 is nothing new. Such a measure was proposed by the Inland Revenue in the early 1980s, the late 1980s and the early 1990s as a tax-producing dodge—a way of raising money for the Treasury. Previous Conservative Chancellors rejected that method outright because they recognised the effects that it would have on small business men and sunrise industries in particular. What is new is that this Government, because they are unable to understand the requirements for producing a high-technology-oriented nation, have fallen for it hook, line and sinker, and 60,000 people will he affected. Perhaps they will all go abroad. Then the Government can say, "We've got 60,000 fewer people. That is why we are allowing so many asylum seekers into this country." [Interruption.] I shall not pursue that line, Mr. Martin, because you would rule me out of order, but there is no other logic to it. Surely the Paymaster General and the Chancellor are not naive enough to fall for a particular proposal even though previous Chancellors refused to do so. That would be absolutely wrong.

Dawn Primarolo

I am sure that the hon. Gentleman did not want to make a gratuitous and unacceptable comment in referring to asylum seekers. May I help him? If he wants to criticise the Government on the fast-tracking of work permits, he is entitled to do so. However, every Member of the House recognises that pouring oil on the flames represented by the hysterical language that some Members use about asylum seekers has no place in the Chamber.

The First Deputy Chairman

Order. I shook my head earlier to show that I would not allow a debate on asylum seekers. Points have been made by both sides so it will be best if we return to the debate on the clause.

Mr. Fabricant

Thank you, Mr. Martin. I would not like to create a situation in which the Paymaster General can be even more pompous and patronising than usual.

A couple of interventions on my hon. Friend the Member for Croydon, South (Mr. Ottaway) showed a lack of understanding of the effect of IR35, and the hon. Member for St. Helens, South (Mr. Bermingham) asked an interesting question of the hon. Member for Kingston and Surbiton (Mr. Davey): what is the difference between a lawyer and a worker in a high-tech software industry? Let me answer that. I put it to him that there are two clear differences. First, as a barrister, he is self-employed and already enjoys all the benefits of not being hit by IR35. When the Bill is passed, he will retain those benefits, but people in high-tech industries will not. In effect, they will be on schedule E, while he is on schedule D.

The second difference is more profound. As a lawyer, the hon. Gentleman does not have to invest quite so much in technology. He has to invest in books and needs access to the internet, but I am not convinced that he requires access to as much software and chip writing as those who work in the high-tech industries. He also does not have to travel to seek work. If he had to go to Aberdeen to represent an oil company, he would be retained by a solicitor and would already have the contract. People seeking a contract to write software may travel to Aberdeen, not win the contract and be unable to claim travel and accommodation expenses.

Sir Nicholas Lyell

My hon. Friend points up another unfairness between IT contractors, on whose behalf we are speaking, and self-employed people such as myself and the hon. Member for St. Helens, South (Mr. Bermingham). I have returned to private practice and I know that barristers are spending a lot of money on IT as well as on books and retraining. However, they are not restricted to 5 per cent. of their gross earnings whereas IT contractors, who are at the cutting edge, are being so restricted. I want the Government to justify that. Can my hon. Friend help me?

7 pm

Mr. Fabricant

Sadly, I cannot help my right hon. and learned Friend—and, even more sadly, I doubt whether the Paymaster General will be able to help him either.

It is clear that those who will be hit by IR35 will experience all the penalties and none of the benefits. We have already heard that they will receive no sick-pay benefit, no holiday-pay benefit and no unemployment benefit. They will not be able to charge equipment against tax; nor will they be able to charge their travel and accommodation.

We are discussing a provision that was rejected by Conservative Chancellors, by Australia and Germany and, to an extent, by the United States. I ask the Minister to check with her officials after the debate to establish whether the information that she gives is wholly correct, because she will find that in some American states there is no IR35 provision.

Yet again, Labour has demonstrated that it is no friend of business. Yet again, it has accepted tax-raising schemes proposed by the Inland Revenue and rejected by Conservative Chancellors. Yet again, Government spin doctors have been dragooned into demonising small high-tech businesses in sunrise industries by namecalling—by branding them tax-dodgers. Yet again, Labour has shown itself to be of the deepest red hue: while pretending to be "new Labour", it has driven those that are part of the enterprise culture into a new and more damaging brain drain.

Mr. Bermingham

I did not intend to make a speech, but when I hear an argument so misused and language so abused in the making of terrible points that have no merit, I feel that I must deny my natural self-restraining principles.

The hon. Member for Lichfield (Mr. Fabricant) has done it again. I do not know whether it is the time of the month or the movement of the moon that produces the rants, but they occur with periodic frequency. The hon. Gentleman really is being rather silly—and I say that with the greatest respect.

Let us suppose that I am an information-technology contractor, and an expert in the field. Let us suppose that I suddenly decide that the tax regime will be against me, and resolve to take myself to Paris, Frankfurt, Dublin or another European capital or major city and flog my services from there. In that event, I would find myself paying tax in Paris, Frankfurt or Dublin, where personal taxation is higher. Oh dear! It seems that that would not be a very wise move.

I realise that, as a humble barrister, I do not live in the whiz-kid world of today; I live in the world of yesterday. Let me gently remind the hon. Member for Lichfield, however, that I was once a senior partner in a firm that employed hundreds and hundreds of people, and today employs thousands. I have just a little bit of knowledge about the running of large businesses with million-pound turnovers: I speak on the basis of experience rather than ignorance.

Mr. Ottaway

That was a long time ago.

Mr. Bermingham

Yes, but there is a funny thing about some of us. We may move to a different side of our profession, but we keep in touch with our former colleagues, and we therefore keep up to date with what is happening—shock, horror.

Be that as it may, let us suppose that I am an IT consultant, or perhaps an engineer. Why do we not hear much about the Institution of British Engineers and the engineering consultants? Why do we not hear much about surveyors, chartered accountants, or, indeed, specialist pharmacists and forensic scientists who act as sole practitioners and consultants? We hear nothing about those people, who are all self-employed. That is because, when they set out to be self-employed, they set themselves up in a way that justified the tax allowances and expenses that they could claim. How do they do that? Well, they charge a fee for their services, and if they earn more than £60,000 a year gross—I think that that is the current turnover—they charge value-added tax, which is, of course, collectable and payable. They then find themselves in the interesting position of having to finance their own expenses and overheads. In my case, that will be chambers fees; in the case of pharmacists or forensic scientists, it may be laboratory fees. They will offset the costs against their incomes, which will result in a net figure on which they will pay tax in the normal way.

There is, however, a risk in being self-employed. Self-employed people are not paid during their holidays. They are not paid when they are sick, so they cannot succumb to any illness unless they are insured against it. If they are made redundant—if they are no good, and are out of a job—they do not receive unemployment benefit. That is the risk.

If IT consultants set themselves up in the same way, they must take the same risks as the rest of us who are self-employed. I am not here to say whether that is good or bad; but if there are dodges that mean that some people receive holiday and sickness pay and all the rest while pretending to be self-employed, and if that is not open to those who are self-employed, should there not be a level playing field? Let me tell the hon. Member for Lichfield and the hon. Member for Kingston and Surbiton (Mr. Davey) that there are ways of organising one's affairs to ensure that one is genuinely self-employed and, as such, taxed genuinely. There are, however, risks and disadvantages in being self-employed, from a taxation and from a personal point of view.

Mr. Edward Davey

The hon. Gentleman is completely misrepresenting the issue. The self-employed IT contractor does not receive the sickness and unemployment benefits that the hon. Gentleman is trying to claim that he would receive: the hon. Gentleman has misunderstood the tax change that we are debating.

Mr. Bermingham

In fact, the hon. Gentleman has completely misunderstood what I am saying. I said that, for someone who is self-employed, those are the disadvantages. If the IT contractor is genuinely self-employed and consults an accountant, he will be in exactly the same position as others and there will be no problem. I do not understand the sudden assumption that there is a difference.

Mr. Malcolm Bruce (Gordon)

I know that the hon. Member for Aberdeen, Central (Mr. Doran) has already raised this issue, but may I raise a specific point relating to contractors in the oil industry? They do not have the option of becoming self-employed, because the oil companies will not deal with them if they do. They must set themselves up as separate businesses, yet they are restricted to the 5 per cent. allowance. Many of my constituents say that their expenses constitute 10, 15 or 20 per cent., but that they cannot reclaim those amounts. Is that fair?

Mr. Bermingham

That is exactly why I accept what was said by my hon. Friend the Member for Aberdeen, Central (Mr. Doran). I was about to refer to exceptional circumstances in which the nature of the industry—[Interruption.] Just one second. In such circumstances, the nature of the industry creates a climate in which a level playing field is not possible.

I accept the concept that lies behind what the Government seek to do. Like my hon. Friend the Member for Aberdeen, Central, I also accept that there are exceptional circumstances that need to be dealt with. However, we must not throw out the baby with the bathwater; we must seek to rectify the situation, and perhaps that will happen later.

That is why I was rude about the hon. Member for Kingston and Surbiton. In fact, when I intervened on him I was trying to be helpful. If he does not accept that, it is sad. Sometimes I try to be helpful even to Liberal Democrats, although it goes very much against the grain. It was, however, the speech of the hon. Member for Lichfield that prompted me to speak, because again it was the wrong point in the lunar cycle and we got a rant.

Mr. Fabricant

On a point of order, Dr. Clark. Is it in order for one Member to make personal remarks about another?

The Temporary Chairman (Dr. Michael Clark)

I do not think that I heard any personal remarks.

Mr. Bermingham

I agree with my hon. Friend the Member for Aberdeen, Central, who made a valuable point. I hope that it will be taken on board, that eventually self-employed will mean self-employed, and that the advantages and disadvantages will be the same for all self-employed people, whatever their field.

Sir Robert Smith (West Aberdeenshire and Kincardine)

I welcome the contribution that we have just heard because it highlighted the problems of the oil industry and reinforced the point already made by the hon. Member for Aberdeen, Central (Mr. Doran). I too represent a constituency in the north-east of Scotland, where many constituents are concerned about how the proposals in IR35 will affect them. I reinforce the point that it is not just the one sector—the IT industry—that will be affected; several sectors are affected.

When the Welfare Reform and Pensions Bill was going through the House last year, many Labour Members were completely blank as to whether there was a problem at all, or where it was coming from. It seems to be an issue that affects some constituencies very badly and does not touch other constituencies. Well over 60 constituents have raised the issue with me directly, yet I have talked to Members from other parts of the country and not a single constituent has raised it with them. That is why the understanding is perhaps deeper among some Members than others.

I reinforce the point about the oil industry. I hope that if the Government cannot take it on board tonight, they will at least hint that they will take it on board later in the Standing Committee. People find themselves working through single-person companies not because they went to an accountant and said, "How can I minimise my tax take?" but because they lost their job, and setting themselves up to work through a single-person company was the only way they could get another.

The Government must therefore look carefully at the arbitrary 5 per cent. costing and explain where it came from and how it was worked out. Why can they not recognise genuine costs that have been incurred by someone trying to operate a company, and look at the actual costs on a case-by-case basis, individual by individual?

The other problem in the oil industry is the ageing profile of the people working in it. Many of them are getting near to retirement. They are trapped, having made their financial plans on the basis of the current arrangements. I wonder whether the Government could give them any hint, advice or certainty as to how they might sort out their pension arrangements and what their future plans should be if the Government push through their proposals unamended. Now that those people are so near to retirement, there is little scope for them to make adjustments. They have planned on the basis of a way of working and a tax regime that they understood, working towards retirement.

Others may have made slightly better provision for retirement, but there is a threat of skill shortages. The downturn in the oil industry and the low prices have masked a serious recruitment problem. The next generation is not coming into the industry. Some people will look at the proposals, the way their life is going and what they have already sorted out and will say, "Perhaps early retirement is the way forward for me." There could be a loss of skills and a loss of work force.

I hope that we will hear from the Government that they recognise that it is not just an IT problem, but one that affects other sectors in the economy—it affects many in the north-east of Scotland in particular—and that the people coming to my surgeries who face 20 per cent. cuts in their contract income, as the hon. Member for Aberdeen, Central has already said, are not high-flying earners looking for a great tax avoidance regime. The industry is structured in a certain way, so they have worked in that way. They have now been hit by a sledgehammer and are looking for some reassurance from the Government that, finally, at the 11th hour, there will be an understanding that they have genuine costs that need to be met and recognised.

Mr. Swayne

In view of the lucid exposition given by my right hon. and hon. Friends, from which we have all just benefited, and particularly in view of the robust contribution of my hon. Friend the Member for Lichfield (Mr. Fabricant), I shall not need to detain the Committee long.

Like my right hon. and learned Friend the Member for North-East Bedfordshire (Sir N. Lyell), I have benefited from meeting many intelligent and articulate constituents who have brought their concerns about the measure to me, but they are not quite as clever as some of us might imagine. I had about 30 written representations and have met half the authors. About two thirds of them—let us say 10 of them—prefaced their remarks with the extraordinary and unprompted admission: "I did not vote for you. I am very sorry, Mr. Swayne. I voted new Labour for the first time at the general election." One cannot help having a slight smirk on one's face and saying, "Is it not a measure of your own contributory negligence that you now find yourself in the position that you are in?" They were warned that it would be like this and that is how it has turned out. However, one has to rise above that personal, selfish, unworthy reaction and consider the national problem that is being engendered by the measure, which will affect not only our own constituents.

7.15 pm

The Government's attitude has been given away by the terminology that they have used. They have spoken of disguised employment that should be otherwise—that should be proper employment. It is a Canute-like attitude. They do not like the world that they find but want it to be otherwise and introduced the measure to make it so.

The world is different for a good reason. For 10 years before I was elected to the House, I worked as a systems analyst for a large bank. That 10 years spanned the change—

Mr. Campbell-Savours

Who was analysing whom?

Mr. Swayne

For the benefit of the hon. Gentleman, who comments from a sedentary position, I was analysing risk management systems and dealing rooms at the cutting edge of modern technology, so I know what I am talking about. Those 10 years spanned great change in the industry. When I started, the IT department of the bank was effectively the monopoly supplier of IT services to the bank, but the technology itself changed and became much more project driven.

We required skills that we did not have. Those skills had to be acquired from the marketplace, but, given the nature of technical change, they were necessary only for a short period so we found ourselves relying much more heavily on the contract market.

Yes, we employed as contractors people whom we had previously employed full-time. That was not because we were a bogey employer who made people redundant and then tried to find a cheap way of employing them subsequently; it is the nature of the change in technology that has driven these things. The Government's attempts to turn back the clock by altering the tax system and the national insurance framework will fail, to the detriment of the industry as a whole and to our economy.

Last night, the hon. Member for Workington (Mr. Campbell-Savours) seemed unable to appreciate the fact that—[Interruption.] I can remember. He seemed to be unable to appreciate the fact that people change their behaviour in response to economic stimuli. He will recall that in the debate on excise duty he would not accept that a large price differential would affect how much that people traded legally or illegally in a market. That is precisely the attitude that now seems to dog Labour Members.

I accept entirely the force of the argument that has been made by Labour Members that if the IT high-tech contractor, who has largely been the focus of the debate, suffers certain disadvantages in respect of his employment conditions—the lack of sick pay, the lack of holiday pay or whatever—he will need to be recompensed through the pay packet, rather than through the tax system. That argument has force, but Labour Members fail to appreciate that we are, in effect, in a global market. Employees and companies can consider the conditions and the tax situation that apply elsewhere.

People who have skills and are capable of moving elsewhere will do so if they perceive that the circumstances will benefit them. That was precisely what the hon. Gentleman could not understand last night about the sale of cigarettes. It is also precisely what he cannot understand about the IT industry and how people move in response to economic stimuli.

Mr. Bercow

My hon. Friend is developing a powerful argument. Does he agree that for someone who ceases to be an employee of a company thereafter to become a consultant to that company is both commonplace and entirely unobjectionable? Is not the fact that it strikes Labour Members as so bizarre merely testimony to the fact that the great majority of them have only ever worked either in the public sector or for pressure groups and regard any other pattern of employment with incredulity?

Mr. Swayne

I often found myself having to acquire specific skills in order to manage a particular project. If someone who had previously been in the employment of my organisation was available in the marketplace, that person would be my natural first choice because of his knowledge of the organisation; so it is entirely proper that such people should be so employed.

Further to my point about economic stimuli, Labour Members fail to take account of the fact that we are desperately short of certain skills, and if we drive people with those skills abroad we will all suffer. Labour Members have continued to deny the fact that those people will indeed move abroad. As my hon. Friend the Member for Croydon, South (Mr. Ottaway) pointed out, they have done so and are doing so simply in anticipation of the proposed changes. I know that it is extraordinary for some Labour Members to consider that anyone would uproot themselves from England and go to Holland, for example, and have to live with brass money and wooden shoes. However, the reality is that people will move overseas, despite the prejudices of Labour Members. It is an extraordinary little Englander attitude from a party that claims to be so communautaire.

Dr. Vincent Cable (Twickenham)

I should like to say a few words in support of my hon. Friend the hon. Member for Kingston and Surbiton (Mr. Davey), who originally called for this debate. The speeches that we have heard this evening have vindicated that request.

Difficult though it may be, given the way in which the debate has proceeded, it might be useful to identify what are admittedly rather limited areas of common ground. There is some acceptance among Labour Members, at least formally, that there are people working in the IT industry and the offshore oil industry who are self-employed, even in the narrow terms defined in the Inland Revenue regulations and in tax law. I believe that the estimate is that something like 20 per cent. of the current IT contractor population will be given self-employed status. The phenomenon of the self-employed contractor is acknowledged to exist, but I am interested in why the figure of 20 per cent. has been used. It may be larger or smaller and I should like to know why it has been defined in that way.

Conservative and Liberal Democrat Members fully acknowledge that there are cases of abuse and that there are people who are trying to avoid tax by creating single-person companies. It is absolutely right that any Government should try to deal with those cases. That is common ground among Members on both sides of the Committee. We are concerned about the others—it maybe a large group of people—who fall between the two categories. Essentially they fall into two groups, as the hon. Member for Aberdeen, Central (Mr. Doran) said. Some people are involuntarily working in the sector mainly because of their age. The IT industry is a very young industry in which anybody over 30 is considered old. Many people are forced out of organised employment and have to accept frequent and multiple contracts. They have to accept the risks, but they cannot define themselves as self-employed, as the hon. Member for St. Helens, South (Mr. Bermingham) argued they should, because of the nature of their work, which the hon. Member for New Forest, West (Mr. Swayne) explained. They mainly undertake project work, which means that they are likely to fail a control test as they work as part of a team under a project manager, probably for several months at a time. Such people are involuntarily in the position of self-employed service companies and they will be hit the hardest.

The second category comprises people who have consciously chosen that life style. They are willing to accept the risks and the fact that they have no job security, no guaranteed employer contribution and no national insurance contributions. They take all the risks in order to enjoy the flexibility of that life style, but, because of the way the tax law operates, they cannot be classified as self-employed. Those two groups of people, who are not tax avoiders, and who under no circumstances can be described as such, will be hit the hardest. That is why there is such strong feeling among Opposition Members.

As it is such a grey area and the big arguments of principle have already taken place, many of us are looking for some sign that the Government recognise that a large number of people are on the margin, and are prepared to show some flexibility in dealing with them. They could do so in two main ways. First, they should recognise the force of the arguments about the limited nature of the 5 per cent. allowance. Many of the people to whom I have spoken can produce their accounts showing expenses of up to 20 per cent. Even if one discounts a little, expenses are generally considerably more than 5 per cent., for reasons that have been set out in some detail.

In addition, the Government should show some flexibility in the way in which the Inland Revenue deals with individual cases. My understanding is that some people could face penal charges if, quite accidentally, they classified themselves as self-employed and were subsequently determined not to be. I believe that the Inland Revenue sets itself five years to determine whether the self-employment principle applies, and people who are subsequently found to be in the wrong category after a year face tax penalties. That seems absolutely wrong. If someone has made a genuine mistake, the tax that they have paid should be credited to their eventual account.

Mr. Bercow

The hon. Gentleman and I agree that it would be better not to have these proposals at all. However, will he clarify whether he is advocating a larger blanket expenses limit to take account of the concern that the proposed limit is not adequate, or suggesting the operation of a taper, which might have some merit, but would be administratively highly burdensome?

Dr. Cable

I take the hon. Gentleman's point that it would be burdensome. If I were making a recommendation, it would be for the former.

Finally, one point that emerged from the discussion a few moments ago related to the total tax take, which is now estimated to be £900 million. When we discussed the matter six or nine months ago, the figure cited was £450 million. Will the Paymaster General explain why the estimate has changed so radically? Is it because, as I rather suspect, the conditions and exemptions will be much more narrowly drawn, so the tax base will be significantly higher? Is it based on some sort of calculation of how much leakage there will be in terms of people leaving the profession? This is a genuine question; I do not know the answer. It would be useful to know why this tax measure, which was initially introduced as having a modest tax take, is now approaching the £1 billion mark.

Dawn Primarolo

I thank the hon. Member for Twickenham (Dr. Cable) for his calm approach to an important discussion. I know that he has worked hard. He has written to me and has come to see me to discuss the issues. That is in marked contrast to other speeches from Opposition Members. I hope that I will be able to deal with all the points that have been raised, but if I do not manage to do so, I am sure that the hon. Gentleman will intervene.

Let me start with the points on which we appear to agree. I shall quote from Computer Contractor—a magazine that seems to be very relevant to the debate, as we are talking about information technology contractors. Under the headline "Make hay while the sun shines", it states: The optimum salary to draw this year is £4,335, which covers your personal allowance…I know a lot of readers will be worried about the minimum wage. Although this does not apply to company directors…it is highly unlikely that any contractor will be served with a notification. Beg, borrow and steal to avoid paying higher rate tax this year. Next year you will not be able to avoid it. You should recognise your company for what it is, a tax haven. 7.30 pm

Many quotes have been given in the debate. I shall quote from a letter to The Independent written by someone who has worked in the IT industry for 27 years. He said: Although there are many honourable exceptions, the majority of— service company workers— were cynically taking the rest of us for a ride…They should admit defeat gracefully and be grateful for all the years in which they got away with their rip off on society. The Government is to be congratulated for making them contribute their fair share towards the funding of our hard-pressed public services. [Interruption.]

Opposition Members can heckle as much as they like. Today, so far, all that they have done is repeat the well known arguments of one organisation—the Professional Contractors Group, which was established exclusively to campaign against the proposal. People in that organisation have a vested interest in not wanting the provision to be applied.

Sir Nicholas Lyell

Will the Minister give way?

Dawn Primarolo

If the right hon. and learned Gentleman will allow me to make this point, I shall happily give way to him.

The points made in the debate have dealt with whether the companies are entrepreneurs; whether the definition of self-employment correctly reflects the labour market in the sector; whether the people concerned are entitled to benefits; whether there will be a brain drain; what Australia is doing in its legislation on the matter; whether the proposal is discriminatory in any way; whether there has been consultation; whether it is an attack on large business—

Mr. Bercow

Small business.

Dawn Primarolo

Yes. The points also dealt with whether small businesses are being assisted in meeting training costs; whether there will be a legal challenge to the proposal; and the issues that the oil industry has raised. The right hon. and learned Member for North-East Bedfordshire (Sir N. Lyell) also made some points on self-employment status and the 5 per cent. deduction for training costs. I hope to deal with all those points as calmly and clearly as the Committee will allow me to do. First, however, I shall be happy to give way to the right hon. and learned Gentleman.

Sir Nicholas Lyell

I am most grateful to the Minister. Does she realise that the constituents who have come to see me on the matter have all made the point that they pay themselves substantial salaries, on which they pay tax? Plainly, they do not fall into the categories described in the two quotations that she has given. They are deeply concerned about the 5 per cent. limit because, among other things, they have genuine expenses that are far higher than that figure.

Dawn Primarolo

I am grateful for the right hon. and learned Gentleman's comments, as I wanted to deal with that point. The objective of some of the speeches made in this debate and of the arguments made by some vested interests has been to spread fear and misinformation about how the arrangements will work. Although I hope to deal clearly with those points in my speech, the Committee will have other opportunities to deal with them.

In the past 12 months, much information has been published about our proposals for tackling tax and national insurance avoidance by service company workers and others who provide services to clients through intermediaries. I think that it is fair to say that the general objective of our proposals is pretty well understood now. We want to stop people who are really the same as employees from dressing up their working arrangements by setting themselves up as a service company to avoid paying the correct level of properly due tax and national insurance.

As I said, individuals are not entitled to choose self-employed status simply because they fancy being self-employed. There are clear precedents and case law defining "self-employed" and "employee". The proposal seeks clearly to align rights, so that if someone is an employee, he or she is entitled to all the rights of an employee and will be defined as such. Conversely, if someone is self-employed, he or she will continue to receive all those other rights.

I fear that many of the companies with which the right hon. and learned Member for North-East Bedfordshire has been in contact are under a misapprehension about how the rules will affect them.

Sir Nicholas Lyell

If the Minister, by saying that those companies are under a misapprehension, means that they do not need to worry because they will be accepted in the status that they require, why are they to be limited to 5 per cent. expenses? Does she realise that those who have come to see me—like those who have gone to see most of my hon. Friends, I suspect—are highly intelligent people performing a function in which it is not open to them to be employees, because those for whom they work do not wish to employ them as employees? Those people can do the job only through the type of service company that we are discussing, and they are being badly and unfairly hit by the proposals.

Dawn Primarolo

People who are employees will receive exactly the same treatment as every other employee in the tax system. However, we have agreed that, for those employees who seek to work through service companies, we shall allow a 5 per cent. deduction to help run those companies. Nevertheless, we are saying that they are employees. If they are self-employed, the 5 per cent. deduction will not apply to them because they have access to all the other reliefs, as ably explained by my hon. Friend the Member for St. Helens, South (Mr. Bermingham).

Mr. Ottaway

Can the Minister confirm that people who are caught by IR35 and end up paying class 1 national insurance contributions will not be in the same position as "an employee" as they will not be entitled to sick pay and other benefits that employees receive, and that they will not be entitled to unemployment benefit between contracts?

Dawn Primarolo

If a worker is designated as an employee and is paying national insurance contributions as an employee—which is the whole purpose of the proposal—he or she will be entitled to the benefits to which any other employee paying national insurance contributions is entitled.

Mr. Ottaway

rose—

Dawn Primarolo

I shall deal with the point in more detail later. If the hon. Gentleman will let me make some progress, and if he is still unclear on the point, I shall give way to him.

Mr. Ottaway

It is on this point.

Dawn Primarolo

The problem is that hon. Members have asked various questions, but are refusing to allow me logically to develop the answers and explain the procedure. Do they want to hear the answers or only to ask more questions?

Mr. Ottaway

I was merely quoting from the Inland Revenue's own guide on the matter, not making up figures. Will the Minister confirm that, when someone has a relevant engagement that is caught by IR35, that person will not be entitled to the benefits of an employee?

Dawn Primarolo

I cannot understand why the hon. Gentleman finds this point so complex. If employees pay national insurance because they are employed as employees, they will be entitled to the same rights as other employees. [Interruption.] Perhaps I should stop looking at Opposition Members, Dr. Clark, and focus my gaze on you. I hope that you will not misinterpret that; it is just that Opposition Members are really not a very attractive prospect.

As I said, I think that the objectives are well understood now. It is true also that all right-minded citizens, business representatives, individual taxpayers and their advisers, Members of Parliament and those who are in the other place recognise—it is a matter of public record—that no one wants that type of avoidance to continue. Such avoidance simply is not fair to the rest of us, and we should deal with it.

It is also true that, until 6 April 2000, people were perfectly entitled to obtain a tax and national insurance advantage by working in that way through service companies. However, it became apparent that many of the people doing so were acting against the spirit of the legislation, to their considerable personal advantage, and at a disproportionate cost to the Exchequer. In reaching this decision, we recognised that we were proposing to remove what had been a legitimate way of reducing tax and national insurance bills. That is why we announced our intention to make this change a full year ago—to allow good time for preparation and consultation. The Government have taken extensive consultation on this matter. Even the PCG, which has been so extensively quoted, has said publicly that the Government consulted and listened on this matter. However, we have not gone as far as the PCG would have wished.

People with a vested interest in continuing to avoid paying tax and national insurance, plus one or two powerful lobby groups, have been sowing confusion about what the measure does. Let me deal first with the point made by the hon. Member for Croydon, South (Mr. Ottaway) that IR35 is an attack on entrepreneurs. The tax system has a long-established method for distinguishing between employees and the self-employed entrepreneur. Some people have chosen to use service companies because they do not fit the definition of self-employment, but still want to benefit from the tax breaks available for self-employment. They are really only employees who want a better deal from the tax system than that to which their status entitles them. Those people will be targeted by the new rules.

As I said on Second Reading, our intention is not to prohibit the use of service companies. Instead, we are telling those who are really employees that using service companies will not enable them to avoid paying their national insurance and tax at a fair level. The idea that people who are really employees are the same as self-employed people in taking risks, creating employment and seeing their companies grow simply does not stand scrutiny.

We are not talking about all service companies or all IT contractors. The new rules will apply to people in service companies who would be employees of their clients if the service company did not exist. The usual case law tests will be used to determine whether someone would be an employee. Those tests have been used for all others in the tax system and are well known. I do not believe that it is beyond the intellectual capability of those IT consultants who are still protesting to get to grips with these rules.

Mr. Malcolm Bruce

Will the hon. Lady explain how an employee who has travel and training expenses is treated in the same way as someone with a company who has those expenses? Is it not normal for the company's employer to pay those expenses and claim tax relief on them?

Dawn Primarolo

If someone is employed by a company which provides training, there is no claim on a benefit in kind for the employee, but there is no relief—the employer gets it. An employee cannot claim his training expenses—nobody can. Training expenses for employees cannot be tax-deductible. If employees pay for their training, that is up to them.

Sir Robert Smith

Will the Minister give way?

Dawn Primarolo

No.

Opposition Members must fix in their minds what employees are entitled to and what self-employed people are entitled to. We are ensuring that the rules in the tax system are properly aligned.

The next point was that there would be a brain drain—a massive exodus from this country. Many people have said that they will go abroad, but the IT industry recognises that that is just a lot of noise. Britain is still a low-tax country and there will still be good money to be made in the IT industry, even after IR35. The trade journals show what has been said by the profession. Computer Consultant said: Although many of the contractors questioned said they intended to look for work overseas, the feeling is that this is an expression of contractors' defiant anger rather than a true intention to migrate. Christine Little of the Recruitment and Employment Confederation said: I cannot believe the tax advantages of working in Germany or Holland are going to be enough to justify uprooting and moving abroad. 7.45 pm

The idea that IT consultants can go somewhere else where they will not have to pay tax on their earnings is interesting but incorrect. In some countries, workers will be worse off than if they had stayed in the United Kingdom and fallen within IR35. I have received some interesting postcards from someone who allegedly moved to Germany as a consequence of IR35. I have news for that contractor: on an income of £55,000 per year, his take-home pay in Germany will be £25,000. If he had stayed here, it would have been £34,000 under IR35. His friend, who apparently moved to Strasbourg, will be taking home £30,000 instead of the £34,000 that he would have taken home in the UK. In the United States, Norway, Belgium, the Netherlands, Germany—all the countries that contractors claim that they will move to—the liability to tax is higher than it is here.

The next area is to do with the expenses and the 5 per cent. allowances proposed under this measure. The new rules will affect only income from engagements that would have been employment if entered into directly with the client. It is a question of whether an activity passes the employment test. Income from any other source within that service company is completely unaffected by the legislation and can be used by the company to meet running costs, make investments, make capital purchases, employ staff, pay dividends, or whatever.

When a service company has income only from engagements that are caught by the legislation and nothing else, we do not think it right that the service company worker should be in a more advantageous position on tax and national insurance than a conventional employee. I really cannot understand why the Committee is struggling with that simple proposition.

The 5 per cent. allowance, which is on top, is intended to cover the basic running costs of the service company, such as Companies House filing charges and accountancy fees. We have said that we will not inquire into how that money is spent, and also that the service company need not keep any records in support of the expenditure. As far as we are concerned, this is an automatic, flat-rate allowance. It is pretty generous, given that most of the work done by service companies would be as an employee.

The hon. Member for Kingston and Surbiton (Mr. Davey) spoke on Second Reading about the compliance regime. He said that he would ask me again about whether the position on IR35 would be flexible. I say to him, as I said to the Inland Revenue, that officials are to give the benefit of the doubt where businesses make genuine mistakes when trying to comply with the rules. That is only fair, given the change during this period. It is a light-touch approach. Of course, in the rare cases in which avoidance of tax and national insurance liability is deliberate and intended, the same compliance regime and penalties will apply as exist in the tax system for trying to avoid paying tax and national insurance.

Contractors working for service companies will be entitled to statutory sick pay and maternity pay, like other employees. They may not get the benefits from their clients but they may, in the short term, from their companies. IR35 does not discriminate against anybody in terms of their relationships. The regulations make it clear that we must consider associates and how they work together.

Hon. Members mentioned Australia and questioned whether it had withdrawn its legislation. It has not—it is going ahead with it and has made some amendments, as we have done, but in different areas.

Anyone who meets the accepted definition of an employee should pay tax on the same basis as any other employee. This measure is not anti-competitive and it does not discriminate in favour of big business against small firms. It is simply not true to say that it does. Again, I will quote the industry, in a debate about the measure on "Accounting Web", in which it was stated: I find it laughable when people who have been using the veil of incorporation to hide what is fundamentally the relationship which would otherwise exist between an employer and an employee, claim that it is somehow going to harm British business. It is not—it's going to harm their pockets. That is what those affected are complaining about.

Sir Nicholas Lyell

I have been listening carefully to the Minister and I have read the Chief Secretary's most recent letters to me on this important topic. My impression is that the sort of constituents to whom I referred in my speech, who are paying substantial tax but sometimes work for long periods for an individual company that uses their services, will not be regarded as employees and will not be caught by IR35. Will the hon. Lady confirm that only the blatant cases are likely to be caught? Or is she expecting to scoop up the lot, in which case my constituents and those of my hon. Friends and other hon. Members who have spoken will still be very worried?

Dawn Primarolo

I have already answered that question in the debate. The question is whether the person is an employee or is self-employed. The terms and conditions of their contract with their client are the issue and those determine their status. If the relationship with the client is clearly that of the self-employed, as laid down in case law and in the Bill, the answer as to their liability to IR35 is clear.

My hon. Friend the Member for Aberdeen, Central (Mr. Doran) and the hon. Member for West Aberdeenshire and Kincardine (Sir R. Smith) asked a series of questions about the oil industry. If a worker in that industry works for a client in circumstances that meet the definition of employment, PAYE and national insurance should be paid. Until now, clients have been able to insist that workers set up service companies—my hon. Friend referred to this—to enable the client to avoid liability for PAYE and national insurance.

I listened carefully to my hon. Friend's comments and to those of the hon. Member for West Aberdeenshire and Kincardine. I think that they will find that that definition is the issue and that was the requirement for companies, but I will reconsider those decisions carefully. [Interruption.] I realise that Opposition Members find two things difficult. One is a woman speaking at the Dispatch Box, because they treat women appallingly in the House. The other is that although they ask questions, they do not want the answers because they know the weakness of their case. They can heckle me all they like, but I am putting the Government's case on the record and I intend to continue to do so.

The final question asked by the hon. Member for Twickenham concerned the figures in the Red Book and the increase in the first year to £900 million. He will see from our original assessments that we estimated the number of companies that were using the loophole as we described. We were challenged about the estimate by the hon. Gentleman and a number of organisations. I asked the Inland Revenue to assess thoroughly through our network the number of companies that appeared to be using that mechanism, and which would therefore be affected. That is where the new £900 million figure came from. In truth, the avoidance mechanism is being used far more extensively than we had thought, and the Government have moved to close that loophole.

I commend the clause to the Committee and I look forward to what I hope will be more good-natured debates on the same subject in the future.

Mr. Ottaway

The problem is not that we do not listen to the answers; it is that the Paymaster General does not answer the questions.

The Inland Revenue published a leaflet called, "Questions frequently asked about IR35", which makes it clear that an individual who works through a personal service company will not be in the same position as an employee while both are paying class 1 national insurance contributions. That person will not be entitled to benefits from the company or to unemployment benefit between contracts. The most honest thing that the Minister could do is admit that, rather than trying to mislead the Committee into thinking that people will be in the same position.

The hon. Lady did not answer the question posed by my right hon. and learned Friend the Member for North-East Bedfordshire (Sir N. Lyell) about the 5 per cent. Most importantly, she did not deal with the fact that the Red Book estimates that the measure will raise £900 million. Inland Revenue documents state that 60,000 companies will be affected. One does not have to be a genius to work out that every one of those companies will have to pay £15,000 a year extra in taxation.

The hon. Lady did not deal with any of those issues, nor did she deal with the fundamental matters raised by hon. Members on both sides of the Committee, despite the objections of the hon. Member for Aberdeen, Central (Mr. Doran). That is why we will vote against the measure.

Question put, That the clause stand part of the Bill:—

The Committee divided: Ayes 252, Noes 147.

Division No. 177]	[7.57 pm
AYES
Adams, Mrs Irene (Paisley N)	Dowd, Jim
Ainger, Nick	Drew, David
Alexander, Douglas	Dunwoody, Mrs Gwyneth
Allen, Graham	Eagle, Maria (L'pool Garston)
Armstrong, Rt Hon Ms Hilary	Ellman, Mrs Louise
Atherton, Ms Candy	Ennis, Jeff
Austin, John	Field, Rt Hon Frank
Banks, Tony	Fisher, Mark
Barnes, Harry	Flint, Caroline
Bayley, Hugh	Flynn, Paul
Beard, Nigel	Foster, Rt Hon Derek
Benn, Hilary (Leeds C)	Foster, Michael Jabez (Hastings)
Benn, Rt Hon Tony (Chesterfield)	Foulkes, George
Bennett, Andrew F	Fyfe, Maria
Benton, Joe	Gardiner, Barry
Bermingham, Gerald	George, Bruce (Walsall S)
Berry, Roger	Gerrard, Neil
Best, Harold	Gibson, Dr Ian
Blackman, Liz	Godman, Dr Norman A
Blears, Ms Hazel	Godsiff, Roger
Blunkett, Rt Hon David	Goggins, Paul
Borrow, David	Gordon, Mrs Eileen
Bradley, Keith (Withington)	Griffiths, Nigel (Edinburgh S)
Bradshaw, Ben	Grocott, Bruce
Brinton, Mrs Helen	Grogan, John
Brown, Rt Hon Gordon (Dunfermline E)	Gunnell, John
	Hain, Peter
Brown, Rt Hon Nick (Newcastle E)	Hall, Mike (Weaver Vale)
Brown, Russell (Dumfries)	Hamilton, Fabian (Leeds NE)
Browne, Desmond	Hanson, David
Butler, Mrs Christine	Heal, Mrs Sylvia
Byers, Rt Hon Stephen	Healey, John
Campbell, Mrs Anne (C'bridge)	Henderson, Doug (Newcastle N)
Campbell, Ronnie (Blyth V)	Henderson, Ivan (Harwich)
Campbell-Savours, Dale	Hepburn, Stephen
Cann, Jamie	Hill, Keith
Caplin, Ivor	Hinchliffe, David
Caton, Martin	Hodge, Ms Margaret
Cawsey, Ian	Hood, Jimmy
Chaytor, David	Hoon, Rt Hon Geoffrey
Clapham, Michael	Hope, Phil
Clark, Rt Hon Dr David (S Shields)	Howells, Dr Kim
Clark, Dr Lynda (Edinburgh Pentlands)	Hughes, Kevin (Doncaster N)
	Humble, Mrs Joan
Clarke, Charles (Norwich S)	Hurst, Alan
Clarke, Eric (Midlothian)	Hutton, John
Clarke, Rt Hon Tom (Coatbridge)	Iddon, Dr Brian
Clarke, Tony (Northampton S)	Jackson, Ms Glenda (Hampstead)
Clelland, David	Johnson, Alan (Hull W & Hessle)
Clwyd, Ann	Johnson, Miss Melanie (Welwyn Hatfield)
Coaker, Vernon
Colman, Tony	Jones, Rt Hon Barry (Alyn)
Connarty, Michael	Jones, Helen (Warrington N)
Cooper, Yvette	Jones, Ms Jenny (Wolverh'ton SW)
Corbett, Robin
Corbyn, Jeremy	Jones, Dr Lynne (Selly Oak)
Corston, Jean	Jones, Martyn (Clwyd S)
Cranston, Ross	Keen, Alan (Feltham & Heston)
Crausby, David	Khabra, Piara S
Cryer, Mrs Ann (Keighley)	Kilfoyle, Peter
Cryer, John (Hornchurch)	Ladyman, Dr Stephen
Cummings, John	Lawrence, Mrs Jackie
Cunningham, Rt Hon Dr Jack (Copeland)	Lepper, David
	Levitt, Tom
Dalyell, Tam	Lewis, Ivan (Bury S)
Darling, Rt Hon Alistair	Liddell, Rt Hon Mrs Helen
Davey, Valerie (Bristol W)	Lloyd, Tony (Manchester C)
Davies, Rt Hon Denzil (Llanelli)	Love, Andrew
Dawson, Hilton	McAvoy, Thomas
Dean, Mrs Janet	McCafferty, Ms Chris
Denham, John	McDonagh, Siobhain
Donohoe, Brian H	Macdonald, Calum
Doran, Frank	McDonnell, John

McFall, John	Ross, Ernie (Dundee W)
McGuire, Mrs Anne	Rowlands, Ted
McIsaac, Shona	Roy, Frank
McKenna, Mrs Rosemary	Ruane, Chris
Mackinlay, Andrew	Ryan, Ms Joan
McNamara, Kevin	Sarwar, Mohammad
MacShane, Denis	Savidge, Malcolm
Mactaggart, Fiona	Sawford, Phil
McWilliam, John	Sedgemore, Brian
Mahon, Mrs Alice	Sheerman, Barry
Marsden, Paul (Shrewsbury)	Simpson, Alan (Nottingham S)
Marshall, Jim (Leicester S)	Skinner, Dennis
Meacher, Rt Hon Michael	Smith, Rt Hon Andrew (Oxford E)
Meale, Alan	Smith, Miss Geraldine (Morecambe & Lunesdale)
Michael, Rt Hon Alun
Milburn, Rt Hon Alan	Smith, Jacqui (Redditch)
Miller, Andrew	Smith, John (Glamorgan)
Moffatt, Laura	Smith, Llew (Blaenau Gwent)
Moonie, Dr Lewis	Snape, Peter
Moran, Ms Margaret	Soley, Clive
Morgan, Ms Julie (Cardiff N)	Spellar, John
Morley, Elliot	Squire, Ms Rachel
Morris, Rt Hon Sir John (Aberavon)	Steinberg, Gerry
	Stevenson, George
Murphy, Denis (Wansbeck)	Stewart, David (Inverness E)
Murphy, Jim (Eastwood)	Stewart, Ian (Eccles)
Naysmith, Dr Doug	Stoate, Dr Howard
Norris, Dan	Stuart, Ms Gisela
O'Brien, Bill (Normanton)	Taylor, Rt Hon Mrs Ann (Dewsbury)
O'Hara, Eddie
Olner, Bill	Taylor, David (NW Leics)
O'Neill, Martin	Temple-Morris, Peter
Organ, Mrs Diana	Thomas, Gareth (Clwyd W)
Osborne, Ms Sandra	Timms, Stephen
Palmer, Dr Nick	Tipping, Paddy
Pearson, Ian	Todd, Mark
Perham, Ms Linda	Trickett Jon
	Truswell, Paul
Pickthall, Colin	Turner, Dennis (Wolverh'ton SE)
Pike, Peter L	Turner, Dr Desmond (Kemptown)
Plaskitt, James	Turner, Dr George (NW Norfolk)
Pollard, Kerry	Twigg, Derek (Halton)
Pond, Chris	Tynan, Bill
Pound, Stephen	Vis, Dr Rudi
Powell, Sir Raymond	Ward, Ms Claire
Prentice, Ms Bridget (Lewisham E)	Wicks, Malcolm
Prentice, Gordon (Pendle)	Williams, Rt Hon Alan (Swansea W)
Prescott, Rt Hon John
Primarolo, Dawn	Williams, Alan W (E Carmarthen)
Prosser, Gwyn	Williams, Mrs Betty (Conwy)
Purchase, Ken	Wilson, Brian
Quin, Rt Hon Ms Joyce	Winnick, David
Radice, Rt Hon Giles	Wood, Mike
Rammell, Bill	Worthington, Tony
Rapson, Syd	Wray, James
Raynsford, Nick	Wright, Dr Tony (Cannock)
Reed, Andrew (Loughborough)
Reid, Rt Hon Dr John (Hamilton N)	Tellers for the Ayes:
Roche, Mrs Barbara	Mr. Robert Ainsworth and
Rooker, Rt Hon Jeff	Mr. Don Touhig.

NOES
Ainsworth, Peter (E Surrey)	Brand, Dr Peter
Allan, Richard	Brazier, Julian
Amess, David	Breed, Colin
Ancram, Rt Hon Michael	Brooke, Rt Hon Peter
Arbuthnot, Rt Hon James	Browning, Mrs Angela
Ashdown, Rt Hon Paddy	Bruce, Ian (S Dorset)
Atkinson, Peter (Hexham)	Bruce, Malcolm (Gordon)
Baldry, Tony	Butterfill, John
Ballard, Jackie	Cable, Dr Vincent
Berth, Rt Hon A J	Campbell, Rt Hon Menzies (NE Fife)
Bercow, John
Blunt, Crispin	Cash, William
Boswell, Tim	Chapman, Sir Sydney (Chipping Barnet)
Brady, Graham

Clappison, James	Madel, Sir David
Collins, Tim	Malins, Humfrey
Cormack, Sir Patrick	Maples, John
Cran, James	Maude, Rt Hon Francis
Curry, Rt Hon David	Mawhinney, Rt Hon Sir Brian
Davey, Edward (Kingston)	May, Mrs Theresa
Davies, Quentin (Grantham)	Michie, Mrs Ray (Argyll & Bute)
Davis, Rt Hon David (Haltemprice)	Moore, Michael
Donaldson, Jeffrey	Moss, Malcolm
Dorrell, Rt Hon Stephen	Nicholls, Patrick
Duncan Smith, Iain	Norman, Archie
Emery, Rt Hon Sir Peter	Ottaway, Richard
Faber, David	Page, Richard
Fabricant, Michael	Paice, James
Flight, Howard	Paterson, Owen
Forth, Rt Hon Eric	Pickles, Eric
Foster, Don (Bath)	Portillo, Rt Hon Michael
Fowler, Rt Hon Sir Norman	Prior, David
Fox, Dr Liam	Robathan, Andrew
Gale, Roger	Robertson, Laurence
Garnier, Edward	Robinson, Peter (Belfast E)
Gibb, Nick	Ross, William (E Lond'y)
Gill, Christopher	Rowe, Andrew (Faversham)
Gillan, Mrs Cheryl	Russell, Bob (Colchester)
Gray, James	St Aubyn, Nick
Green, Damian	Shephard, Rt Hon Mrs Gillian
Greenway, John	Shepherd, Richard
Grieve, Dominic	Simpson, Keith (Mid-Norfolk)
Gummer, Rt Hon John	Smith, Sir Robert (W Ab'd'ns)
Hamilton, Rt Hon Sir Archie	Spicer, Sir Michael
Hammond, Philip	Stanley, Rt Hon Sir John
Harvey, Nick	Steen, Anthony
Hawkins, Nick	Streeter, Gary
Heald, Oliver	Swayne, Desmond
Heathcoat-Amory, Rt Hon David	Syms, Robert
Hogg, Rt Hon Douglas	Tapsell, Sir Peter
Horam, John	Taylor, Ian (Esher & Walton)
Howard, Rt Hon Michael	Taylor, John M (Solihull)
Howarth, Gerald (Aldershot)	Taylor, Matthew (Truro)
Jack, Rt Hon Michael	Taylor, Sir Teddy
Jackson, Robert (Wantage)	Thomas, Simon (Ceredigion)
Jenkin, Bernard	Tonge, Dr Jenny
Johnson Smith,	Tredinnick, David
Rt Hon Sir Geoffrey	Trend, Michael
Key, Robert	Tyler, Paul
King, Rt Hon Tom (Bridgwater)	Tyrie, Andrew
Kirkbride, Miss Julie	Waterson, Nigel
Kirkwood, Archy	Webb, Steve
Lansley, Andrew	Welsh, Andrew
Leigh, Edward	Whitney, Sir Raymond
Letwin, Oliver	Whittingdale, John
Lewis, Dr Julian (New Forest E)	Widdecombe, Rt Hon Miss Ann
Lidington, David	Wigley, Rt Hon Dafydd
Lilley, Rt Hon Peter	Willis, Phil
Livsey, Richard	Wilshire, David
Lloyd, Rt Hon Sir Peter (Fareham)	Winterton, Mrs Ann (Congleton)
Llwyd, Elfyn	Winterton, Nicholas (Macclesfield)
Loughton, Tim	Yeo, Tim
Lyell, Rt Hon Sir Nicholas	Young, Rt Hon Sir George
McIntosh, Miss Anne
MacKay, Rt Hon Andrew	Tellers for the Noes:
Maclean, Rt Hon David	Mrs. Eleanor Laing and
Maclennan, Rt Hon Robert	Mr. Peter Luff.

Question accordingly agreed to.

Clause 59 ordered to stand part of the Bill.