IR35 (Hansard, 3 July 2002)

§ Mr. Bercow
I beg to move, That the clause be read a Second time.
In common with all the new clauses that my hon. Friends and I have tabled, new clause 8 is so manifestly reasonable that only an extraordinarily unreasonable Government could resist it. That is the yardstick by which the Paymaster General will be judged when she replies. As she and the House know, IR35 provisions apply to individuals who are employed by their own service company, but whom the Government consider as employees of the business to which they are contracted. They are taxed as if they were employees, hence they cannot benefit from the ability to defer tax liabilities via dividends, and so on. That is to say, they cannot enjoy the normal benefits of incorporated businesses.
My hon. Friends and I believe that the costs of vocational training should be deductible for an IR35 individual—if I may so describe him or her—who is both employee and employer, in the same way that those costs would be deductible for any other employer.
In order to anticipate the charge that will be lobbed at us, I say in advance that the Conservatives are not advocating tax avoidance. It is merely a case of bringing employees and employers subject to IR35 provisions into line with other employees and employers. Since the Paymaster General has said that IR35 individuals can get all the tax benefits of being employed—that was what she said in Committee—we think that it is reasonable for them to get relief for eligible and relevant training costs.
The idea contained in the new clause would be valid even if it were merely the product of a back of a cigarette packet calculation by my hon. Friend the Member for 342 Arundel and South Downs (Mr. Flight), because any such calculations that he makes are invariably cogent. However, the new clause has the added benefit of being derived from the grass roots. It is the result of representations and the consequence of us going around the country and hearing what people who are faced with Government imposts say about the inequity of the treatment that they currently suffer.
It is a modest request, made with my characteristic modesty and self-effacement. I am sucking up to the Minister in the hope that, at almost 11 pm, she will give an even more favourable reply than she was otherwise disposed to do. Exceeding even my own now established reputation for brevity, I commend the new clause to the House.

§ Mr. John Burnett (Torridge and West Devon)
The changes to bring IR35 into being, and bring the self-employed—in this case, invariably computer specialists—into the employees' national insurance contributions network, were unfair for numerous reasons. First, those people got no enhanced benefits. Secondly, the companies deemed to employ them, which were often large multinational companies, did not have to pay employers' NICs. Thirdly, the nature of the change was deeply prejudicial.
The businesses in question are knowledge businesses. Their principal or main assets are the individuals who work so hard for them. The individuals do not have a choice about how they trade—that is dictated by their employers. We have always called for a wholesale review of the IR35 system. It is unsatisfactory, partial and prejudicial. Nevertheless, we agree that in the meantime the costs of vocational training should be deductible and we support the new clause.

§ Chris Grayling
I shall follow the example set by my hon. Friend the Member for Buckingham (Mr. Bercow) and be brief. The Minister needs to understand that the status of someone who is encompassed by IR35 is very different from that of the conventional employee. Employers do not provide the infrastructure of support to them that employees normally enjoy, including training. Such individuals have a very different status in the organisations. Leaving aside the short-lived—or at least time-limited—nature of their contracts, they do not receive training and other support. The new clause is an admirable proposal that would certainly make the life of many IR35 people much easier and I hope that the Minister will accept it.

§ Dawn Primarolo
I shall not accept new clause 8 and I am sorry to disappoint the hon. Member for Buckingham again. I intend to put forcefully the Government's arguments on the issue. The hon. Members for Buckingham, for Torridge and West Devon (Mr. Burnett) and for Epsom and Ewell (Chris Grayling) are labouring under a misconception. The new clause would not bring IR35 employees in line with others in the tax system. Indeed, it would do the reverse. It would give them an advantageous position that no one else in the tax system possesses.
I need to remind the House what the legislation on service companies was intended to do. It is called IR35 because it appeared in Inland Revenue press release 35. In the tax system, individuals are dealt with according to 343 whether they are self-employed or employees, and the reliefs given are within the tax system. I shall leave partnerships aside.
11 pm
What happened was that a large number of people who use a service company structure sought to give themselves the benefits of the reliefs that employees gain and those that the companies would receive. They then undertook contracts within a company as allegedly self-employed subcontractors, but the control of the hours worked, the tasks of the job and the work undertaken were completely identical in every other sense to those of the people whom they worked alongside, who were employees of the company.
A huge amount of tax was lost through national insurance and income tax because those individuals did not pay the correct amount, even though case law determined that they were employees. The Government introduced legislation that said that, where the service company sought to disguise the fact that there was only one person in the company and that person was really employed in another company and he or she worked alongside an employee and, by every test, was an employee, that person therefore had to be designated as an employee of that service company. Our legislation was indeed repeatedly challenged in the courts, and the Government's position was repeatedly supported by the courts as following case law. That is the purpose of the IR35 legislation.
Where someone is in a service company and he or she is not caught by the provisions that say, "You are working alongside someone else and your job is exactly the same, so you are not self-employed because your job is controlled. You are an employee. You pay through PAYE", that person is genuinely self-employed and genuinely working through a service company, and the Government's legislation does not impinge on him or her.
I shall remind hon. Members how training is treated under the tax system. The employer receives the tax relief to pay for the training of their employees. The new clause would allow the service company, as the employer, to gain access to the tax relief and then give it 5 per cent. on top for no earthly reason whatever. It would allow the company to claim the employee's tax relief and the employer's tax relief for the same person. That is simply not fair. It is not fair on the other taxpayers, and there is no justification for special treatment in that way.
I would go further. I am interested to hear the hon. Member for Buckingham say that he has been heavily lobbied on this issue, because the organisation that represents service companies—the Professional Contractors Group, the lobby and professional group which has worked with the Government for the past few years—has been totally silent on this issue. In fact, it has been totally silent on every issue over the last 12 months. Its website no longer carries the frequent information and demands that it used to have. When the Government introduced the legislation, we said, "This is what we believe to be the case; we are standing by this legislation. However, we will work with you. If you can clearly demonstrate to us that we have made an error in how we treat you in relation to either your training costs or the 5 per cent. that we already allow—which nobody else 344 gets, and which can be paid on training costs or on administration costs—talk to us about it." There has been no discussion; there has been radio silence.
I understand and applaud the hon. Gentleman's declaration that he merely wants to ensure that those in service companies are not disadvantaged because of the IR35 legislation and do not receive unequal or different treatment from everybody else in the tax system. That is what the status quo provides. Under his new clause, those who seek extra reliefs with no justification to reduce their tax liability would have an unfair position with regard to all other taxpayers. I would therefore ask him to withdraw it.
The Government continue to be prepared to discuss these issues if evidence of a problem can be supplied to us. If the hon. Gentleman prefers to press the new clause to a vote, however, I shall have to advise my hon. Friends to oppose it in the name of fairness and justice to the 26 million taxpayers who work in the tax system and get a fair deal from it as it is. They would rightly be outraged if a small proportion of taxpayers were to receive a greater advantage than them.

§ Mr. Flight
I have received complaints, inevitably, from those in the software industry that, because they have fallen within the IR35 legislation and they face considerable training costs to keep their skills up-to-date, they are tax-disadvantaged. The new clause does not seek a tax privilege for those people. As the Paymaster General has said that the Government are entirely open to addressing any problems, however, I should like to pursue, outside the Chamber, what problems might exist and whether they need to be addressed, or whether the body of people who have approached me have misunderstood their position under IR35.
The basic principle of the new clause is that people should not be disadvantaged with regard to skill training—everybody wants to ensure that the country is more skilled and that productivity rises—just because they fall under IR35. On the basis that the issue will be investigated further, given what the Paymaster General has said, I beg to ask leave to withdraw the motion.