§ 53 Clause 70, leave out Clause 70.
The Commons disagreed to this amendment but proposed the following amendments to the words so restored to the Bill—
53A Page 74, line 36, leave out ("in any specified circumstances")
53B Page 74, line 40, leave out ("and")
53C Page 74, line 42, leave out ("a contract between the client and a third party,") and insert ("arrangements involving a third person (and not referable to any contract between the client and the worker),")
53D Page 74, line 43, at end insert ("and
53E Page 75, line 1, leave out ("the purposes of the applicable provisions of this Act") and insert ("those purposes")
53F Page 75, line 3, leave out from ("his") to end of line 4.
53G Page 75, leave out lines 5 to 9 and insert—
53H Page 75, line 14, leave out ("relevant payments or benefits,") and insert ("the specified amount of relevant payments or benefits (the worker's "attributable earnings"),").
53 Page 75, line 15, leave out ("client") and insert ("intermediary").
53K Page 75, line 16, leave out ("client") and insert ("intermediary (whether or not he fulfils the conditions prescribed under section 1(6)(a) above for secondary contributors)")
53L Page 75, line 17, leave out from ("of") to end of line 19 and insert ("the worker's attributable earnings;").
53M Page 75, line 23, leave out from ("of") to ("period") in line 25 and insert ("the worker's attributable earnings for any specified").
53N Page 75, line 26, at end insert—
53P Page 75, line 37, leave out ("third party") and insert ("intermediary").
53Q Page 75, line 44, at end insert ("persons, whether — (i)")
53R Page 75, line 47, after ("1988)") insert (", or
53S Page 76, line 7, at end insert—
53T Page 76, leave out lines 13 to 23.
53U Page 76, line 35, leave out ("third party") and insert ("intermediary").
53V Page 76, leave out lines 40 to 44.
§ Lord Goodhart rose to move, That this House—
- (a) do not insist on their Amendment No. 53 to which the Commons have disagreed,
- (b) do agree with the Commons in their Amendments Nos. 53A to 53H and 53L to 53V to the words so restored to the Bill, but
- (c) do disagree with the Commons in their Amendments Nos. 53J and 53K to the words so restored to the Bill.
§ The noble Lord said: My Lords, these amendments deal with what were originally Clauses 70 and 71 of the Bill that came to your Lordships' House from the Commons. Those clauses caused a great deal of controversy in both Houses and indeed outside Parliament. The clauses are an attempt to block the use of single person personal service companies for tax avoidance. When I say "tax avoidance", I use 'that phrase for convenience though it is not really very accurate. The real concern is not with income tax but with national insurance contributions. In fact, the scope for avoiding income tax by the use of a personal service company is quite small. By contrast, the scope for avoiding national insurance contributions is enormous. That applies both to employers' and to employees' national insurance contributions.
§ An organisation called the Professional Contractors Group has run an energetic and effective lobbying campaign on behalf of its members, who are mostly IT experts working through their own personal service 1217 companies. Like most lobby campaigns, some of the Professional Contractors Group's claims need to be taken with a certain pinch of salt. There is no doubt that tax avoidance is a much greater element in the formation of personal service companies than the Professional Contractors Group concedes. Indeed, that problem will become worse if the rules are not changed. I am not convinced by the claim that most IT workers will "up sticks" and move themselves and their businesses abroad. But the campaign has also made some strong points, to which I shall come in a moment.
§ The Government's original proposals in the Bill as it emerged from the other place were strongly criticised by a number of senior professional bodies such as the Institute of Chartered Accountants and the Chartered Institute of Taxation. The Government accepted those criticisms—at any rate, to some extent—and came back at Report stage in your Lordships' House with a number of useful revisions. Unfortunately, those revisions were deeply flawed. In particular, it is wrong that, as those revisions provided, liability for employers' NICs should be imposed on the nominal employer—the personal service company—rather than on the real employer. That is wrong for two main reasons.
§ First, it is grossly unfair on a worker who uses a personal service company, especially in borderline cases where it is uncertain whether the worker's job will be classified as that of an employee or as an independent contractor. It puts on the employee the entire risk of an adverse ruling on the status. Secondly, what is plainly now going to happen is that the clients will insist on contracting only with workers who can use their own personal service companies as an intermediary. The clients will refuse to contract with the workers directly. That, I believe, is entirely contrary to the public interest.
§ That is why we accept most of the government amendments to the clause, but object to the two key amendments, Amendments Nos. 53J and 53K, which would impose liability to pay the secondary NICs—the employer's national insurance contributions—on the personal service company. If those amendments are deleted, the liability will return to where it should rest; namely, on the client.
§ But that is only part of the problem. The Government need to rethink these matters at a more fundamental level, and at two issues in particular. First, they must look carefully at the whole NIC system, because of the enormous preference that it gives to self-employment over employment. Self-employed people now receive almost the same benefits as employees. But the NIC contributions paid in respect of the self-employed are very much lower—in particular, because there is no equivalent of the employer's contribution. I have seen figures suggesting that the NIC subsidy by employees to the self-employed may be as great at £2½ billion a year.
§ Secondly, the Government need to examine carefully the classification of people as either employed or self-employed. That is where the 1218 Professional Contractors Group has its strongest point. People with very high skills who enter into a short-term contract to perform a specific job and then expect to move on to another job with another client, seem to be more clearly self-employed than employed. Such people do not receive, and do not expect, rights under employment law: holiday pay, membership of occupational pension schemes and the other benefits that go with employment. But under the existing tests they may be employees for tax purposes even if they are not employees for the purposes of employment law.
§ We need to re-examine the whole question of classification so that the test for the classification as employed or self-employed can take into account not merely the specific job being done but the whole pattern of work that a particular worker goes in for. That is why we believe that Clauses 70 and 71 present serious and unsolved problems. We believe that the Government should take those matters away, reconsider them and return with solutions at a later date. I beg to move.
§ Moved, That this House do not insist on their Amendment 53 to which the Commons have disagreed, do agree with the Commons in their Amendments Nos. 53A to 53H and 53L to 53V to the words so restored to the Bill, but do disagree with the Commons in their Amendments 53J and 53K to the words so restored to the Bill.—(Lord Goodhart.)
§ The Earl of Kintore
My Lords, in my valedictory speech in this House—a place that I shall miss a great deal—I do not intend to re-rehearse the points that were well made in a rather late short debate in the other place last Wednesday (at cols. 404–429 of the Official Report) as to why Clause 70 should stay removed from the Bill. When the House divided at midnight the Government insisted that Clause 70 should be reinstated, despite the fact that at the very least it appears to discriminate against smaller contracting businesses.
At a meeting of about 240 professional contractors in Aberdeen in July, and a similar number in the Jubilee Room last Wednesday, there seemed to be feelings of anger and bewilderment: anger that running one's affairs through a long-established personal service company is now regarded almost as an illegal activity; and bewilderment that a perfectly sensible, popular, preferred, flexible, and in some cases necessary method of working as contractors is under attack. If there is large-scale fraud as regards the National Insurance Fund, I am sure that there is all-party support in this House to help the Government to stop it. A figure of £200 million was given, but doubts have been expressed about its accuracy.
The aspect that alarms me most about the situation is that in order to catch a few wrongdoers there is ready acceptance that many perfectly legitimate contracting businesses will have to close down if they cannot change their method of working or absorb the competitive pressures from larger, favoured organisations.
1219 I realise that this provision has had to be accommodated in a large, complex and important Bill. But Clause 70 is important to those whom it affects. I make a plea that in a similar future situation adequate parliamentary time will be allowed, away from the Bill, in both Houses, and that there should be genuine pre-legislative consultation with established pressure groups such as the Professional Contractors Group. The group continues to have real concerns about the practical application of Clause 70 and has suggestions for better ways of achieving the Government's objective. Here I should declare an interest in the Professional Contractors Group. The group intends to give me a hugely expensive dinner this coming Wednesday. I believe that fish is to be the main course.
During my journey back to Scotland on Friday after our sadly curtailed Sitting, I read an article in the Evening Standard of which I should like to quote the first sentence:Shortly after becoming Chancellor of the Exchequer, Gordon Brown decided to find out why there are so few entrepreneurs in Britain".I think I can now assist the right honourable gentleman. The threat of IR35 being enacted has already caused a trickle of entrepreneurs to go abroad. If the provision is enacted as Clause 70, there is a danger of the trickle becoming a flood. If the seven or eight contractors—young, smart, articulate and interested—who were listening to the debate with me in another place last Wednesday are a representative sample of the group, we should be fighting tooth and nail to keep them in this country, and not treat them like unwanted raffle prizes.
The Minister will probably tell me, as usual, that I am talking rubbish. I shall not try to embarrass the noble Lord; however, I earnestly hope that on this occasion he is correct and I am wrong.
§ Lord Jenkin of Roding
My Lords, shall not detain the House long as I have deployed the arguments at previous stages: we debated this point in Committee, on Report and at Third Reading. I am deeply disappointed that the Government have decided to bring these clauses back to the House at this stage.
I have tried to read and understand the debate in the other place. I must say that it was an extremely scrappy debate. The knowledge that it would be guillotined encouraged people to intervene at every stage. Like the noble Earl, Lord Kintore, I find it difficult to see the justification for taking this measure through in such a blunderbuss fashion.
No one on this side of the House has denied that there is a problem with the Friday to Monday transition, as the noble Lord, Lord McIntosh, has asserted. But there is absolutely no doubt that this and the succeeding clause will hit a large number of perfectly reputable self-employed people, who will find themselves having to pay not merely the self-employed tax but both the employer's tax and the employee's contribution. In a very competitive industry that kind of thing can make a difference.
1220 We have talked a good deal about people in the IT contracting industry. I do not know whether even now the Minister realises the scale of the attack that this clause represents. Recently, I received a letter from Mr P J Street who works as a consultant in the railway industry. he writes:Until recently I was in full time, salaried employment, but I resigned and set up my own company. This, I hasten to add, was so that I would obtain more variety and job satisfaction (I'm no longer working for my original employer). As you rightly pointed out"—he refers to my speech at Third Reading—the effect of Clauses 71 and 72",as the matter stood then,will be simply to saddle me with an excessive tax liability because I will have to fund both employee's and employer's NIC. I work in the railway industry …Unlike a permanent employee I have no continuity of employment. The client doesn't fund a pension scheme, sick pay scheme, holidays, etc, and if I want a perk, such as a mobile phone, I have to fund it myself".Is it really the intention of the Government to hit people like that—because that is what they are doing? I fear that, as the noble Earl said, some people will simply pack up and go abroad because they feel that they are being unjustly penalised and will be unable to compete under the burden. That is a great shame.
We are told in the press, given the usual leaks, that there will be all kinds of splendid bonuses for people to engage in share option schemes and so on. What the Government give with one hand they take away with another. I believe that it is a great shame.
§ 7 p.m.
§ Lord Higgins
My Lords, I understand that we are to have just one debate on IR35. It is perhaps appropriate for me to comment at this stage, although the noble Lord, Lord Goodhart, concentrated on the specific amendments that are before us. First, I pay tribute to the noble Earl, Lord Kintore, who has been assiduous in pursuing the arguments on this point with considerable skill. It is sad that, as I understand it, in a short time he will no longer be with us. One cannot help but ask whether those who come after him will be of the same quality that we have seen from his speeches on this amendment. I believe that he has represented the interests to which he has spoken 'with considerable skill.
We conduct this debate following a further spin session on the way in which the Government are to encourage entrepreneurs. As with the welfare reform side, I believe that we must look carefully at the way in which the Government say one thing in public relations terms and do something quite different. We have seen that illustrated clearly in the case of this clause. We on this side of the House have made it abundantly clear that we do not favour tax avoidance, but we genuinely believe that as a result of the measures that are now before us a considerable number of people, who are perfectly genuine entrepreneurs, will find themselves paying a substantial amount in tax and national insurance contributions. We have yet to see the particular tax 1221 proposals. However, this is another stealth tax. It is no good the noble Lord raising his eyebrows. Unless we can together find a reasonable solution it will have the effect of discouraging industry and lead to it going abroad, as well as other unfortunate consequences.
I had not realised until I read Hansard in another place that this was yet another "Yes, Minister" case. We discovered in relation to the previous set of amendments that the Government's new proposals to deal with the disabled were put to the previous government and turned down. They have re-emerged with this Government. I understand that this is a somewhat similar situation. The Revenue proposed this measure to the previous government, who turned it down, and now it emerges again. Alas, with the bar on documents proceeding from one government to that of another party we shall never know.
§ Lord Jenkin of Roding
My Lords, perhaps my noble friend will give way. He may recollect that when I first debated this matter at the early stages of the Bill I said that they tried it out on me when I was Secretary of State for Social Services in 1979. I turned it down.
§ Lord Higgins
My Lords, it has taken a long while to surface. I recall it well. I also recall that, quite apart from the merits, when my noble friend and I were both at the Treasury, the Inland Revenue and HM Customs and Excise customarily came along with a list of 20 or 30 so-called anti-avoidance proposals. Generally, we agreed that each could have two and that would be it. Be that as it may, it is crucial that further consultations should take place.
I should like to quote an observation by Mr Timms in the other place:The proposals … have been widely welcomed, not least by the Chartered Institute of Taxation and the Professional Contractors Group".—[Official Report, Commons; 3/11/99, col. 428.]My understanding is that that is not so. The group does not welcome what is now proposed.
Following the original insertion of this clause in the Bill and its translation to your Lordships' House, a considerable amount of consultation took place but largely with bodies such as the Law Society, to which the noble Lord, Lord Goodhart, referred, and other organisations of that kind. As a result, significant changes were made. The government amendments now before us are very different from those originally tabled. I am happy to say that the so-called control test has gone, certification has been dropped and so on.
What is now before us is certainly better than what we had before, but the fact is that that is largely as a result of consultations with those major professional bodies, not those most affected. I hope that this evening we shall have an undertaking from the Minister that the Government will carry out a further round of consultation with those people who are affected. A large number of them came to the House the other day to make representations to various people, including their own Members of Parliament. 1222 That is of great importance if the proposal is to proceed in a reasonable form and is not to have the undesirable effects that we have already debated.
The central point is the Government's proposals in regard to the question of costs. The essence of the problem is that as far as concerns this group of people, what is proposed to be taxed and to be subject to national insurance contributions and so on is the total revenue of the operation. If it is a normal plc that is not so: the revenue is divided up into its component parts and so on. But as the clauses now appear before us the new rules will allow personal pensions for the individuals concerned from expenses allowed to employees under Schedule E rules to 5 per cent of the gross fees to cover running costs. But they do not cover a considerable number of other costs, for example salaries paid to support staff, most training and in particular capital equipment. The whole amount of the revenue is classified as income. That has a serious effect on those companies. That is clearly wrong if we are to have a level playing field between the large and small companies operating in this area. I cannot believe that it is in the interests of the economy as a whole to discriminate in that way so that only large companies find themselves able to expand the business, to invest, and so on. The Government have not recognised a serious problem.
Before the provision comes forward in the finance Bill, the Government should carry out a series of further consultations. I pay tribute to the noble Lord, Lord McIntosh, who arranged a suitable meeting for those concerned in this House. None the less, we have a long way to go before the clauses are in a satisfactory form. I understand that there are provisions in the Bill for the Treasury, and other orders, to alter the provisions. If that is so, we can put right what we are unable to do now. It is too difficult to try to form specific amendments which we could have sought to force on the Government today. I do not propose that my noble friends should vote against the proposals before us. However, I express the hope that the issues will be further considered and a sensible solution to the problem found.
§ 7.15 p.m.
§ Lord McIntosh of Haringey
My Lords, two sets of congratulations are due. The first is to the noble Lord, Lord Goodhart. He has become more radical and antagonistic to the provisions as the Bill has proceeded through the House. The noble Lord will remember that when the matter first arose, he was concerned only with the definition of self-employment. He objected to the control test rather than the existing test. He argued that if the amendment were accepted or passed, his Benches would support the clause. We did what he wanted; and he has gone to the next issue.
The next issue was to oppose the whole clause on the grounds that we have heard; I shall not repeat them. Now he agrees with almost all the clause but appears to oppose the basis on which national insurance contributions are calculated and charged. The noble Lord is a true radical and deserves praise for that, if not for consistency.
1223 The second congratulations are due to the Professional Contractors Group. I have never encountered such a literate, persuasive series of letters. Ministers have had something like 2,000 letters. I have received many dozens. The noble Lord, Lord Jenkin, has received a number. They are literate, well spelt, well argued, persuasive letters—and wrong. A great dealt of parliamentary time has been taken up because a number of people have gathered together, put aside a certain amount of money for lobbying, and persuaded a number of noble Lords opposite of a view of this legislation which is utterly misguided and misconceived. They deserve credit for it; that is the way lobbying works; that is the way politics work. That is what we have to respond to; and I have been responding to it.
However, I shall not go over the wider argument on the clause. The amendments before us from the noble Lord, Lord Goodhart, are on one specific aspect: whether the client of the worker is responsible for deciding whether the new rules apply to a contract and is liable to pay employers' national insurance contributions if they do.
The Motions numbered 53W and 54W would have the effect of reverting to the original proposal, and place liability on the client for any NIC liability incurred by a worker hired through a service company. One of the most unpopular features of our original proposals in the very widespread consultation we carried out—I shall not repeat the figures—was the proposal to do just what the noble Lord proposes. As a result of the consultation, we listened to what people said. We were persuaded that it would have the effect of putting an end to a mechanism which provided valuable flexibility in the market for skilled workers. Most people have welcomed the changes we have made which allow that flexibility to continue while at the same time ensuring that the right amount of tax is paid.
Before I turn to the arguments put forward by the noble Lord, Lord Goodhart, it is necessary for me to quote from the response of the Professional Contractors Group to the press release of 23rd September. It said, first, that the removal of registration is to be welcomed; it would have been an administrative burden. That we did, and it is not in contest.
Secondly, the group said that the move from a single test of supervision, direction and control is to be welcomed. That we have done; it has not been contested.
Thirdly, on the transfer of a responsibility for accounting for tax and NIC from the client to the service company, it said that it is "very welcome indeed". That is not much support for the arguments put forward by noble Lords opposite.
Four points have been argued in the debate. First, it is easier for the client than the worker to bear the risk of having to pay the employer's NICs in particular where the client is a substantial company with a number of short-term contract workers. That implies that larger companies are not as concerned about 1224 profit margins as smaller companies—which I contest. But it surely does not reflect the reality of the business world: that businesses of all sizes compete. On the contrary, the onus for calculating any secondary and primary Class 1 contributions is best placed with the service company. The worker will build up a knowledge through his previous contracts, and possibly his concurrent contracts, about what working circumstances lead to a NIC liability.
Secondly, it has been argued that where there is liability as to whether the provision was applicable, it is plainly easier for the client than the worker to get legal advice and to form a judgment on the degree of risk. But that ignores the fact that the service companies will have access to advice from the Inland Revenue on whether a contract is caught by the provision. In addition, they will have a right of appeal if they are not happy with the decision. We should not forget that the original proposals would have introduced a new test—to decide whether the provision is applicable to a contract—which has now been withdrawn.
There is a wealth of experience in the private sector and the Inland Revenue in applying these rules. A borderline test will be clear to contributors as being just that: one on which advice should be sought. I do not believe that such advice cannot be obtained by service companies.
Thirdly, there is concern that if there is a dispute with the Inland Revenue, it is easier for a client than for a worker to fight it. That may be true for elaborate avoidance vehicles dreamed up by City lawyers. But the provision is simply to ensure that where a worker would be the employed earner of the client but for the service company, they should pay NICs on relevant contracts. It is a simple concept which has a right of appeal when there is disagreement.
Finally, there is concern that our proposals will increase the pressure on workers to form service companies; in other words, as the noble Lord, Lord Goodhart, said, that clients will refuse to contract with workers who do not have service companies. I hope that I explained from my experience of nearly 30 years that that is not in practice the case. It is not the way the system works. The cost to the client should be the same whether he hires an employee or a service company. The worker will seek to pass on the NIC cost to the service company in the cost that he charges to the clients. The decision is tax and NICs neutral.
I shall not go back on the existing definitions of employment. However, I wish to respond to the noble Lord, Lord Higgins, about consultation with the Professional Contractors Group. I assure the noble Lord that we are consulting the Professional Contractors Group on guidance for its members so that the proposals can be made as clear as possible.
§ Lord Higgins
My Lords, if the noble Lord will allow me to intervene, that is the essence of the group's complaint. It will be told the position; it will be made as clear as possible. The group's complaint about the consultation is that it has not had a reasonable 1225 audience on the arguments for changing the Government's proposals. What the Minister has just said brings out that fact: that the Government will tell the group, but they will not listen to it.
§ Lord McIntosh of Haringey
My Lords, when this charge was made at the last stage in this House, I said that the Professional Contractors Group had been present at the seminar which the noble Lord attended and that when I asked it about the consultation, it said they were satisfied with it and that it understood that the Government intended to pursue the basic thrust of the proposal. After all, if we are talking about something over £200 million in tax avoidance, it is the responsibility of the Government to pursue a proposal of that kind. I was astonished when the noble Lord, Lord Higgins, said that he accepted only one or two out of 18 or 20 tax avoidance measures put forward by the Revenue. Ministers in the Treasury are supposed to be on the side of taxpayers, not on the side of tax avoidance. I found that a very curious set of priorities.
§ Lord Higgins
My Lords, I accept what the noble Lord, Lord McIntosh, said about the meeting which he was kind enough to arrange for the noble Lord, Lord Goodhart, myself, and others who attended. Nonetheless, there is a widespread feeling among people who do not feel that the Government are listening to all the arguments. Can I put one argument? Is it the case under the present arrangements proposed by the Government that if the personal service company invests more in equipment which, together with its other costs, exceeds the 5 per cent limit the Government have imposed, it will find that it is at a disadvantage compared with a large company because it will be taxed on the amount over 5 per cent and the large company will have no such inhibition?
§ Lord McIntosh of Haringey
My Lords, I think that objection is based on the misconception which has been prevalent in this debate that somehow these one person service companies are entrepreneurs and that they are making some specific contribution other than the skill of the person. We are talking about one-person companies. We are talking about people who choose to form themselves into a company rather than being self-employed without incorporation, which is what most other people in the same position do. Why are they doing that? I do not say that every single one of them is doing it for the purpose of tax avoidance, but I think it has been generally accepted that that is a very substantial reason. We, as guardians of the public purse, have the responsibility of ensuring that that tax avoidance element of the formation of service companies is not allowed to continue.
I hope that the noble Lord, Lord Goodhart, will not feel it necessary to press his rather modest amendment to this very important change.
§ Lord Goodhart
My Lords, I am most grateful to the Minister for his reply. I would particularly single out the question of the risk with which I do not think he 1226 dealt adequately. The risk arises particularly in borderline cases. First of all, the noble Lord did not accept what seems to me patently and obviously true. That is that the risk of an adverse decision, so far as employers' NICs are concerned, should rest with the real employer and not with the nominal employer. It is the bigger organisation and not the one person company who is clearly in a better position to bear that risk. It can be spread over a much larger number of cases. For the individual concerned in the one person personal service company, it may be catastrophic, as pointed out in the letter that the noble Lord, Lord Jenkin, read to us. It must undoubtedly be an issue for many people in that position.
Equally, the reason why employers or clients will insist on dealing only with service companies is again simply the risk. By dealing with the service company, they know they are at no risk at all if Clauses 70 and 71 are brought back in the form that the Government want them as the risk is bound to lie on the worker and not on the employer. Whatever the noble Lord, Lord McIntosh, may have done in the past, I am sure he was an exceptionally good employer and would not have allowed that sort of issue to disturb him.
§ Lord McIntosh of Haringey
My Lords, not just my company is doing it now. All market research companies are doing it now.
§ Lord Goodhart
My Lords, the question is how much longer they will continue to do so if the personal service company becomes something which is clearly seen as a protection for them against the risk in borderline cases.
The Minister will no doubt be relieved to hear that I do not intend to divide on the Motion. There are three reasons. First, we have probably had enough Divisions today. Secondly, broadly speaking, we agree with the Governments' objectives but feel that the proposal has not been adequately thought out and that it needs more care. Thirdly, there will be opportunity for further consideration in the next six months or so because, as we know, there will be legislation in the next Finance Bill to deal with the tax aspects of a personal service company and Clauses 70 and 71 can then, as a result of subsection (9) in each clause, be revised in the light of the relevant decisions taken in that Bill. However, I hope very much that the Government will take the opportunity of reconsidering something that I believe is aimed in the right direction but which is a deeply flawed solution. I beg leave to withdraw my Motion.
§ Motion, by leave, withdrawn.