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Mr. Deputy Speaker (Sir Alan Haselhurst): With this, it will be convenient to discuss the following: Government new clause 16--Earnings of workers supplied by service companies etc: Northern Ireland.
Government amendments Nos. 108, 109, 111, 112, 107 and 110.
Mr. Timms:
Where businesses hire workers through an intermediary, such as a service company, rather than employing them directly, it is possible to disguise what would otherwise be treated as employment. In that way, they can reduce the national insurance that they would otherwise pay, or even eliminate it entirely. That is clearly wrong.
The service companies are given an unfair advantage over businesses who have their staff on the payroll, and there is a growing loss of revenue to the national insurance fund, which has to be made good by workers and employers who pay their fair share. There are around 50,000 service companies, and their numbers are increasing.
That is why, in his Budget statement this year, my right hon. Friend the Chancellor of the Exchequer announced that he would close the loophole, and that the national insurance and tax rules would be changed fromApril 2000. New clause 15, and the amendments that go
with it, will make the necessary change to national insurance legislation. The clause gives the Inland Revenue the powers to make sure that those who disguise employment will pay the same contributions as if they employed their workers direct. New clause 16 provides the same powers for Northern Ireland.
Parallel changes will be made to tax law in next year's Finance Act to ensure that businesses will also be required to operate pay-as-you-earn. However, we need to ensure that the appropriate revenue is collected with the least burden to business. In April, the Inland Revenue sent draft guidance on how the proposal will work to all who had expressed interest in the Budget announcement and to their representative associations. The Revenue will shortly meet representatives of those bodies. Their feedback will be valuable in finalising the regulations that result from this clause.
In the meantime, I will explain how we intend the power to work. The new clause will allow the Revenue to draw up tests, set out in regulations, which it can use to examine the relationship between a business and a hired worker. The key element of the test will be the degree of control the employer has over the worker. This uses the control test already successfully used to determine whether an employment agency should be treated as the employer for the purposes of liability to pay class 1 NlCs.
The question to be asked is:
It may be helpful if I give two examples illustrating the scope of these new rules. First, a doctor comes to work in the United Kingdom for two years. She is engaged by a hospital through a UK service company. The consultant in charge directs the doctor as to what work she should do, has ultimate clinical responsibility for the patients and can supervise the doctor in the performance of her duties. This arrangement should be caught by the new rules. Responsibility for paying class 1 NICs and introducing PAYE would lie with the hospital.
In the second example, an information technology engineer employed by a medium-sized manufacturing company decides to go it alone, leaving employment to set up his own IT consultancy. A few weeks later, the former employer engages the consultant to undertake a millennium bug health check on all the computer company's systems. The consultant negotiates a fixed fee providing a specified service to a pre-determined deadline. The company has no on-going right of control over exactly what is done by the consultant or how it is done. The new rules will not apply in that case.
The measure is intended to remove a significant fiscal disadvantage faced by businesses that employ their workers directly. The clause will ensure that where a worker is engaged by a business through a third party, such as a service company, and that relationship has the characteristics of employment, any payments made by
the business to the third party for the worker's services will be regarded as the worker's earnings for national insurance purposes.
Mr. Christopher Chope (Christchurch):
In the first example, would the hospital be responsible for sickness pay for that worker in the event that he or she fell sick?
Mr. Timms:
The hospital will certainly be responsible for paying national insurance for the worker. My assumption is that the answer to the hon. Gentleman's question is yes. If, on further reflection, that turns out not to be the case, I will return to the matter.
The new clause is not intended to remove the benefits that many businesses derive from the use of employment agencies for a supply of labour. Demands for workers can fluctuate, depending on the order book. Employment agencies have a crucial role in helping business cover such fluctuations.
Under existing legislation, the agency that supplies the worker, and not the client, is liable for any tax and national insurance payable on the worker's earnings. The worker is regarded as an employee of the agency, which must set up a pay-as-you-earn arrangement and ensure that the necessary class 1 contributions are deducted for any earnings, as well as paying those secondary class 1 contributions as an employer. We have no wish to reverse that arrangement and the clause will not do so.
Indeed, subsection (3) allows exemptions from the provision to deal with that issue. For example, if the worker is regarded for income tax purposes as employed by a "certified" agency, and the services are performed by the worker in the course of that employment, the clause does not bite. A business need seek confirmation only that a worker is supplied from a certified agency to be assured that it is not liable for any tax and national insurance on that worker's earnings.
The Inland Revenue will be responsible for running the certification scheme.
Mr. Desmond Swayne (New Forest, West):
What confidence can the House have that the regulations will work in the way in which the Minister described, given that new clause 15 (9) states that any change to income tax provisions may trigger the complete rewriting of the new clause?
Mr. Timms:
We need to ensure that the tax and national insurance rules are in line. The subsection to which the hon. Gentleman referred would allow us to ensure that the two are absolutely aligned. The reduction of burdens on business, and ensuring that we have one system rather than two for businesses to deal with, have been our objectives in changing the way in which national insurance is administered.
The essence of the certification scheme is that the agency that supplies the worker will take responsibility for setting up pay-as-you-earn arrangements and paying class 1 national insurance contributions for all the workers on its books. As well as established agencies, other providers of labour are likely to wish to seek certification through the new Inland Revenue scheme.
I have already mentioned that similar provisions are being introduced in the next Finance Bill. It is crucial that from next April both tax and national insurance be aligned on this issue; otherwise business will face the burden of operating two systems.
Mrs. Browning:
Will the Minister clarify one of his examples? He mentioned that one test of whether someone was under the control of the contracting company or organisation was that it set out exactly the work to be done, which was carried out entirely according to its criteria. Let us suppose that a company carried out a series of short-term contracts in any one financial year--perhaps, two, three, four or five weeks at a time. Realistically, it could be expected to carry out only one contract at a time, but in the course of a year several contracting companies might be used. I should have thought that although the worker concerned might be conforming with the stipulations of a contract, if he or she worked for a variety of employers, for want of a better word, in one financial year, a good case could be made with the Inland Revenue under existing rules. Does this rule affect every case or apply only when employees can prove within a financial year that they have worked for a series of people?
Mr. Timms:
The judgment would need to be made for each separate employment. Where one person works for a series of different employers, the judgment would need to be made about each employment. If it was a series of contracts with a single employer, I think that it would be necessary to consider the whole period of work and judge the nature of the relationship over that time.
We need to ensure fair treatment for those engaged directly and those engaged on otherwise equivalent but indirect terms.
Sir Robert Smith:
New clause 15 gives power tomake regulations. Has the Minister published the draft regulations so that we can judge whether he needs the powers? If they do not make sense, there is no point in having the powers.
"Has the employer ongoing control over what tasks the worker does or how they are carried out?"
If the answer is yes, the arrangement will be caught by the new rules and any earnings will be subject to class 1 contributions. Alternatively, where a worker is engaged to complete a job and has total control over the manner in which the task is undertaken and the way in which it is achieved, the relationship will be outside the scope of the new rules.
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