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Dr. Vincent Cable (Twickenham): Several veterans of the debate six months ago are present, including the Minister, but what has happened since is a gradual growth of awareness about what the measure will achieve. Some of us are beginning to receive postbags comparable to those on fox hunting and the issue is arousing real and strong feelings.

In order to take the debate forward, I shall address some of the arguments that the Government have advanced tonight. There are three arguments for what the Government are trying to do. One is revenue, the second is stopping what they regard as tax avoidance, and the third is fairness--the idea that nurses and computer consultants should be treated on the same basis.

On the revenue argument, when this debate started, we were talking about large sums of money. Some£450 million would be generated and would be spent on good causes such as schools and hospitals, and other things of which we all approve. The Inland Revenue has subsequently revised its estimate to more than£200 million, but that is also probably an exaggerated sum. One reason for that is that the contributory principle cuts both ways. If people do not pay national insurance contributions, they do not get the benefits, but if they are forced into being employees they become eligible for contributory benefits. Many of the people in that category have said clearly that if they are made redundant under the new regime, they will start to claim benefits. The loss to the Treasury will become substantially greater.

The other reason why the Treasury estimates are almost certainly exaggerated is that economic leakages will occur. That will happen in two obvious ways. First, some individuals will simply move somewhere else. The profession is very mobile and, as my hon. Friend the Member for Harrogate and Knaresborough (Mr. Willis) has pointed out in the past, several companies are moving to Frankfurt because of the new regime. It would not take an enormous flood of companies to do the same to cut the dividend tax revenue, and the value added tax that goes with it, to the point where all the supposed benefits of the measure would be lost.

The other channel through which loss will occur is that of end-users who cease to become competitive. Given the high pound, margins are very fine and the market is very competitive. Countries such as India are moving into the market, and they have good people and low costs. Work will be lost at the margin and revenue will be lost to the Treasury. The Treasury should supply a revised estimate

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of the real revenue from the measure. As a hint, perhaps it could draw upon the regulatory impact assessment that the Inland Revenue has done, which is parked in an obscure corner of its website, and which suggests that the loss of revenue will be substantial. The revised figure should take the leakages into account.

Mr. Fabricant: The hon. Gentleman said that leakages could occur in two ways, but there is a third way. Because software can be transmitted by e-mail, some individuals are planning to do their work in the United Kingdom but invoice from countries in the European Union, such as Holland. That will mean that we will lose VAT and the direct taxes, and other countries will gain. The Treasury has not done its homework.

Dr. Cable: I am sure that there will be other leakages.

Mr. David Heath: There is yet another form of leakage, in that businesses will cease to trade. The people who are engaged in those one-man consultancies are often in their late 40s and early 50s and are precisely the people who find it most difficult to re-enter the employment market. Instead of contributing to the Exchequer, they would become a drain on it.

Dr. Cable: I am sure that we could go on all night adding more channels for loss of revenue.

The second issue is that of avoidance. Ministers seem to have a caricature picture of many people who do ordinary nine-to-five jobs in IT companies, are paid substantial salaries, have a Porsche in the company garage and have some clever accountant to fix the tax system so that they do not have to pay NICs. That is a grotesque distortion of what happens. The strength of feeling has been summarised by my hon. Friend the Member for Gordon (Mr. Bruce). People really resent being characterised in that way. Many people who work as one-person companies have no choice but to work in that way, as many contracts issued in that business are issued only to people who are limited companies.

The irony is that some genuine tax avoidance problems exist. The Minister knows one of them, the Friday night-Monday morning problem, very well. That practice--when a person resigns from a company on Friday and signs up with it again on Monday--is an example of genuine avoidance. It is common in the industry, but the Bill does nothing to prevent it.

Mr. Wardle: Does not the hon. Gentleman agree that most sensible small business people will turn to the Inland Revenue for advice? Does he not agree with the tax experts in the Institute of Chartered Accountants, who say that the Inland Revenue's advice will not be fully operational until next year and that a backlog for that advice is therefore likely to build up? Should not the Government walk before they try to run?

Dr. Cable: A great deal of technical detail remains to be resolved, covering such matters as the definitions of schedules D and E, and the problem of expenses. I shall turn to those matters later, but the mass of detail, involving thousands of contracts, is too great to be sorted out in the next four months.

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As for fairness, superficially, the question is plausible and reasonable: why should a nurse earning £20,000 a year be in a less advantageous position than a computer software contractor earning the same amount? That possibility sounds terribly unfair, but the two people are not in comparable positions, as the single-person company has no job security or contributory benefits.

The credibility of the fairness argument was destroyed by a cynical action that the Government took a couple of weeks ago, when they agreed to a loophole found by a delegation of City lawyers and accountants. Will the Minister confirm that, as a result, the City's six biggest accountancy firms, and its leading law firms, will now be exempted from the provisions of IR 35, even though the small computer consultants will still have to pay? If the fat cats are to be exempt from IR 35, it totally invalidates the moral basis of the argument about unfairness.

Mr. Edward Davey (Kingston and Surbiton): A constituent of mine, Mr. Richard Hider, is a civil engineer with his own service company. His earnings tend to be less than £40,000 a year, which is a relatively modest income for a consultant. Does not my hon. Friend agree that it is totally unfair that the Inland Revenue should be looking to impose a tax hike of thousands of pounds on a person who earns such a modest income? Where is the fairness in that?

Dr. Cable: My hon. Friend is right, but it is revealing that interventions with further examples should be coming only from Liberal Democrat and Conservative Members. No Labour Member wants to intervene to deny what has been said.

Mr. Bercow: Such is the hon. Gentleman's concentration on his speech that he may not have noticed the ministerial reaction to the important point that he has just made. The hon. Gentleman is right to say that no contradiction to his point has been forthcoming, but is he aware that both the Minister and his Parliamentary Private Secretary, the hon. Member for Gedling (Mr. Coaker), have been looking elsewhere in pursuit of inspiration and advice?

Dr. Cable: I thank the hon. Gentleman for that. The Government's central case has been unravelling by the day. What is so fundamentally wrong with IR 35? First, it betrays a complete inability to understand how new types of flexible employment are evolving in high-technology industries. The Government have been very good at the rhetoric of high tech--at handing out free laptop computers, and so on. It is not hardware but software that lies behind knowledge-based industry. The basis of that software is people, and we must understand how people work in industry. Much project work--in offshore oil and in the computer industry--requires flexibility, often meaning that someone works simultaneously for several employers. The tax system must reflect that, but it does not at present.

11.15 pm

The proposal will do serious long-term damage to a major British industry. I hope that the Minister will mention the Government's regulatory impact assessment in his reply, because I understand that it says that the

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proposal will seriously damage competitiveness among many companies struggling to operate. If I am wrong, I should be happy to be contradicted, but I understand that the Government's own evidence suggests that there is a serious problem.

Much of our argument has been about general principle, but several interventions have made it clear that the small print is often crucial. What will make the proposal lethally rather than mildly damaging will be the way in which the Government deal in practice with details such as the split between schedules D and E. Many provisions could do a lot of damage if the Inland Revenue treats them unimaginatively.

The control test is an example of that. If there is close supervision, for example, a person cannot be regarded as being self-employed, but many computer contracts require close supervision. In other cases, the application of standard tests would suggest that exemption cannot be gained for self-employment if the work is not finished, but the software industry often involves work that is being constantly adapted.

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