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Mr. Richard Allan (Sheffield, Hallam): Does my hon. Friend share my concern about the use of the tools test? Contractors in the IT industry often have to invest heavily in computer equipment that they use at home to gain skills and conduct research, but which they do not take to work because they can use on-site equipment. None the less, they are using off-site tools to gain the skills that they need.
Dr. Cable: That point is fundamentally correct. Many tests were devised in a pre-computer age, some of them in the 19th century. Applying them unimaginatively and mechanically, as both I and the industry fear the Inland Revenue will, will do immense damage.
My final point relates to how expenses will be allowed for. Most people who work in the industry are staggered that the Government should imagine that the operating costs of running a one-person company are 5 per cent. of turnover. In most cases, it is probably about 20 per cent. once normal business administration, training and other things have been taken into account. The 5 per cent. figure is absurd and entirely disconnected from reality.
Mr. Fabricant:
Does the hon. Gentleman realise that the movement to schedule E will mean that an individual trader who travels around the country to try to win a contract may stay overnight in an hotel and spend a fortune on an internal flight but will be unable to charge that against tax? That will hit smaller businesses even if it might be absorbed by the larger ones.
Dr. Cable:
The hon. Gentleman has opened up a whole new area relating to treatment of expenses. Many people in the oil sector--there are a few in the Chamber--have to commute to Norway, running up expenses that a sensible tax regime would allow for, but for which ours does not.
The Government's idea is badly conceived and it will do a great deal of damage. We will join the rest of the Opposition in flatly opposing it.
Sir Nicholas Lyell:
I am glad to follow the hon. Member for Twickenham (Dr. Cable). I was encouraged
The Government's policy is a very serious mistake. I am encouraged because I think the Minister--whomI have seen frequently recently in Committee--is considering the matter carefully. I am convinced that the Inland Revenue has got it wrong.
I can speak openly about my constituent, Mr. Norman Silvain, who runs a small public limited company in the chartered accountancy sector that employs 12 people, because his views are entirely on the public record. He has told me straight that the Professional Contractors Group has clearly demonstrated the flaws in the Inland Revenue argument. I saw Mr. Silvain today, and he has set out those flaws on paper. I shall write to the Minister outlining Mr. Silvain's arguments, and I will expect a blow-by-blow reply. If that response is not convincing, I hope that the Government will get the message and change their policy.
That largely sums up my argument. Constituents who have written and spoken to me are genuinely offended by the notion that they are fly-by-night tax avoiders. They are not. As the hon. Member for Twickenham (Dr. Cable) said, that is a caricature. Although consultation on the proposal lasted for some months, it has not proved satisfactory in depth or detail. The Government have not taken the care to listen to thoroughly responsible small entrepreneurs who know what they are taking about. They have to deal with these matters day by day, and most of them grant themselves realistic salaries on which they pay perfectly proper amounts of PAYE tax.
For example, my constituent Mr. Silvain pays himself a salary which, as I understand it, is approximately 50 per cent. of his company's gross earnings after he has paid his employees. He has to take account of pensions, national insurance, health insurance and training costs. His salary is entirely justifiable and it is on the record. The Inland Revenue and the Minister are not doing justice to the argument with their caricatures.
We seriously doubt that the Government will do anything more than pay lip service to business. However, the Opposition's objective tonight is not to make party political points but to persuade the Government to listen carefully and to rethink this measure, which they have got wrong at present.
Mr. Ian Bruce:
I hope that I can be as brief as my right hon. and learned Friend the Member for North-East Bedfordshire (Sir N. Lyell). At the outset, I must declare that I advise the Telecommunications Managers Association, a number of whose members certainly work through limited companies. Some will be caught by this measure and some will not.
I want to address the unfairness of the Government's proposal, which will catch only a small number of people--and certainly not the fat cats that Labour said in
its manifesto it would pursue. I also have a limited company and I am not caught by the Government's proposal, although I am probably a fat cat. Perhaps the Government should rethink their measure in light of that missed opportunity.
The Minister had a short--he is still a young man--but distinguished career in the computer industry. Therefore, unless he suffers from amnesia--I know that the Government Whips are very good at giving Labour Members amnesia--he knows what we are talking about. If an entrepreneur starts up a company employing 100 people, makes £1 million a year and pays himself most of that amount in dividend--because his accountant tells him not to pay it in salary--why should he not have to pay national insurance when the one-man band is compelled to do so under the Government's proposal?
The only logical step for the Government to take is to move to a single tax system that includes national insurance and everybody paying the same amount. After all, nobody is getting contributory benefits any more. The Government wiped that out: if people have more than £8,000 in the bank, the benefits that they expected to accrue from paying national insurance are no longer available.
The real illogicality of this proposal is that it catches the person who has worked for a single employer for a long period. A person who has had three employers or who can show that not more than 50 per cent. of his or her work has come from any one source will be excluded from these requirements. Certainly, the mixed business in my limited company would allow me, because I am not employed by any other person, to ensure that I was fireproofed against these measures.
I have started two groups of companies, and on both occasions I began as a one-man band. One of the companies grew to employ 30 people. The other--my present company--employs only my wife and me, so it is not caught by the proposals. However, my first company, with 30 permanent employees and as many as 200 temporary employees, would never have got off the ground if, as the Government now propose, every penny that came into the company had to be paid to me in a salary on which I had to pay national insurance. I did not pay myself for the first three years; I had to live off the company's earnings because I put all the money back into the company to create employment for others.
IBM got rid of many of its staff, telling them, "You must go off and become limited companies." In the main, the individuals who had a single client in IBM thought that that was not a long-term solution and felt that they had to go and find other clients. These measures would stop them doing that because they would be unable to invest time and money in building up another client base.
People in employment agencies will face difficulties. The scientific and computer industry contains many limited companies that use employment agencies to find them work. How will the measures affect that situation, in which there are, so to speak, three in the bed? The amount that agencies charge is significant and it is certainly not 5 per cent. of the companies' earnings.
I shall give an example, because most hon. Members have not had the experience of being, effectively, a one-man company, as I have. Should we say to people who are employed by one individual that because 50 or 100 per cent. of their salary is given to them in expenses,
they should pay national insurance on that? The costsof MPs' offices, housing allowances, car expenses allowances and all the benefits of this place mean that we probably cost 300 times our salary, so should we now have to pay national insurance on that sum? It appears, from what the Government have said, that people who exploit labour and who have many employees will not pay national insurance on their dividends, and only the one-man businesses will be kicked into touch.
The Minister has the Treasury breathing down his neck. I know that he is mathematically competent; he was the treasurer of Pitcom, which means that he is also technologically competent. He will know that people who move from being an employee on a Friday to being a limited company on Monday have their total take-home pay doubled over that weekend because the company loses all its costs of sickness pay, holidays and so on. They pay themselves twice the original hourly rate, and sometimes much more.
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