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Dr. Julian Lewis (New Forest, East): In support of my hon. Friend's remarks, may I give him the example of Mr. Simon Scantlebury in my constituency? In July, he told me:
- "As a freelance licensed member of a national organisation, I pay nearly £30,000 in Income Tax and National Insurance. If I am forced to work as an employee, my umbrella organisation will fold. Age 61, I will become unemployed. No doubt you agree this is extremely unsound economics!"
11.30 pm
Mr. Bruce: I hear what my hon. Friend says and I am glad that he related to me his constituent's case, but that individual case is multiplied by hundreds of thousands.
Are we attacking only those people? Will the plumber with 1,000 clients a year not be caught by the provision, simply because he does not have to pay himself a salary? He can pay himself dividends as well.
The Minister has given the House only 24 hours' notice of the changes that he asks us to make. The new proposals are as badly thought out as the original ones. I appeal to him, at this late stage, to withdraw them and, if necessary, to bring them back in the Finance Bill next year, when we may consider the entire matter again.
Mr. Jack:
I hope that I have commanded the Minister's attention because, having been the last Financial Secretary
The one thing that the Minister has not done tonight is to lay before us a clear set of reasons for his continued wish to restore clause 70 to the Bill. He could not give me an answer to the factual questions. He could not tell us of the analysis that he must have received from the Inland Revenue to determine his course of action. Just how many people does he believe are avoiding their proper national insurance and tax? We have heard nothing of that. How many examples can he cite of people who have, so to speak, done the Friday to Monday change that other hon. Members have mentioned--people who may well be genuinely taking advantage of the tax system to the disadvantage of the rest?
The Minister has done nothing to put the matter in perspective, and I am afraid that he looks like a Minister who has forgotten the meticulous way in which, as a Back Bencher, he used to question Treasury Ministers. He used to seek out the facts and get detailed information out of the Treasury. Since he has donned the clothes of ministerial office, that meticulous and forensic approach has gone out of the window, and he has bought straight into the typical Inland Revenue broad-brush estimating, whereby staff take a limited sample, multiply it by the largest number that they think of when they get up the next day, give it to the Minister and say, "This is roughly where we are."
In a telling speech, the hon. Member for Twickenham (Dr. Cable) questioned the amount of revenue that was at risk. Will the Minister give us the facts? How much national insurance is at risk? How much tax is at risk? How have the calculations been made? I, for one, notice a lack of thoroughness.
I feel strongly about the subject because many of my constituents work for British Aerospace or for the Benefits Agency--in the latter case, a Government agency. As the Secretary of State for Social Security--who is in his place on the Treasury Bench--knows, that agency relies heavily on people who are flexible, in the form of being personal service companies, to do its business at an economic rate. Tonight, the Minister has put forward a proposition that will affect the Government. It will make the Government's business more expensive to do, and yet we hear no analysis on that point.
I have a constituent, Mr. Ian Shearer, who is a very interesting man. He and I have differed politically on many issues. For example, he very strongly opposed the sale of British Aerospace Hawk aircraft to East Timor. However, when it came to his personal position, he was very quick off the mark in seeking my assistance in making representations on IR 35.
Mr. Shearer said in a letter to me, "I am not a dishonest man; I want to pay my tax and my fair contribution. But in my business, as a personal service company, I bear the risk for my pension, sickness and unemployment, periods when I am not in work, and my training, equipment and investment. I cannot guarantee that I will be in continuous employment."
Mr. Shearer has all the characteristics of somebody in self-employment. As the hon. Member for Twickenham pointed out, Mr. Shearer may nevertheless have to work for quite long periods under contract--as he does for the Benefits Agency. The very nature of the information technology business requires him to trade in that way. When I asked him whether he felt that the Minister's revised proposals had done anything to redress the impact on his business and the loss of at least 10 per cent. of his income, he was sceptical, to say the least.
I held further consultation on the matter with the Institute of Chartered Accountants in England and Wales because I wanted sound advice--more than the Minister has received. I asked whether it felt that the Minister's revised proposals had done the trick. The answer was no. The institute made a very interesting point: a sole trader running a corner shop who can, under such circumstances, make exactly the same decisions on salary and dividend as a personal service company, remains unaffected by the Minister's proposals.
In contrast, somebody trading entirely legitimately as a personal service company is affected in a way that suggests almost a witch hunt in Government circles against such individuals. The Inland Revenue's pursuit of that group of people is taking place against an unproven factual background.
Is it not interesting that, for its new friends in big business, perhaps in the world of property, Labour is quite happy to condone, for example, the sale of a building after the formation of a company whose sole asset is that building in order to get around some of the problems on stamp duty--we hear nothing from the Minister about that--but, when it comes to individuals making their living as personal service companies, providing flexibility to the aerospace industry and the Benefits Agency, the Government want to do them down? The case is unproven. The Minister should withdraw the proposal and go back to the drawing board.
Mr. Allan:
When discussing taxation, we must remember that there is a balance to be struck between stifling industry and fairly raising revenue. It is very much the Liberal Democrat view that the proposals strike the wrong balance, and stifle industry.
We must also always consider in detail the impact in the real world of the proposals that we debate, rather than discussing their virtues in principle in a virtual world. The examples given in the debate show many of the potential real-world impacts of the proposals.
I am particularly concerned about the test to determine whether someone is an employee or a contractor. In the information technology sector particularly, many people will fall foul of that test, but should not. The requirement that somebody should be an employee rather than a contractor may end up killing some of the most successful, most entrepreneurial businesses.
The right hon. Member for Fylde (Mr. Jack) referred to Government contracts. I listened to the views of some contractors earlier, who threw out a challenge: will the Government employ all people on such contracts on the
same terms once the new proposals come into force? Unfortunately, my suspicion is that much of that work will go elsewhere.
The new system will be bureaucratically burdensome and more expensive, so Government agencies will contract overseas, especially in developing areas such as India, rather than use UK-based contractors, as they would have previously. Will the Minister assure those who work for the Benefits Agency or under the many other Government contracts that they will continue to enjoy favourable conditions under IR 35?
I am particularly concerned about the many thousands of ordinary people who have micro-businesses, many of which, we must remember, grow into larger businesses. Over time, they may employ 30, 40, 50 or 100 people. Microsoft started as a three-man business in the United States. We have similar businesses that have grown into enormous corporations. People were given their first break on contracts, they developed the software skills and went on to become major earners in the UK and abroad.
I am particularly concerned about the age group to which my hon. Friend the Member for Somerton and Frome (Mr. Heath) referred--the older people who have gone into the IT business. That has been a tremendous opportunity for them to retrain, set up a small service company and get into the IT business.
At a younger age, I found myself in a similar situation. I read an advertisement in The Guardian which asked, "Are you a useless arts graduate? Would you like to learn a profession?" It was an advertisement to study for an MSc in IT. I did the MSc and spent several years contributing to the UK economy. At the end of that period, I was on contracts that varied from day to day and were renewed monthly. Had I stayed longer--had I not stumbled into this job--I would have moved into a service industry and would have hoped to be successful there too. That is the spirit that we are stifling.
At the beginning of the debate, the Minister spoke about motivation. He was wrong to quote one article from one magazine that conveyed a negative view, rather than quoting from the many hundreds and thousands of letters that we receive from contractors, telling us what their motivation was.
One of my constituents wrote:
"In freelance consultancy, if I do a good job then I will be rewarded by getting repeat work and possibly more money. Conversely, if my work is not up to scratch then I can be asked to leave. Freelance consultancy has given me the opportunity to work for myself and has proved a great boost to my confidence and self-esteem."
That is the attraction for most contractors--the opportunity to run their own businesses. It is about the entrepreneurial spirit, not the sordid tax avoidance that the Minister presented to us. I accept that there are cases in which that is evident, but it is incumbent upon the Inland Revenue to root out such cases and produce regulations to catch the culprits, not to produce a broad, sweeping net.
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