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Clause 59
Question proposed, That the clause stand part of the Bill.
Mr. Ottaway: This debate is about IR35 and its introduction. The Government entered office in 1997 on the back of a clear general election victory. They had the support of almost every age group, both sexes, the professional classes and, most important, the business sector. In my judgment, the influence of the business sector played a crucial role in the Labour party's victory. The small business man and the self-employed had much to look forward to. After all, the Labour party's business manifesto said:
- A new Labour Government will give Britain's entrepreneurs and small businesses the backing they deserve.
Not content with raising the burden of taxation on business by £5 billion a year, a £5 billion regulatory burden, a complete revamp of double taxation relief costing billions and imposing national insurance contributions on share options, the Government now want to clobber the heart of Britain's high-tech industry with IR35 at a cost of £900 million a year, which is a heck of a lot for Britain's self-employed to pay.
Mr. Michael Fabricant (Lichfield): My hon. Friend is perhaps falling into the trap of at least giving credence to the idea that it was the Labour Government's idea to introduce IR35. Is he aware that the Treasury suggested that IR35, or its equivalent, be introduced in the early 1980s, in the late 1980s and then the early 1990s, but the idea was rejected three times by Conservative Chancellors of the Exchequer? They knew the effect that it would have on high-technology companies in the United Kingdom.
Mr. Ottaway: My hon. Friend is right. We opposed IR35 because of its impact on the flexibility and operations of labour markets, and I shall make that point later.
At least the leopard does not change its spots. In the 1960s, the Labour party nearly brought the economy to its knees and, in the 1970s, it tried to tax the service sector into oblivion. Now in the 1990s, as the high-tech era lifts off, it wants to hit those who make such a large input to the sector's success.
Not content with treating the self-employed with contempt, the Government do it with offence. They accuse Britain's entrepreneurs of "disguised employment" as though they were somehow cheating. The Government fail to recognise that the world is changing. Labour patterns and methods of doing business are changing. Highly skilled staff no longer stay with employers for long periods. We have an increasingly mobile work force and trying to tax them in such a way will inevitably lead to difficulties.
For decades, the self-employed have worked through service intermediaries. They form a business with themselves as its main asset.
Mr. Michael Clapham (Barnsley, West and Penistone): Is the hon. Gentleman suggesting that an employee of an intermediary who works for a client and is under the control
of a client and therefore engages as an ordinary employee would engage, should have benefits over and above those available to the employees of the client?
Mr. Ottaway: I am grateful for that intervention. I am certainly not suggesting that and, what is more, it would not be the case. As I shall shortly point out, the self-employed caught by IR35 will still be worse off in terms of the benefits that they receive.
The self-employed work through intermediaries not, as the Government would have us believe, to avoid national insurance contributions, but primarily because it is the most sensible way to arrange their affairs. It helps with the establishment of offices at home, with the purchase of specialised equipment to carry out their job and with travel and accommodation expenses. The Government, with a complete lack of vision, accuse such people as though they were somehow cheating the public. The very opposite is true. Contractors do not get such a good deal; they often do not receive such good benefits as the employed personnel with whom they work.
If I can have the attention of the hon. Member for Barnsley, West and Penistone (Mr. Clapham) for a second, the Inland Revenue has confirmed that, even under IR35 and despite paying class 1 contributions, the self-employed will still not be entitled to rights such as sick pay and holiday pay and, what is worse, they will not be entitled to unemployment benefit when they are not contracted. In short, it is pain without gain.
The national insurance element is being dealt with by delegated legislation shortly to be taken in Committee and against which the Conservative party has prayed in early-day motion 657. The other half of the Government's attack are the rules subjecting intermediaries to schedule E taxation. They are contained in schedule 12 and will be introduced by the clause that we are debating.
Mr. Geraint Davies: Will the hon. Gentleman give way?
In simple terms, the rules governing the employed--
5.45 pm
Mr. Dale Campbell-Savours (Workington): On a point of order, Mr. Martin. We have just heard a remarkable response from the hon. Member for Croydon, South (Mr. Ottaway). In Committee on the Floor of the House, we give way.
The First Deputy Chairman of Ways and Means (Mr. Michael J. Martin): Giving way is--[Interruption.] Perhaps the hon. Member for Workington (Mr. Campbell- Savours) will listen to my response. He might learn something. Giving way is up to the individual Member. It is not for the Chair to decide whether a Member should give way.
Mr. Ottaway: I recognise the courtesies to which the hon. Member for Workington (Mr. Campbell-Savours) refers. I would give way to 658 Members. It happens that in the past the hon. Member for Croydon, Central (Mr. Davies) has intervened with offence. As a result, I will not be giving way to him.
I shall continue with the debate, and the important subject of IR35, which will attack many people.
Mr. Bercow: Will my hon. Friend consider adding to his list of Members to whom he does not intend at any stage to give way the hon. Member for Workington (Mr. Campbell-Savours), who has just had the chutzpah to accuse the Opposition of defending tax dodging? He has therefore subjected 60,000 hard-working IT professionals to a calumny.
The First Deputy Chairman: Order. The hon. Member for Croydon, South (Mr. Ottaway) was doing all right before the interventions.
Mr. Ottaway: I am grateful to my hon. Friend the Member for Buckingham (Mr. Bercow). I would certainly give way to the hon. Member for Workington (Mr. Campbell-Savours). We do not agree with him on this side of the Chamber, but we treat him with respect.
I shall return to IR35. In simple terms, the rules governing the employed and the self-employed are being changed. The self-employed person who looks as though he might be employed will be treated as employed, and will have to pay tax and national insurance contributions as an employee, not as a self-employed person. Expenses incurred in running a business will be taxed as income, and a mere 5 per cent. of turnover will be allowed as a genuine business deduction. That is not taxation of Britain's self-employed; it is discrimination against Britain's upwardly mobile work force. Those who will feel it hardest will be the high-tech sector, which is the sharp end of British industry. They are the people whom Britain can least afford to lose.
I shall quote from the Electronic Telegraph. A software engineer at an aerospace-related corporation preferred to remain anonymous because his contract is not yet completed. When it is, he plans to work with a German partner, or possibly an Italian. He said:
- The Government is creating a brain drain like the one that happened in the 60s. Software is a peculiar thing which has produced a good income for Britain and lots of spin-offs but lots of other countries like Germany are not very good at it.
- and so take trade away from Britain, in addition to the tax loss from losing high-income experts.
- is ashamed to say that I voted for this business hostile Government . . . I have no wish to remain in a country that punishes enterprise instead of encouraging it. My company turned down six months' further work in the UK implementing e-commerce systems for our major telecommunications company, entirely because of IR35.
- I spent three months and about £50,000 of my company money to try to develop a marketable item of hardware. IR35 will stop this kind of enterprise. Under the new rules, I could not afford to work here. My outgoings in travel and living costs will be swallowed up in two months under the 5pc ruling for expenses.
I shall take another example. Would Laetitia Caster, the model chosen to represent the symbol of the French Republic, La Marianne, have come to the United
Kingdom if she had known about IR35? She almost certainly works through a personal service company, and she ran away from France to avoid 54 per cent. tax, but found that she would have to pay 52.2 per cent. tax here. It comes as no surprise to find that when she arrived and saw what was going on, she quickly announced that she would not be resident in the UK for tax purposes.
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