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Mr. Beard: Can the hon. Gentleman suggest a motive for people to leave full-time employment and set up a personal service company other than tax evasion?

Mr. Ottaway: The hon. Gentleman must consider the complexities of the issue. Many of the self-employed incur expenditure on the tools of their trade, particularly in the high-tech sector when they buy computer equipment. Under the self-employed rules, that expenditure is tax deductible, but under IR35 it is not. Many people therefore prefer to be self-employed so that they can at least count expenditure on the tools of their trade as tax deductible.

Mr. Desmond Swayne (New Forest, West): I worked in the industry, and for most people it is not a question of giving up employment because most jobs are project- driven and contract staff are required, so more often than not full-time employment is not an option.

Mr. Ottaway: My hon. Friend is right. As I was saying earlier, we have a mobile work force, and work patterns are changing. Fewer people are employed as regular staff for a long period. Individuals move frequently and are subject to a wide variety of circumstances.

Mr. Beard: I understand the point that people who are employed on a casual basis may have a greater reward than those who are employed on a regular basis, but that should be given in their salary or payment. Why should it be given through the tax system?

Mr. Ottaway: It is not a reward. Any business is entitled to tax deductions for its operations, such as capital allowances for large corporations. The Government are saying that if people are caught by the IR35 rules, their expenditure cannot be tax deductible, particularly if it is more than 5 per cent. That is perfectly straightforward.

Mr. Campbell-Savours: There is one simple point that I cannot understand. Why should people want to relieve themselves of tax liability when the United Kingdom has some of the lowest income taxes in the whole of the developed world? Even the Tories kept telling us that in the last Parliament, and taxes are lower now.

Mr. Ottaway: The hon. Gentleman misunderstands me: people are not trying to relieve themselves of taxes; they simply do not want to be taxed on the turnover of their business.

Mr. Campbell-Savours: Some people say that it is tax evasion.

Mr. Ottaway: It is not evasion; that is illegal.

Mr. Campbell-Savours: It is avoidance.

Mr. Ottaway: Avoidance is a much better word.

3 May 2000 : Column 187

Mr. Fabricant: I am grateful to my hon. Friend for giving way because I am conscious that he has faced a barrage of interventions. He mentioned tax relief on the purchase of equipment, but he should also make it clear that if the clause is passed, IR35 will mean that people will be unable to claim tax deductions for expenditure on travel and accommodation when they go out to seek work but are unsuccessful. That is a disincentive to go out and seek work.

Mr. Ottaway: My hon. Friend is right, although he should be careful to note that the Inland Revenue has issued guidelines about what is self-employment and what is employment. As far as I can tell, the old rules are being changed, although how that interacts with case law is not yet apparent. Perhaps we shall explore that in the Standing Committee. The point applies to people who are caught by IR35 because they are considered to be employed.

The Government say that the self-employed have nothing to fear from IR35, but how do we know whether someone is genuinely self-employed? As I said, the Government's guidelines will tell us, but those guidelines are applied by the Inland Revenue, which finds out who is self-employed by checking every single case. That is not means-testing, it is a witch hunt. Every person who thinks that, according to the Government's guidelines, he may be self-employed has the right to ask the Inland Revenue for verification.

The Inland Revenue has let it be known, however, through leaks, that if someone is unsure whether they are self-employed, it will almost certainly tell them that they are employed. That means that a subjective judgment is made by the official considering the case. In two test cases put forward by the Professional Contractors Association, the two people in question were doing the same job, and one was told that he was employed and subject to IR35, and the other was told that he was self-employed and therefore not subject to it.

What sort of encouragement to British industry is that? Someone may invest in equipment only to find that no tax relief is available. The uncertainty will be devastating to the high-tech sector, and it is no wonder that people are up in arms about IR35 and fleeing abroad. It is no wonder that Australia abandoned a similar scheme because of its complexities and the difficulty of introducing it.

Mr. Edward Davey: I have been listening carefully to the hon. Gentleman and agree with almost every word. Does he agree that it is absurd to introduce a system that requires small businesses to check every contract with the Inland Revenue? Is not that bureaucracy gone mad?

Mr. Ottaway: The hon. Gentleman is right. When, only a few weeks ago, the Australians realised how complex their scheme, which was very similar, would be, they abandoned it.

Concerns have been expressed not only by the industry and Members on both sides of the Committee but by the Minister for Small Business and E-Commerce. She went to the United States to try to woo ex-pats back to this country, but considering the chaos that IR35 is about to cause, who in their right mind would want to return? It is not only Conservative Members who are saying that the Paymaster General is wrong, but her fellow Ministers. As usual, however, she refuses to listen.

3 May 2000 : Column 188

The good news is that part of the Government have got the message. They announced yesterday that the time taken to process work permit renewals is to be cut to three months to help Britain to compete for overseas specialists in areas such as information technology. The Department for Education and Employment press release said:

It continued:

The press release's notes to editors said:

That annexe includes analyst programmers, software engineers, database specialists and IT managers. Part of the Government has got the message that there is a shortage of IT staff. The press release also said:

I only hope that the message gets through to the Treasury.

Mr. Davey: Will the hon. Gentleman speculate on whether that is an example of joined-up government or shambolic government?

Mr. Ottaway: It is completely disjointed government. I hope that the Paymaster General will address the issue. Chamber debating banter aside, this is a serious issue because one Department is pushing a programme that is in complete opposition to what the Treasury is doing.

Germany is seeking to recruit IT workers from India. The United States is introducing a high-tech Act, which will come into effect on 1 October. That will allow the US to increase the number of visas for IT consultants coming to the country by 200,000 over three years. I hope that the Paymaster General will get the message that there is a shortage of IT workers around the world. Yet the Treasury, in its obsession about so-called fair taxation, is driving IT specialists out of the country as fast as other Departments are trying to woo them in, and believe me, they have plenty of places to go.

6 pm

We now have a battle between Departments and between nations. We have the case of Mr. Richard Marriott, who says that, although the Government claim to favour small business, they are

He is a specialist computer consultant and is moving to New Jersey to avoid IR35. Stuart Ranson, a programming consultant, was worried when Labour came to power, but returned from an overseas contract none the less.

says the programming consultant, now in Holland. He adds:

3 May 2000 : Column 189

Dawn Primarolo: Before the hon. Gentleman digs himself into an almighty hole, I thought I might mention that, in the United States of America, IR35 rules are in force: someone earning £55,000 gross will have net earnings of £37,000, but, of course, has to pay health costs. There are also service company rules in the Netherlands: someone earning £55,000 will take home £29,000.

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