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Mr. Campbell-Savours: Is it not true that the Liberals' desire to raise the higher rate of tax by 10p would have exactly the same effect?

Mr. Davey: I am more than happy to confirm that that is our policy, because we have just debated it under the previous clause, but it would not by any means have the same impact. [Interruption.] The hon. Gentleman asked me a question; he should have the decency to listen to the answer. Many of the people who are writing to me earn far less than the £100,000 threshold at which the Liberal Democrats want to impose a 50p top tax rate. Many of them earn £30,000 or £40,000. They work in genuine small businesses and have modest incomes. The hon. Gentleman's party want to shove an extra 10 or 20 per cent. tax on to people who are struggling to make a living.

Mr. Fabricant: Are the Government not targeting the very people whom we need in this country--those who are not risk-averse, those who comprise the enterprise culture and those who work in high-tech sunrise industries? They are the very people whom we should not be driving abroad.

6.15 pm

Mr. Davey: The hon. Gentleman is absolutely right; I agree with everything that he has said.

If we are to oppose the proposal constructively, we must debate how we would tackle the abuse that we agree has occurred--the "Friday evening, Monday morning" abuse to which the hon. Member for Bexleyheath and Crayford (Mr. Beard) rightly referred. The Liberal Democrats believe that that abuse could be tackled without hitting the legitimate contractor. One could consider past contractual relationships between employees of a personal service company and its main or sole clients; we could target that abuse and hone in on it to stop it. That is the approach that we recommend, but not the one in the schedule that the clause will implement.

Mr. Rammell: Will the hon. Gentleman give way?

Mr. Davey: I shall give way in a second; I wish to make the following key point.

A survey of small contractors by the Professional Contractors Group, which represents the people targeted by the clause, showed that the main client of 4 per cent. of its members is the former employer. So it seems that

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not only have the Government overestimated the abuse, but their measure is totally inadequate to capture the people whom they say they want to stop.

Mr. Rammell: I heard the hon. Gentleman say that it would be wrong to criticise the proposition without offering an alternative. I then heard him say that he would hone in on abuse. Will he enlighten the Committee by telling us exactly what he means by that, or was the phrase simply vacuous?

Mr. Davey: I am more than happy to do so; in fact I just did. Before the hon. Gentleman intervened, I talked about the past contractual relationship between an employee of a personal service company and its main or sole client, which constitutes the abuse that the Government said they wanted to tackle. The PCG has come up with more detailed tax proposals that would stop the abuse about which the Government say they are concerned without hitting legitimate business. If the hon. Gentleman is concerned about the people in his constituency who will be hit--they may have voted for him--he should be criticising the Government and asking them to think again, just as in Australia, where the Government proposed a similar provision but realised that it would harm the new economy.

The far east and the Pacific rim are very competitive. Those countries realise that they must retain home-grown, skilled IT workers in order to develop businesses. Fortunately, the Australian Treasurer had the wisdom to back down. When the Australian Government changed their proposals, the Treasurer said:

by the change--

That is what our Government should be doing, and that is what we are arguing for.

Mr. Quentin Davies (Grantham and Stamford): The hon. Gentleman quoted the figure of 4 per cent. of contractors whose principal customer is a former full-time employer. Does he agree that for many of those contractors, the relationship will have changed at the initiative of the former employer? Those people will have been made redundant. The employer will have decided that he could no longer bear that individual as a fixed cost, but could do so as a variable cost. In other words, the individual who is pushed into being a contractor bears the economic risks of his activity in a way that he previously did not. It is perfectly right and economically rational that such people should be taxed on that basis, as self-employed.

Mr. Davey: Although I agree with the thrust of the hon. Gentleman's point, in opposing the clause we must be careful not to give succour to employers who go down such a route. I agree with some of what the Government say about the Friday evening, Monday morning practice being wrong. Far fewer employers use it than the Government are trying to make out; none the less, we must not give succour to people who behave in such an appalling way. We are against such abuse of the tax

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system. We are in favour of a different approach, which does not discriminate against small companies. The Government will be taken to the courts because of this measure, and rightly so. I do not know whether the Conservatives are pleased that it will be under European legislation that the Government are criticised in the courts--

Mr. Bercow: Ends and means.

Mr. Davey: It seems that some on the Conservative Benches want to have their cake and eat it. We will not let them do that.

The Professional Contractors Group will seek a judicial review, because it believes that the Government's proposals represent anti-competitive measures that discriminate against small businesses, which are the bedrock of the economy. The measures favour the big boys, and that must be wrong.

Mr. Bercow: I strongly agree with the hon. Gentleman's comments about discrimination against small firms. Should we not therefore be told by the Paymaster General whether, against all the evidence with which she will have been provided, she believes that the 5 per cent. expenses limit is, on average, adequate to cover accountancy, computer and training costs, or whether she knows perfectly well that it is not adequate, but that she does not care because the figure has been plucked arbitrarily out of the air, as a capricious means by which to raise taxes?

Mr. Davey: The hon. Gentleman is right. The Government must justify the 5 per cent. figure, and I fear that they will be unable to do so. We pointed out to the Paymaster General that the figure does not represent the training cost that must be borne by contractors in the industry. They often find that within six months their skills are obsolete, because the industry changes so much. They will be out of business unless they spend heavily on investment in their skills.

In response to that argument, the Government say that employees must fund their own training costs. The Government clearly fail to see the difference and the issue that we are trying to highlight. A self-employed business man or woman trying to build up his or her business needs to make that investment. In the new economy--the knowledge economy--such an investment in training and knowledge is comparable to an investment in machinery and plant in the old economy. If the Government fail to realise that, they will damage the cornerstone of the country's future wealth.

The discrimination against small companies is of particular concern to Liberal Democrats. The Government have granted various exemptions to larger companies, which smaller companies will not enjoy. With such a bureaucratic system, as the hon. Member for Croydon, South described it, the compliance costs will be much higher for small companies. The Government are reinforcing the existing anti-small business features of the tax system. Small businesses already have higher compliance costs than larger companies. Again, the Government seem to be favouring the big boys.

As for who will be caught by IR35 and who will not, the key issue is the definition of self-employment. No doubt we will debate that in detail in Committee.

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The Government need to realise that, in the knowledge economy, self-employment is inevitably a more difficult concept to pin down.

In the case of physical goods--say, rabbit hutches--it is easy to prove that one is a sole trader manufacturing rabbit hutches and selling them on. A sole trader running a shop can show that he has premises from which he sells his wares. However, if the goods and services that one is providing are in one's head, and those are provided to a number of clients, of course that will be more difficult to prove under the old rules fashioned two centuries ago.

When the Minister replies to the debate, will she tell us of any case dealt with by the courts in which they have defined for the knowledge economy the criteria that constitute self-employment? Whereas there are a host of cases that define self-employment in many other industries, there is no such case law for the new economy and the IT sector. The Government and the Inland Revenue have to make it up as they go along. That leads to huge uncertainty and will result in people facing penal tax rates, which they should not have to do.

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