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Dawn Primarolo: If the right hon. and learned Gentleman will allow me to make this point, I shall happily give way to him.

The points made in the debate have dealt with whether the companies are entrepreneurs; whether the definition of self-employment correctly reflects the labour market in the sector; whether the people concerned are entitled to benefits; whether there will be a brain drain; what Australia is doing in its legislation on the matter; whether the proposal is discriminatory in any way; whether there has been consultation; whether it is an attack on large business--

Mr. Bercow: Small business.

Dawn Primarolo: Yes. The points also dealt with whether small businesses are being assisted in meeting training costs; whether there will be a legal challenge to the proposal; and the issues that the oil industry has raised. The right hon. and learned Member for North-East Bedfordshire (Sir N. Lyell) also made some points on self-employment status and the 5 per cent. deduction for training costs. I hope to deal with all those points as calmly and clearly as the Committee will allow me to do. First, however, I shall be happy to give way to the right hon. and learned Gentleman.

Sir Nicholas Lyell: I am most grateful to the Minister. Does she realise that the constituents who have come to

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see me on the matter have all made the point that they pay themselves substantial salaries, on which they pay tax? Plainly, they do not fall into the categories described in the two quotations that she has given. They are deeply concerned about the 5 per cent. limit because, among other things, they have genuine expenses that are far higher than that figure.

Dawn Primarolo: I am grateful for the right hon. and learned Gentleman's comments, as I wanted to deal with that point. The objective of some of the speeches made in this debate and of the arguments made by some vested interests has been to spread fear and misinformation about how the arrangements will work. Although I hope to deal clearly with those points in my speech, the Committee will have other opportunities to deal with them.

In the past 12 months, much information has been published about our proposals for tackling tax and national insurance avoidance by service company workers and others who provide services to clients through intermediaries. I think that it is fair to say that the general objective of our proposals is pretty well understood now. We want to stop people who are really the same as employees from dressing up their working arrangements by setting themselves up as a service company to avoid paying the correct level of properly due tax and national insurance.

As I said, individuals are not entitled to choose self-employed status simply because they fancy being self-employed. There are clear precedents and case law defining "self-employed" and "employee". The proposal seeks clearly to align rights, so that if someone is an employee, he or she is entitled to all the rights of an employee and will be defined as such. Conversely, if someone is self-employed, he or she will continue to receive all those other rights.

I fear that many of the companies with which the right hon. and learned Member for North-East Bedfordshire has been in contact are under a misapprehension about how the rules will affect them.

Sir Nicholas Lyell: If the Minister, by saying that those companies are under a misapprehension, means that they do not need to worry because they will be accepted in the status that they require, why are they to be limited to 5 per cent. expenses? Does she realise that those who have come to see me--like those who have gone to see most of my hon. Friends, I suspect--are highly intelligent people performing a function in which it is not open to them to be employees, because those for whom they work do not wish to employ them as employees? Those people can do the job only through the type of service company that we are discussing, and they are being badly and unfairly hit by the proposals.

Dawn Primarolo: People who are employees will receive exactly the same treatment as every other employee in the tax system. However, we have agreed that, for those employees who seek to work through service companies, we shall allow a 5 per cent. deduction to help run those companies. Nevertheless, we are saying that they are employees. If they are self-employed, the 5 per cent. deduction will not apply to them because they

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have access to all the other reliefs, as ably explained by my hon. Friend the Member for St. Helens, South (Mr. Bermingham).

Mr. Ottaway: Can the Minister confirm that people who are caught by IR35 and end up paying class 1 national insurance contributions will not be in the same position as "an employee" as they will not be entitled to sick pay and other benefits that employees receive, and that they will not be entitled to unemployment benefit between contracts?

Dawn Primarolo: If a worker is designated as an employee and is paying national insurance contributions as an employee--which is the whole purpose of the proposal--he or she will be entitled to the benefits to which any other employee paying national insurance contributions is entitled.

Mr. Ottaway rose--

Dawn Primarolo: I shall deal with the point in more detail later. If the hon. Gentleman will let me make some progress, and if he is still unclear on the point, I shall give way to him.

Mr. Ottaway: It is on this point.

Dawn Primarolo: The problem is that hon. Members have asked various questions, but are refusing to allow me logically to develop the answers and explain the procedure. Do they want to hear the answers or only to ask more questions?

Mr. Ottaway: I was merely quoting from the Inland Revenue's own guide on the matter, not making up figures. Will the Minister confirm that, when someone has a relevant engagement that is caught by IR35, that person will not be entitled to the benefits of an employee?

Dawn Primarolo: I cannot understand why the hon. Gentleman finds this point so complex. If employees pay national insurance because they are employed as employees, they will be entitled to the same rights as other employees. [Interruption.] Perhaps I should stop looking at Opposition Members, Dr. Clark, and focus my gaze on you. I hope that you will not misinterpret that; it is just that Opposition Members are really not a very attractive prospect.

As I said, I think that the objectives are well understood now. It is true also that all right-minded citizens, business representatives, individual taxpayers and their advisers, Members of Parliament and those who are in the other place recognise--it is a matter of public record--that no one wants that type of avoidance to continue. Such avoidance simply is not fair to the rest of us, and we should deal with it.

It is also true that, until 6 April 2000, people were perfectly entitled to obtain a tax and national insurance advantage by working in that way through service companies. However, it became apparent that many of the people doing so were acting against the spirit of the legislation, to their considerable personal advantage, and at a disproportionate cost to the Exchequer. In reaching this decision, we recognised that we were proposing to

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remove what had been a legitimate way of reducing tax and national insurance bills. That is why we announced our intention to make this change a full year ago--to allow good time for preparation and consultation. The Government have taken extensive consultation on this matter. Even the PCG, which has been so extensively quoted, has said publicly that the Government consulted and listened on this matter. However, we have not gone as far as the PCG would have wished.

People with a vested interest in continuing to avoid paying tax and national insurance, plus one or two powerful lobby groups, have been sowing confusion about what the measure does. Let me deal first with the point made by the hon. Member for Croydon, South (Mr. Ottaway) that IR35 is an attack on entrepreneurs. The tax system has a long-established method for distinguishing between employees and the self-employed entrepreneur. Some people have chosen to use service companies because they do not fit the definition of self-employment, but still want to benefit from the tax breaks available for self-employment. They are really only employees who want a better deal from the tax system than that to which their status entitles them. Those people will be targeted by the new rules.

As I said on Second Reading, our intention is not to prohibit the use of service companies. Instead, we are telling those who are really employees that using service companies will not enable them to avoid paying their national insurance and tax at a fair level. The idea that people who are really employees are the same as self-employed people in taking risks, creating employment and seeing their companies grow simply does not stand scrutiny.

We are not talking about all service companies or all IT contractors. The new rules will apply to people in service companies who would be employees of their clients if the service company did not exist. The usual case law tests will be used to determine whether someone would be an employee. Those tests have been used for all others in the tax system and are well known. I do not believe that it is beyond the intellectual capability of those IT consultants who are still protesting to get to grips with these rules.

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