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Mr. Malcolm Bruce: Will the hon. Lady explain how an employee who has travel and training expenses is treated in the same way as someone with a company who has those expenses? Is it not normal for the company's employer to pay those expenses and claim tax relief on them?

Dawn Primarolo: If someone is employed by a company which provides training, there is no claim on a benefit in kind for the employee, but there is no relief--the employer gets it. An employee cannot claim his training expenses--nobody can. Training expenses for employees cannot be tax-deductible. If employees pay for their training, that is up to them.

Sir Robert Smith: Will the Minister give way?

Dawn Primarolo: No.

Opposition Members must fix in their minds what employees are entitled to and what self-employed people are entitled to. We are ensuring that the rules in the tax system are properly aligned.

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The next point was that there would be a brain drain--a massive exodus from this country. Many people have said that they will go abroad, but the IT industry recognises that that is just a lot of noise. Britain is still a low-tax country and there will still be good money to be made in the IT industry, even after IR35. The trade journals show what has been said by the profession. Computer Consultant said:

Christine Little of the Recruitment and Employment Confederation said:

7.45 pm

The idea that IT consultants can go somewhere else where they will not have to pay tax on their earnings is interesting but incorrect. In some countries, workers will be worse off than if they had stayed in the United Kingdom and fallen within IR35. I have received some interesting postcards from someone who allegedly moved to Germany as a consequence of IR35. I have news for that contractor: on an income of £55,000 per year, his take-home pay in Germany will be £25,000. If he had stayed here, it would have been £34,000 under IR35. His friend, who apparently moved to Strasbourg, will be taking home £30,000 instead of the £34,000 that he would have taken home in the UK. In the United States, Norway, Belgium, the Netherlands, Germany--all the countries that contractors claim that they will move to--the liability to tax is higher than it is here.

The next area is to do with the expenses and the 5 per cent. allowances proposed under this measure. The new rules will affect only income from engagements that would have been employment if entered into directly with the client. It is a question of whether an activity passes the employment test. Income from any other source within that service company is completely unaffected by the legislation and can be used by the company to meet running costs, make investments, make capital purchases, employ staff, pay dividends, or whatever.

When a service company has income only from engagements that are caught by the legislation and nothing else, we do not think it right that the service company worker should be in a more advantageous position on tax and national insurance than a conventional employee. I really cannot understand why the Committee is struggling with that simple proposition.

The 5 per cent. allowance, which is on top, is intended to cover the basic running costs of the service company, such as Companies House filing charges and accountancy fees. We have said that we will not inquire into how that money is spent, and also that the service company need not keep any records in support of the expenditure. As far as we are concerned, this is an automatic, flat-rate allowance. It is pretty generous, given that most of the work done by service companies would be as an employee.

The hon. Member for Kingston and Surbiton (Mr. Davey) spoke on Second Reading about the compliance regime. He said that he would ask me again

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about whether the position on IR35 would be flexible. I say to him, as I said to the Inland Revenue, that officials are to give the benefit of the doubt where businesses make genuine mistakes when trying to comply with the rules. That is only fair, given the change during this period. It is a light-touch approach. Of course, in the rare cases in which avoidance of tax and national insurance liability is deliberate and intended, the same compliance regime and penalties will apply as exist in the tax system for trying to avoid paying tax and national insurance.

Contractors working for service companies will be entitled to statutory sick pay and maternity pay, like other employees. They may not get the benefits from their clients but they may, in the short term, from their companies. IR35 does not discriminate against anybody in terms of their relationships. The regulations make it clear that we must consider associates and how they work together.

Hon. Members mentioned Australia and questioned whether it had withdrawn its legislation. It has not--it is going ahead with it and has made some amendments, as we have done, but in different areas.

Anyone who meets the accepted definition of an employee should pay tax on the same basis as any other employee. This measure is not anti-competitive and it does not discriminate in favour of big business against small firms. It is simply not true to say that it does. Again, I will quote the industry, in a debate about the measure on "Accounting Web", in which it was stated:

That is what those affected are complaining about.

Sir Nicholas Lyell: I have been listening carefully to the Minister and I have read the Chief Secretary's most recent letters to me on this important topic. My impression is that the sort of constituents to whom I referred in my speech, who are paying substantial tax but sometimes work for long periods for an individual company that uses their services, will not be regarded as employees and will not be caught by IR35. Will the hon. Lady confirm that only the blatant cases are likely to be caught? Or is she expecting to scoop up the lot, in which case my constituents and those of my hon. Friends and other hon. Members who have spoken will still be very worried?

Dawn Primarolo: I have already answered that question in the debate. The question is whether the person is an employee or is self-employed. The terms and conditions of their contract with their client are the issue and those determine their status. If the relationship with the client is clearly that of the self-employed, as laid down in case law and in the Bill, the answer as to their liability to IR35 is clear.

My hon. Friend the Member for Aberdeen, Central (Mr. Doran) and the hon. Member for West Aberdeenshire and Kincardine (Sir R. Smith) asked a series of questions about the oil industry. If a worker in that industry works for a client in circumstances that meet the definition of employment, PAYE and national insurance should be paid. Until now, clients have been

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able to insist that workers set up service companies--my hon. Friend referred to this--to enable the client to avoid liability for PAYE and national insurance.

I listened carefully to my hon. Friend's comments and to those of the hon. Member for West Aberdeenshire and Kincardine. I think that they will find that that definition is the issue and that was the requirement for companies, but I will reconsider those decisions carefully. [Interruption.] I realise that Opposition Members find two things difficult. One is a woman speaking at the Dispatch Box, because they treat women appallingly in the House. The other is that although they ask questions, they do not want the answers because they know the weakness of their case. They can heckle me all they like, but I am putting the Government's case on the record and I intend to continue to do so.

The final question asked by the hon. Member for Twickenham concerned the figures in the Red Book and the increase in the first year to £900 million. He will see from our original assessments that we estimated the number of companies that were using the loophole as we described. We were challenged about the estimate by the hon. Gentleman and a number of organisations. I asked the Inland Revenue to assess thoroughly through our network the number of companies that appeared to be using that mechanism, and which would therefore be affected. That is where the new £900 million figure came from. In truth, the avoidance mechanism is being used far more extensively than we had thought, and the Government have moved to close that loophole.

I commend the clause to the Committee and I look forward to what I hope will be more good-natured debates on the same subject in the future.

Mr. Ottaway: The problem is not that we do not listen to the answers; it is that the Paymaster General does not answer the questions.

The Inland Revenue published a leaflet called, "Questions frequently asked about IR35", which makes it clear that an individual who works through a personal service company will not be in the same position as an employee while both are paying class 1 national insurance contributions. That person will not be entitled to benefits from the company or to unemployment benefit between contracts. The most honest thing that the Minister could do is admit that, rather than trying to mislead the Committee into thinking that people will be in the same position.

The hon. Lady did not answer the question posed by my right hon. and learned Friend the Member for North-East Bedfordshire (Sir N. Lyell) about the 5 per cent. Most importantly, she did not deal with the fact that the Red Book estimates that the measure will raise £900 million. Inland Revenue documents state that 60,000 companies will be affected. One does not have to be a genius to work out that every one of those companies will have to pay £15,000 a year extra in taxation.

The hon. Lady did not deal with any of those issues, nor did she deal with the fundamental matters raised by hon. Members on both sides of the Committee, despite the objections of the hon. Member for Aberdeen, Central (Mr. Doran). That is why we will vote against the measure.

Question put, That the clause stand part of the Bill:--

The Committee divided: Ayes 252, Noes 147.

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