Standing Committee H
Tuesday 6 June 2000
[Mr. Frank Cook in the Chair]
(except clauses 1, 12, 30, 31, 59, 102 and 113)
The Chairman: I hope that right hon. and hon. Members had a relaxing break. It may be of interest to the Committee to know that I spent most of my break carrying out parliamentary duties, but that I enjoyed the same level of masochistic gratification that I experience while presiding over our proceedings.
Mr. Richard Ottaway (Croydon, South): On a point of order, Mr. Cook. I hope that your gratification is not too retarded. You will be aware that amendments Nos. 17 and 18 have not been selected for discussion. Notwithstanding the fact that they are defective-given that Opposition amendments, if selected in principle, must be refined-I believe that they were not selected because they relate to benefits, not taxation. To that extent, I do not quarrel with the decision that we debate tax matters rather than benefits. However, the Government are moving towards an integrated tax and benefits system, as shown in the operation of the working families tax credit and the imposition of national insurance contributions on taxation. National insurance contributions relate to benefits, and the amendments were tabled to stimulate a debate on the interaction of benefits and taxation.
Reference is made frequently on the Inland Revenue website that deals with IR35 to benefits from both the Government and employers. My right hon. Friend the Member for Fylde (Mr. Jack) drew to my attention case law on the assessment of IR35, which is based on social security case law relating to benefits. Page 280 of the Bill sets out the nine steps for the assessment of schedule E payments, step six of which refers to national insurance contributions that purchase benefits, so even the schedule refers to the integration of benefits and the tax system. While I do not quarrel with your interpretation of the rules as they stand, Mr. Cook, may I suggest that the matter is referred to the Procedure Committee, so that consideration can be given to permitting the Committee wider debate on the interaction of tax and benefits?
Mr. Michael Jack (Fylde): Further to that point of order, Mr. Cook. I, too, am mystified by the reasoning behind the matters to which my hon. Friend has referred. I draw the Committee's attention to the fact that cases such as Ready Mixed Concrete (South East) Ltd. v. Minister of Pensions and National Insurance are prayed in aid of the Government's position as is the case of Market Investigations Ltd. v. the Ministry of Social Security. The fact that much of the Government's thinking seems to be predicated on those cases in which social security issues are mentioned adds weight to my hon. Friend's point of order.
The Chairman: I thank the hon. Member for Croydon, South (Mr. Ottaway) for giving me notice that he intended to raise the issue. I understand the problem of making a distinction between benefits and taxation, especially given recent developments. I undertake to have the matter reconsidered in the appropriate quarters of the House and to give the Committee an analysis of the issue at the earliest opportunity.
The Paymaster General (Dawn Primarolo): Further to that point of order, Mr. Cook. You said that you would consider the matter. However, I should tell the Committee and particularly the hon. Member for Croydon, South and the right hon. Member for Fylde that the question of IR35 revolves around the definition of employment, which is the subject of forthcoming debates. Employment status determines national insurance and tax payments, and that, not integration of the tax and benefits system, is the common thread that runs through the matters under discussion. The authorities will be able to examine that more closely.
The Chairman: I can do no better than to repeat what I said. I am sure that all remarks made this morning will be taken into account when the authorities deliberate.
Provision of services through an intermediary
Mr. Ottaway: I beg to move amendment No. 38, in page 277, line 13, after ``that'' insert
`having regard to the practice generally received or adopted at any time as to the manner of performance of the services for persons in the same business as the client'.
The Chairman: With this it will be convenient to discuss the following amendments: No. 12, in page 277, line 15, at end insert-
`(d) but, shall not apply if the worker or intermediary works for many different clients or as a sole trader as well as under a relevant engagement.'.
No. 13, in page 277, line 15, at end insert-
`(d) but, shall not apply where the intermediary contracts with a party other than the client such as an agency.'.
No. 39, in page 277, line 15, at end insert
`(nothing in this Schedule shall be taken to alter any rule of law as to whether an individual is or would be an employee of any other person).'
No. 40, in page 277, line 26, at end insert-
`(6) This Schedule applies only to a case where the Inland Revenue can demonstrate to the satisfaction of the General Commissioners that its application would not damage the flexibility of the market for the services performed by and for the client.'.
Mr. Ottaway: Amendments Nos. 38, 39 and 40 would have the same effect; they would ensure that flexibility is maintained in the labour markets by adoption of existing practices and that there is no change in employment law. In her response to the point of order, the Paymaster General rightly said that the proposals relate primarily to employment law. She will also be aware that amendment No. 38 adopts the words
practice generally received or adopted
from Inland Revenue statement of practice 8/91 and would limit Revenue powers to overturn an agreement of tax liability made on the basis of previous prevailing practice or law.
Amendments Nos. 39 and 40 go to the heart of our suggestion that there should be no change in employment law. Paragraph 3 of the press release for the famous-or infamous-IR35, dated 9 March 1999, states that there
is no intention to redefine the existing boundary between employment and self-employment.
That may be the intention and what the Minister says, but it is not how many people understand the legislation. There is a fundamental shift in definitions of employment and self-employment; amendment No. 38 seeks to hold the Minister to the words of IR35 and to stop that shift, which is damaging the economy.
What does IR35 seek to do and what does it mean when it states that there is no attempt to redefine the boundaries? The proposed new rules for the provision of personal services were published at the same time as the press release. Part 1 of the memo summary identifies engagements caught by new rules, and starts with a test of supervision, direction or control. The Paymaster General will be aware that that was subsequently abandoned, even though that was the thinking at the time. On 23 September, there was a climbdown. A press release, under the heading ``Preventing avoidance; preserving flexibility'', stated that
any action must do no unnecessary damage to the flexible labour markets where intermediaries are currently used.
That came after a period of consultation. Clearly, the Paymaster General recognised that a valid point had been made. We welcome the shift of emphasis.
In relation to employment and self-employment rules, one begins to wonder whether, if there is no change in the law, this debate is much ado about nothing. However, there is a change in the law. IR35 is therefore a contradictory document. The two press releases to which I referred are contradictory-effectively, they say, ``There is no change, but here is the change.'' The amendments would limit the damage to the British economy, business-especially small businesses-and, most of all, the self-employed.
In relation to the Paymaster General's press release, issued on 23 September, why, if there is a wish to preserve flexibility, which was always the reason that Conservative Governments rejected the proposal-
Dawn Primarolo: The hon. Gentleman and other Conservative Members repeatedly refer to the number of times that Conservative Governments rejected such proposals. However, I can find only one such instance, in a Committee in 1981. If he wishes to continue repeating the point, will he provide details of when, why and how much revenue was at stake? Otherwise, he should stop making such a vague point.
Mr. Ottaway: I will make the allegations that I want to make, when I want, how I want, and in my own way. I will not be lectured by the Paymaster General. She has no basis for suggesting that no consideration was given to the matter, as she does not have access to Treasury papers relating to the Conservative party's period in office-[
Interruption.] I will tell hon. Members that the matter was considered by Conservative Governments, but not accepted. That is fact.
The Financial Secretary to the Treasury (Mr. Stephen Timms): When?
Mr. Ottaway: Some time between 1979 and 1997. I was not a Treasury Minister at the time, and therefore do not have the detailed information. However, I know, from conversations with colleagues who were in the Treasury at the time, that such a proposal was considered. I shall therefore continue to make the allegation.
The proposal was not accepted because it was felt that it would destroy flexibility in markets. The reaction to the current proposal implies that flexibility is being destroyed. The Inland Revenue's figures show that it will affect 60,000 people, and many commentators believe that it will affect substantially more. I will provide an illustration of the impact of the proposal. If you, Mr. Cook, were to decide to set up as an agent supplying IT consultants to, let us say, British Telecom, and you chose to hire four members of the Committee and pay them a salary, you would not be subject to the schedule's provisions for running a business and receiving income, as you would be simply supplying services. However, the four of us could dispense with your services and form a company, each take a 25 per cent. shareholding, and supply ourselves to British Telecom. We would end up with the same income as before, but we would be subject to the schedule whereas you would not. Four people would do the same work in the same circumstances; in one case a tax would be imposed, and in the other it would not.
If that is an attempt to preserve the flexibility of the markets, I am confused. It would create rigidities in the market. I mean no disrespect to you, Mr. Cook, but it effectively puts someone in a position in which he or she does no work but pays less tax than the four who set off on the exercise in their own right.
The Paymaster General has not made the case about the labour market that she set out in her press release. The modified approach after the press release of 23 September was that the existing rules would be used to determine the boundary between employment and self-employment. That is fine, but whom will it hit? Where will its impact fall?
I have received a substantial amount of correspondence, as I am sure have many members of the Committee. I would like to test your patience, Mr. Cook, by reading a passage from a letter that I received from an IT consultant who was concerned about the operation of the provisions. He states:
As an IT Computer Consultant who has traded for over 25 years, and operated as a limited company since 1983, I am now caught up in the IR35 debacle. The iniquities in this legislation are numerous.
He lists them on an attachment, but I shall not refer to it. He continues:
There are between 200,000 to 300,000 IT contract workers caught up by this situation plus Avionics engineers (who work on the Harrier jet for example), Oil and Gas Engineers who work off shore. These are highly intelligent, motivated, self-starters who are accustomed to the inconvenience of a transient life style and risk of lack of work. We, like the Professional Contractor's Group who represent many of these contractors, feel sure there will be serious repercussions for the development of technology in the UK if these regulations are implemented.
Far from statements about the need for ``a level playing field'', it is clear that the Labour government have no idea of the workings of the highly skilled UK technology industry. They seem to have no idea of the cost to us of keeping skilled (how do they think we got where we are?) and have no idea that they can't just recruit foreign workers as replacements for those who opt to go abroad. On average my partner and I have made NI payments of £640 per month. I doubt if incoming foreign workers would make such level of contributions.
Under IR35 my partner who undertakes all the administration (on a part-time basis), including finding contracts for me, is no longer able to draw a salary and therefore unable to contribute to her pension scheme. As I work flat out either on my client's site, or updating my skills at home, I will still need her assistance. Also, I will now be limited in the amount I can pay into my presently under-funded pension scheme which makes a mockery of this government's statements about self-reliance in old age.
The letter continues, but I have given a flavour of it. That middle-aged man-we have an ageism problem in this country, but that is a separate debate-relies on self-employment to find work, and cannot get back to employment. He is being hit in a way that he did not expect. I suspect that the Government did not expect it either when they started down the road, which is why I hope that they will be persuaded in due course to listen to our arguments.
The Government entered office with a firm commitment to help the business sector. Their 1997 manifesto stated:
A new Labour Government will give Britain's entrepreneurs and small businesses the backing they deserve.
What has been proposed? IR35, which does not constitute ``the backing they deserve''. It constitutes, not help and assistance for Britain's entrepreneurs and small businesses, but a kick in the teeth. Nevertheless, it might be acceptable on its own if it were the only measure involved. However, other proposals include £5 billion extra tax per annum on business and an extra £5 billion regulatory burden, and later amendments will introduce double taxation relief and national insurance contributions on share options, all of which add up to a heavy hit on the business community. There is no doubt that most of the extra burden of taxation will fall on the business community, so it is no surprise that the Government are beginning to lose business support. Their honeymoon with business is now over, and they should not be surprised about that. They have decided, for various reasons, that the proposal is appropriate as part of their drive for fair taxes, and they must pay the cost and accept the consequences.
The language that the Government have used has caused offence to people in the information technology sector. The expression ``disguised employment'' suggests to many people cheating of some sort, or inappropriate behaviour; the phrase has caused offence.
We have already debated the matter at some length. I do not quarrel with the Paymaster General about the fact that there has been some abuse. However, the proposal is the wrong approach to take to tackle that abuse; it is using a sledgehammer to crack a nut. It demonstrates a lack of vision and a failure to recognise that the world is changing and that the way in which companies do business has moved on. Before the Committee started this morning, I was discussing with colleagues the extent to which business has changed-how, for example, work is e-mailed to Bombay from the City overnight, turned around by the cheap labour available there and sent back. When people ring to make a booking on British Airways, they speak not to someone at Heathrow but, more often than not, to someone with a Scottish accent, in Scotland. Location is becoming increasingly less important: the people who do much of the work might, if penal levels of taxation continue, be driven offshore to offer advice from outside British tax jurisdiction, and there is no question that the firms in Bombay doing the overnight work will also be affected.
The Paymaster General has said in the past, when we debated the matter on the Floor of the House-