Finance Bill

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Mr. Michael Clapham (Barnsley, West and Penistone): When a person orders a ticket from BA, the information is translated electronically to Bombay, where the ticket is printed. The people who do such work in Bombay work for an employer and are paid as employees. They have been able to win the contract from BA, so the change that IR35 will effect should not impede British companies from being just as competitive as the people in Bombay.

Mr. Ottaway: I agree. In fact, I gave two separate examples-BA in Scotland, and overnight typing for the City in Bombay. However, the same point applies: it is a competitive world. The hon. Gentleman says that the people in Bombay are employees. I do not know whether schedules D and E apply in India, or about employed and self-employed status in the Indian labour market; my point is that we live in a competitive world, in which new patterns of labour and new methods of raising revenue are emerging. I do not argue about money having to be raised in some way to pay for public services, but the measure will discourage entrepreneurial activity in this country and could drive it offshore.

Kali Mountford (Colne Valley): The hon. Gentleman says that the measure could drive business offshore. Can he give examples of places where he thinks that people will go? The majority of countries have introduced similar measures, so the competitive element means that we are dealing with a level playing field.

Mr. Ottaway: That is the point that I was coming to before I took the intervention from the hon. Member for Barnsley, West and Penistone (Mr. Clapham). Australia has recently abandoned IR35. During the clause 59 stand part debate on the Floor of the House, the Paymaster General suggested that the United States, where many computer consultants are likely to head, was not as attractive to them as I had thought. It would have been helpful if she had pointed out that the Independent Contractor Simplification and Relief Act of 1999, now going through Congress, effectively abandons IR35. She has relied on the USA's having such a policy. That is a good example of the way in which the Government have put their toe in the water, tried to see whether they can make the policy work, and decided that it is not working. It comes as no surprise to discover that the US Government are also passing legislation in tandem with that Act that allows for the fast-tracking of 200,000 high-tech worker immigrants into the US, to make up for their shortfall of IT workers. There is a similar shortage in this country. It would be counterproductive to drive such workers offshore, which is why Australia abandoned the policy and why the United States is doing so.

I alluded to another discouraging factor that keeps rigidities in the market in connection with amendments Nos. 17 and 18, which were discussed on a point of order. The Paymaster General suggested on the Floor of the House that people who were self-employed, or subject to IR35 and directly employed, would be in the same position for the purposes of benefits. In an intervention, I drew attention to the IR35 website-on which I congratulate her, as it is a mine of information for the Opposition.

Dawn Primarolo: Whoops!

Mr. Ottaway: I mean that genuinely; it is a constructive site. For example, its question 38 asks:

    If I work through my own service company on `relevant' engagements will my client have to provide me with employment rights such as sick pay, holiday pay etc?

The answer is no, so people are not in the same position. Question 39 asks:

    If I work through my own service company on relevant engagements will I be entitled to employment benefit?

The answer, to paraphrase, is no. A set of proposals is being introduced that will hit the self-employed so that they pay their national insurance contributions but do not receive the benefits that they would receive if they were directly employed.

Mr. Roger Casale (Wimbledon): I understand the hon. Gentleman's line of argument. It is necessary to give careful consideration to the Bill's impact. Like many hon. Members, I have received several representations from software experts in my constituency, many of whom I have met. Few of them object strongly to the measure in principle, but they do question how it will work in practice. A problem of abuse exists, and the hon. Gentleman does not seem to object in principle to the main thrust of the proposed legislation. Does he recognise the problem that IR35 is intended to solve? If he does not like the proposed solution, what alternative would he suggest?

11 am

Mr. Ottaway: I said a few minutes ago that I recognise that abuse exists. However, the Opposition believe that IR35 is the wrong approach to take to tackle it. We object to it in principle, as we object to the broad thrust. We shall let the hon. Gentleman know in due course what we would suggest in its place. [Laughter.] If the Paymaster General were to make her vast army of excellent civil servants available to me to advise me on the market, and provide me with the necessary data, I could work out a suitable solution. When the Conservative party wins the next election we shall give serious consideration to the matter. We shall have had at least a year to see how the measure is working, and we shall implement fundamental reform as appropriate. Such reform will stimulate entrepreneurial activity, not dampen it, as has occurred.

Dr. Nick Palmer (Broxtowe): Is the hon. Gentleman saying that, prior to the next election, the Conservative party will make no statement on what change it would wish to introduce?

Mr. Ottaway: I am saying that we shall give the matter close consideration and implement whatever reform we regard as appropriate.

I have been slightly blown off course.

The Chairman: I am taking note of it.

Mr. Ottaway: I shall return to the issue of flexibility, which is at the heart of the amendment.

The proposal is a bureaucratic nightmare. A double hit will be necessary-if people have any doubts, they will have to send in their contracts to ascertain whether they are subject to schedule D or schedule E, and a subsequent assessment will have to be made when tax returns are filled in. In many cases, therefore, the Revenue will have to deal with people twice. Individuals will not find it simple to assess whether they fall under schedule D or schedule E-the explanatory notes to this schedule alone constitute a substantial wodge. People who are trying to manufacture widgets do not have time to examine contracts and weigh up whether they are subject to schedule D or schedule E. Many such decisions will be taken on the basis of case law and, as my right hon. Friend the Member for Fylde pointed out, many will relate to social security case law. There is no way that individuals will be able to do that; they will have to rely on professionals.

I would guess that there will be an early test case as to what is a contract. All the tests to enable people to decide what is a relevant contract will relate to substitution. Can one worker be substituted for another worker? Is the person working for a fixed fee, no matter how long the project takes? Can help be hired? Is equipment provided? Such issues will have to be reassessed individually in the light of the measure. The letter that I read out to the Committee a few minutes ago was referring not to the 60,000 workers to which the Minister alluded, but the 300,000 people whose contracts will be affected by the provision. It will be a bureaucratic nightmare of monstrous proportions.

Kali Mountford: I am fascinated by the problem of how to identify whether someone is an employee, an employer or self-employed. I do not understand how someone with the intelligence of the sort of person that the hon. Gentleman is describing would have a bigger problem than, say, my brother who is a builder and subcontracts work to other people, takes on people at certain times but not at others, and continually has to redefine contracts. Why would such a task be more difficult for those described by the hon. Gentleman than it would be for my brother?

Mr. Ottaway: I suggest that the hon. Lady asks her brother. [Laughter.] Does he think that he will fall under schedule 12? [ Interruption.] I challenge the hon. Lady to go through the explanatory notes in the next couple of minutes and to give the Committee an explanation of the workings of IR35. If she can do that, so can her brother.

The market will adapt. Although she cannot say so, I am sure that that is exactly what the Minister hopes will happen. The Government want people to switch from self-employed status to employed status. That will simplify matters. Bureaucratic nightmares will not arise. However, the market will not be as accommodating as the Minister hopes. People will go through the tests of substitution, risk and hiring help and amend their contracts. In fact, many consultants and their clients are about to include a substitution clause in their contracts, which would enable them to avoid being affected by schedule 12. As a result, the Government will not receive the revenue for which they hope.

The Department for Education and Employment has introduced a work permit arrangement. Its press release states:

    The processing time for work permit renewals is to be slashed by up to three months following the introduction of the renewal system

and it says that there will be a

    fast-track work permit route for employers in recognised shortage sectors.

It will take more than a fast-track route to attract the input of IT workers that the Government want. Let us suppose that they did enter the country. That would represent much taxation for the Government and offset much of the revenue that they would lose if they accepted the amendments. The press release continues:

    We are listening to the needs of employers, and we are giving them what they need.

Industry wants a simple system that it can understand and implement satisfactorily. It comes as no surprise that the Minister for Small Business and E-Commerce is making representations behind the scenes and expressing her concern about the measure. The e-commerce tsar is also reported to have expressed reservations about its effectiveness. The Government will not raise the revenue that they hope to raise. If they were not introducing IR35, they would get more revenue from immigrant IT workers. They are not encouraging entrepreneurial activity or flexibility in the markets but destroying them.

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