Standing Committee H
Tuesday 6 June 2000
[Mr. Frank Cook in the Chair]
(except clauses 1, 12, 30, 31, 59, 102 and 113)
Provision of services through an intermediary
Mr. Richard Ottaway (Croydon, South): I beg to move amendment No. 14, in page 279, line 25, leave out ``5%'' and insert ``a sum equal to the running costs of the intermediary.''.
The Chairman: With this we may discuss the following amendments: No. 170, in page 279, line 25, leave out ``5%'' and insert ``10%''.
No. 171, in page 279, line 25, after ``5%'', insert
`and, where the total amount of all such payments and other benefits is £40,000 or less, reduce that amount by an additional £1,000.'.
No. 172, in page 279, line 25, after ``5%'', insert
`or £1,000, whichever produces the largest reduction.'.
Mr. Ottaway: The amendment goes to the heart of one of our main complaints about schedule 12. Paragraph 7 in part II of the schedule sets out the method of calculating a deemed schedule E payment. There are nine steps to be taken to reach the final figure.
Step one allows for a deduction of 5 per cent. from the total amount received. That figure sits in isolation-the Bill does not say what it is for. We understand from Government press releases and statements that it relates to business expenses. However, it is not simply that: it is in lieu of the right to deduct the proper running costs for the intermediary. The amendment would replace that arbitrary figure of 5 per cent. with the genuine costs for the intermediary.
We are dealing with a sector that works extensively through intermediaries and private service companies, who incur substantial expenditure and disbursements in the course of their duties. There are accounting costs, legal costs, training costs, the cost of supplying support staff and, importantly, the cost of the equipment that will allow the worker to provide the services and maintain the necessary skills at home. There are travel costs, including the cost of motor cars. Those are the normal, day-to-day business expenses of the typical self-employed person. Imposing the figure of 5 per cent. may make the Inland Revenue's burden lighter, but it is grossly unfair on the individuals concerned.
The costs will, almost certainly, come to more than
5 per cent. The figure is inadequate, and people could be taxed on money that they have not received. It is taxation on earnings that do not exist. It is taxation on turnover, rather than income. It is taxation on those small companies that are vulnerable to this measure, but not on the big companies that will, by and large, be exempt.
The advantage that the large providers have is that they will continue to be taxed on company profits, while the small independent service providers caught by IR35 will pay tax on company income. There is a fundamental difference. I have no intention of dwelling on the point, but I want the Paymaster General to explain the arbitrary figure of 5 per cent. What about someone whose costs are more than 5 per cent? The Paymaster General should address the following situation: if she were running a shop in Bristol, selling cigarettes and the usual corner shop stuff, she would be allowed to make all the relevant deductions for her business. However, were she to set herself up as a consultant, in the manner that we are discussing, she would fall foul of the provisions. Why is it okay to sell things, but not knowledge? Such issues are at the heart of the measure.
In the Committee of the House, the Paymaster General was pressed on clause 59 three times by my hon. Friend the Member for Mid-Bedfordshire (Mr. Sayeed), but we did not get an answer. How was this figure arrived at, and why does it not equal the running costs of the intermediary?
Mr. Edward Davey (Kingston and Surbiton): I want to reinforce the points made by the hon. Member for Croydon, South (Mr. Ottaway) and support our amendments, which focus on the same points but advance different remedies. We, too, are concerned that this figure, which shows the inconsistency of the Government's position, has been plucked from the air with no particular rationale. If those who run personal service companies are employed, there is no case for a 5 per cent. figure, but if they are self-employed, 5 per cent. is almost certainly too low. As the hon. Gentleman said, many of the business costs that such people incur are far higher than 5 per cent. of turnover. When one takes account of the types of expenditure to which he referred, estimates range from a minimum of 10 per cent. to a maximum of 20 per cent. In IT, there are no one-off training courses and accreditations that last an entire career. Training in IT is on-going, and incurs much higher costs than in many other industries. Moreover, there are the equipment costs to which reference has been made. Therefore, the Paymaster General must give a better explanation of why the figure is only 5 per cent.
We have tabled amendments Nos. 171 and 172 in part because the 5 per cent. figure appears to work against the interests of the smaller business. Because it is a percentage of turnover, available reductions in tax due will be a low absolute amount. Our proposal, which draws on suggestions made by the Institute of Chartered Accountants, would enable the introduction of a de minimis figure, so that companies and individuals who earn little and experience relatively hard times would not be discriminated against.
I believe that there is a duty on the Paymaster General to explain not merely how the 5 per cent. figure was arrived at, but why such a figure-which, as I said, seems to have been plucked from the air-was adopted, given that it is not helpful to the smaller business. As was noted in previous debates, it is the smaller business that this legislation will hinder most, and I hope that the Paymaster General's response will enlighten us.
Mr. Howard Flight (Arundel and South Downs): I want to add to the debate a particular case study, to which I have referred on the Floor of the House. A constituent of mine-one of the few in West Sussex who voted for the Labour party at the general election-is outraged. He is one of many people who worked for a major pan-European high-tech conglomerate, which encouraged all its high-tech staff to become self-employed. This individual had gross revenues of around £60,000 to £65,000 and bona fide expenses of between £11,000 and £14,000. The proposals will require him to find expenses from after-tax income on more than half his expenses-
Mr. Barry Gardiner (Brent, North): Does the hon. Gentleman think that it was right for the company that he mentioned to deal with so many of its staff in that way?
Mr. Flight: I am a realist, and in today's world that is what happens. The company required high-tech people to work on particular projects, but it did not want to have them on a permanent payroll-[
Interruption.] Let me deal with this point. It could not afford to employ them on a permanent basis. It had to choose between employing a smaller number of people on a permanent basis and a larger number of people on a different basis. Constructive dismissal was not involved-I am glad to say that the individuals concerned were bright enough, and that their lawyers and accountants have ways of dealing with this most unjust proposal. We should not bury our heads in the sand or misunderstand the parameters of the new economy-increasing numbers of people will become self-employed. The hon. Gentleman may or may not approve of that, but that is not the point. We need to live with the world as it is.
Mr. Gardiner: Does the hon. Gentleman approve of the situation?
Mr. Flight: That depends on whether it is justified. It is manifestly better to have an unemployment rate of around 5 per cent. under the new economy with self-employment than the rate that applies in the rest of continental Europe, which lacks the flexibility of such employment-its rate is around 20 per cent. It is infinitely better to be self-employed than unemployed.
I object to the Government's view that the self-employed are tax fiddlers-they are a crucial part of our economy. When the economy goes down, it is crucially important that people can easily become self-employed-in this country, they can do so-and there is a favourable tax regime, such as that which applies in the United States. It is not easy for people in continental Europe to become self-employed. One shoots oneself in the foot if one makes it unattractive to be self-employed.
I revert to the essential issue, which is that the rate of bona fide business expenses for the self-employed, who hire out their services to companies, will vary considerably, depending on, for example, what they do, how far they have to travel, what the skill requirements are and what physcial equipment is needed. The Chancellor allegedly makes fairness the key plank of his tax policy. Hundreds of thousands of high-tech people are more incensed about this issue than about any other. There is no justification for the approach, which should be changed.
Mr. Michael Jack (Fylde): I apologise to you, Mr. Cook, and to Committee members, for being slightly late on parade. I had gone back to my office to seek out a letter that I referred to this morning. I did so slightly inaccurately-my memory played tricks on me.
The letter, which was from my constituent, Mr. Shearer, was addressed to the Paymaster General and is dated 19 November. I expect that during the interregnum she, too, may have sought out his letter-if she did, we shall both be able to refer to it. Mr. Shearer's views are typical of those that are held by personal service companies in my constituency, many of which have written to me. I should be grateful if the Paymaster General answered some of the questions that Mr. Shearer raised about the 5 per cent. allowance. He wrote:
The facts in my own case are these: from earned fees averaging £55,000, I have incurred £10,000 as cost of sales (including significant investments in computers and in training) and around £6,500 in administration costs. You may notice that this latter figure is well in excess of the 5 per cent. maximum that will be allowed under the new IR35 rules. Averaged across the last four years, total tax and NI have amounted to £10,300, and retained profit to just £1,000-barely enough to carry the family over a two-month period in 1996 when the contract work simply dried up.