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Several hon. Members rose—

The Temporary Chairman: Order. The hon. Member for Eddisbury (Mr. O'Brien) took a fairly wide-ranging approach in introducing his amendment. It may be helpful if I indicate now that I shall be unlikely to accept a stand part debate as well.

Norman Lamb: We very much support the amendment. We, too, share concern about the absence of a regulatory impact assessment. Often, such assessments do not comply with the Government's guidelines as to what they should include, but the fact that there is to be no assessment at all is of serious concern. The measure will add to the regulatory burden of people who are trying to operate small businesses, so there should be an assessment and I should be grateful if the Paymaster General would respond to that concern.

I also share the concerns expressed by the Conservative spokesman, the hon. Member for Eddisbury (Mr. O'Brien), about the disparity in the tax treatment of sole traders and of limited companies. I shall not go into that in detail, in acknowledgement of your comments, Mr. Gale, but serious concerns have been raised with me and many others by the Federation of Small Businesses. People have been encouraged to incorporate and now this change has happened.

Last year, when IR35 came in, the Liberal Democrats opposed the measure. We fully accepted the importance of tackling abuse and tax avoidance, but we thought that the Government were taking a sledgehammer to crack a nut and that the implications of the measure could be extremely serious. We are now discussing an extension of IR35, and I have some questions for the Paymaster General.

What evidence can the Government show that the scale of abuse makes the measure necessary, given the relatively small amount of extra revenue that it will bring in? Why was it thought necessary to extend IR35? Why was the matter not dealt with last year when the first measure was introduced? I was going to ask what assessment had been made of the amount of extra income that would result, but a figure was mentioned by the Conservative spokesman. What is the overall purpose of the reform?

Mr. Redwood: The clause is disappointing. I welcomed the Government's proposals last year to favour incorporated businesses and to introduce a better tax regime for the smallest companies. It was a sensible measure in favour of enterprise, so it is particularly disappointing that, after only a year, when, as one could have forecast, the policy has enjoyed

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modest success, the Government want to clobber those who took advantage of it and to reverse the position. I urge the Paymaster General to think again. Her thoughts last year were rather better than her thoughts this year.

In support of my case, the Paymaster General has evidence that IR35 is not only a widely hated tax but also that it is extremely damaging to the United Kingdom. It pushed people out of self-employment. It sent some of them abroad, where they had successful, high-earning businesses; but others simply left that employment altogether, because the tax was an imposition too far. It did considerable damage at a time when the high-tech industries, which were especially targeted by the measure, were extremely fragile.

My hon. Friend the Member for Eddisbury (Mr. O'Brien), in moving his amendment, pointed out the big imbalance between the taxation on earnings for a self-employed person and the taxation on profits for a small, incorporated business. He is right about that. However, a fair comparison for the Paymaster General to make, when she assesses the potential damage, as she sees it, to the Revenue, would be not between profits held within an incorporated business and the earnings of a self-employed person but between distributed profits in a small business and earnings. In such a case, the comparison is not as stark as my hon. Friend said, because there would be taxation on the money being drawn out as wages by the person concerned, or even as share dividend. If the person was the shareholder and decided to take money out, there would be a tax payment, which would narrow the gap, so the threat to the Revenue would not be as great as the Paymaster General will undoubtedly want us to believe when she replies to the debate. In normal circumstances, the gap for low-earning, self-employed people would not be nearly as great in terms of tax, as they would want to take all or most of the money out of the incorporated business in one form or another because they would want it to live on. As my hon. Friend pointed out, those people often do not earn much.

Having listened carefully to my hon. Friend, I think that he was very gentle towards the Government, given the magnitude of their U-turn, in their decision to bash the very people whom they encouraged a year ago. His suggested remedy is mild. If he wishes to push the amendment to a vote, I shall have no worries about supporting it because it is better than the current provision.

However, it would be better still if the Government dropped the clause altogether. The clause is nasty and brutish; it is part of rip-off, insensitive government. It will not bring in much revenue—the Treasury figures probably exaggerate the amount—but it will do damage and put many small entrepreneurs, people who are trying to provide a service, under a lot of pressure that they do not deserve. Such people are not experts on the tax system; they do not want to go through these enormously expensive and difficult changes. The measure will worry them, when they want only to provide a livelihood for their families and a service for someone else. I hope that the Paymaster General will realise that, in the main, they are decent people, trying to make a modest living while paying sensible amounts of tax. Her decision to target them will not be welcome in any constituency.

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Mr. Baron: May I welcome you to the Chair, Mr. Gale?

I support the amendment. There is little doubt that clause 135 creates a gross injustice, a point that has been raised by several of my constituents. Last year, the Government encouraged sole traders and the self-employed to incorporate by introducing lower corporation tax rates for small companies. Subsequently, a large number of people did just that. Only a year later, on the grounds of reducing tax avoidance, the Government propose legislation that will tax individuals as though they had not been incorporated at all. Those measures are not targeted at wealthy tax planners; they affect many low-paid workers, who were fooled by the Government into incorporating and, having done so, they are now being ambushed by the Government under the Bill. The victims are normal taxpayers who rely on the Government's legislation in good faith, and they have been badly let down.

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In addition, the anti-avoidance legislation has been drafted so that the individuals concerned will now have to submit two self-assessment returns for this tax year properly to reflect their tax affairs. So those individuals whom the Government encouraged to incorporate now face not only an increased burden of corporate regulation, but no tax incentive whatsoever and considerable complexity in self-assessing their tax affairs.

I can only add to the request made in support of my hon. Friend the Member for Eddisbury (Mr. O'Brien) by asking the Government to undertake a regulatory impact assessment to ensure that the measure has been properly thought through. As has been mentioned previously, IR35 rules were originally written specifically to exclude domestic staff, presumably because the amount of tax and national insurance contributions at stake was not very high—the figure of £15 million has been suggested. I should like to understand better whether that has changed dramatically, which would be surprising given the figures suggested.

The Government are obsessed by tax avoidance, and that is obviously not necessarily a bad obsession, but their approach in this case has hit legitimate businesses that have set up companies to help the organisations that they serve. They are not avoiding tax and, moreover, they provide the very flexibility in the labour market that the Government say that they are trying to encourage and that is an asset to this country.

The Government criticise other EU countries for their lack of labour market flexibility, but they appear to be piling on more and more regulation domestically and introducing more taxes and tax measures that undermine the asset about which they boast. That cannot continue.

I support amendment No. 8, as the Government's proposed changes to the law will put an unnecessary burden on individuals who do not deserve to be persecuted in this way. I ask the Government to recognise that they should have listened to the warnings from my Front-Bench colleagues during consideration of last year's Finance Bill. They should seriously

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consider accepting the amendment, which will at least attempt to salvage something from this shameful sequence of events.

Mr. Burnett: May I too welcome you, Mr. Gale, to the chairmanship of our proceedings this afternoon?

Opposition Members are absolutely right to say that the Government have actively encouraged people to incorporate. However, in this case, the commissioning contractor—for want of a better expression—often insists on dealing with an incorporated person and they do so for reasons of saving tax themselves. We debated that at length when IR35 was introduced, and I consider the changes made then and these changes to be outrageously unfair. Obviously, when the changes are made, additional national insurance contributions will be payable by the subcontractor; nevertheless, no additional employee benefits will accrue or be available to those subcontractors. In other words, they will pay and they will get nothing, and they will also be subjected to an additional burden of bureaucracy.

Finally, I should like to ask the Paymaster General whether she could let the Committee know whether the Government yet have any proposal to make the fiscal penalties for disincorporation more fair and less punitive.

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