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Mr. Djanogly: My hon. Friend the Member for Eddisbury (Mr. O'Brien) described in detail and extremely well how the provision could affect some of the poorest workers in our country. While totally concurring with him, I should like to examine the other side of the coin and explain how the clause will attack middle-class, middle-earning, aspirational and hard-working parents, particularly women. I shall do so in relation to the implications of applying IR35 and how it will affect nannies. That will cost parents who take advantage of the existing regime hundreds of pounds a year. We are talking about extra charges of at least £6 a week and probably £10 or more in London.
Outside London, the average nanny's wage is about £235 a week net of tax, and it is likely that parents will lose about £312 a year. I note that that is some £60 more than the new child trust fund that is being introduced. One tax partner at Grant Thornton said:
- "If you employ a nanny or housekeeper, the chances are you will pay around 25 per cent. more for the service now this tax break has been removed."
For example, a working mother would have to earn a gross salary of £30,345 simply to pay her nanny a gross salary of £20,400, netting some £300 a week. That shows how middle-class parents are being hammered at the moment. The mother's own annual net pay after tax and national insurance deductions would be about £22,350, while the cost of employing her nanny—including employers' national insurance contributions, which are
additional to the nanny's gross wage—would be £22,360. Of course as nanny's wage grows, the triple-whammy effect gets worse.The Government provide help with child care through the working tax credit, but although that payment is worth up to £200 a week for people with approved child minders, it is important to note that, despite ongoing lobbying on that point, the Government refuse to apply registration to nannies. Child minders are mostly registered through Ofsted and regulated by national standards for day care and child minding, but nannies are not approved in that way. In addition, parents with a joint income of £58,000 or more will not be eligible for child tax credits.
We have increasingly seen a move towards nannies and parents going underground in relation to employment, and that will increase under the clause. One of the worst-kept secrets in the capital is that probably as many nannies work outside the tax system as inside it. People do not want to do things that way; they are being forced to do so by a system that does not take notice of the needs of middle-class parents in this country.
Of course this tax affects women in particular because their salary normally pays for the nanny. Most women will have a very difficult decision to take when they have children: should they stay at home, or should they go back to work? They will want to go back to work to keep their minds ticking over and to keep their trade experience up to date, but in effect they will do so to pay for the nanny, as the figures that I have given show, rather than to provide themselves with any additional salary, so we are talking about an additional tax on women. I thought that the Government were in favour of getting women back to work, but they are clearly in favour of getting people whom they see as being lazy and sitting at home back to work but not doing so for aspirational, hard-working middle-class women who want to get out and do something for this country, and we desperately need to get more women back into the labour force.
Mr. Redwood: Although I see my hon. Friend's point that some might be tempted down the path of illegality into the black economy, does he not agree that many of the professional women about whom he is talking, who wish to return to work and have every right to do so, would never dream of going down that path, as it would be against their principles and would prejudice their important employments, in which they are expected to be decent, honest and upright? Will not this therefore be a tax that stops women having the freedom of choice that they should have? It will be very bad news for them and will put them off returning to the labour market, which may result in their losing their confidence in future years.
Mr. Djanogly: I agree absolutely. This Government are not considering aspirational women who want to get out there and improve themselves. My constituency currently has virtually no unemployment, and is one of the fastest-growing areas of the country—a fact of which I am very proud. When I visit local businesses, I am told consistently that there are serious problems with recruitment: they cannot find the people to fill the jobs, and they cannot find people with the necessary skills. Thousands of women in this country are highly skilled and want to work, but they cannot do so because of the
current tax system. I hope that that provides some spur, while going in the opposite direction, for the Government to rethink this issue.
Dawn Primarolo: It may help if I explain to the Committee how the mechanism works in relation to service companies, why domestic employees were exempt last year, and why the Government acted this year. That will lead me directly on to some of the hon. Gentleman's points.
Although I appreciate and understand the important points that Opposition Members have been making about a company being incorporated or unincorporated, they are sorely mistaken on the focus of this specific measure. I want to explain to them why that is. In relation to the decision last year to exempt domestic employees, what has happened subsequently confirms the point that the Government repeatedly make: if a loophole is left, unfortunately, somebody will try to exploit it.
The existing service company legislation ensures that workers who would have been taxed as an employee if they had been working under a contract with the client cannot avoid paying tax and national insurance on the same basis as any other employees by using a limited company or other intermediaries to sell their services. As I have said, the current legislation does not, however, apply to engagement in a domestic capacity. Regrettably—again, this point has been made repeatedly since 1997—the Government have to have mind to how taxpayers will behave towards the tax system. Our duty is to ensure that the right amount of tax is collected and that it is collected fairly: by that, we mean that those who should be paying tax do not find artificial ways of not paying it, as that is patently not fair to all other taxpayers. In advocating a higher rate of tax, the hon. Member for North Norfolk (Norman Lamb) fails consistently to understand that it is important to ensure that people pay the tax that they are supposed to be paying.
2.15 pm
Generally, schemes operate by setting up the domestic worker as a director and shareholder of a personal service company. The individual employee therefore starts off as an employee of the client. Subsequently—not because it improves the employer-employee relationship or because the employer is interested in helping self-employment grow—the positioning of an intermediary is used simply to reduce tax. I shall explain how that works.
The domestic company is set up for the domestic worker so that the domestic worker is a director and shareholder of the personal service company. The service company offers the services of the director to the former employer. The domestic worker takes a salary from the company at around the personal threshold of £4,615, and the remainder in dividends. Therefore, if the company net profits are below the threshold for the starting rate of £10,000, the domestic worker can extract up to £14,615 free of tax and national insurance contributions.
Let me remind the Committee: somebody who was an employee is then encouraged to use an intermediary to reduce the cost to their previous employer or to increase the payment to them by setting up the service company.
Dawn Primarolo: The hon. Gentlemen should let me finish, as they need to know what was being marketed. I will then challenge them to say what they would have done were they in government. We did not act out of some fickle desire: there was proof of what was going on, and I shall give that proof to the Committee.
Mr. Burnett: Will the Paymaster General give way?
Dawn Primarolo: I will not. If the hon. Gentleman will let me explain this complex point, there will no doubt be plenty of time for interventions.
The scheme providers usually charge a monthly fee for operating the scheme. Effectively, the domestic worker still receives a weekly or monthly payment, albeit that it might be a larger amount because of the savings that the scheme produces through avoidance—the savings might be split between the former employer and the domestic worker, or the former employer might take all the benefit.
It was right to ask the question—we did not think that leaving domestic workers outside the system would not raise issues, and as with all points of the tax system, we give careful consideration and follow developments. We had been approached by several parties, however, of which I will give one example, about the number of schemes that were about to be marketed to exploit the loophole. The schemes were able to offer significant savings in tax and national insurance contributions to any domestic employee with net weekly earnings above £111 a week. In terms of the attitude to the Government action, let met quote Leonie Kerswill of PricewaterhouseCoopers:
- "IR35 previously exempted domestic staff, but the cost savings of the arrangement for parents employing nannies has led to an explosion in the use of service companies".
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