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Mr. Baron: Will the Paymaster General give way?
Dawn Primarolo: No. I will finish making this point and then I will give way to the hon. Gentleman. I am trying to explain this complex point, giving the proof for why the Government acted in this way. I will give way at the relevant point.
Bearing in mind the tax and national insurance savings, the Government were faced with a significant problem. For example, a letter was circulated to every client of a particular agency that runs the arrangements for nannies. The letter states:
- "As you will see, we do not believe that the use of a personal service company represents best practice in nanny employment because they involve the use of a tax-saving vehicle which obscures the real employer/employee nature of the relationship between parents and their nannies, with some attendant loss of employment rights for the nannies",
When the measure was announced and comments were made about the Budget, on Saturday 12 April The Daily Telegraph reported the managing director of Nannytax as saying:
- "We cover all types of domestic workers—housekeepers, gardeners, butlers, as well as nannies. The decision to close the tax-break loophole was appropriate. We think the relationship between, for example a family and a nanny, should be one of employer and employee. Nannies who were employed as a private company were losing employment benefits such as maternity leave and some pension rights."
Nursery World is concerned with issues that relate to child care and nannies. In a poll, it asked:
- "Is it a good idea for nannies to become limited companies?"
Mr. Baron: Does the Paymaster General accept that there is a gross injustice? Those problems should have been thought through before the mechanism was introduced last year. The Government have in effect encouraged many self-employed unincorporated people to incorporate, and in the following year have ambushed them with the tax measures in the Bill. That appears to many outside the Chamber as grossly unfair. Will the Paymaster General address that central issue?
Dawn Primarolo: The hon. Gentleman is entirely wrong. The Government have done no such thing. We made our position on IR35 clear when we debated last year's legislation. The clause is not about the rights of people to be self-employed or employed; nor is it about the right of people to have their own companies; it is about the use of a mechanism that is designed only to reduce the amount of tax paid.
Dawn Primarolo: No, I shall not give way.
I am describing a tax distortion that has been driven by a particular arrangement in the tax system by which people choose to be employees and are in danger of being required not to be.
Mr. Flight: When we debated the new zero rate of corporation tax for small companies in the last Finance Bill, we welcomed the general principle but stressed that to introduce it without a parallel or averaged rate for
sole traders made it an obvious tax incentive for people to incorporate and exploit. Indeed, I made the same point when I wrote to the Paymaster General some eight months ago. I said that it was wrong in principle to have rules in our tax system that act as a massive incentive to incorporation and to the exploitation of the advantages that it brings. The Federation of Small Businesses made the same point. The issue is specific, but it is part of the wider territory. If there is such a big distortion in our fiscal arrangements, it is inevitable that people will try to exploit it at all levels.
Dawn Primarolo: The clause is not about individuals who choose to be self-employed or to incorporate. It deals with a specific aspect of the tax system. The exploitation of a loophole was driving people into a particular tax position simply to save tax for their previous employer or themselves, or to share it equally. The hon. Gentleman will know that from our discussions on IR35.
The wider debate, which the hon. Gentleman verges on, relates to changes to incorporated and unincorporated companies, and whether that balance is correctly struck. I believe that it is, but that should not be debated in the context of this clause. I accept that many hon. Members, and people and companies outside the House, want the issue to be explored further. We must always find a basis on which to strike a balance, but that is not what we are dealing with now.
Hon. Members asked why we are making the change now, and I have set out our reasons. They asked how the mechanism was being exploited and why, and I have made that clear. The debate is not about incorporation or unincorporation; it is about whether we should leave a mechanism in the tax system that leads not only to a loss of tax revenue but to a diminution of employment rights, and all because of a loophole.
Mr. Burnett: The Paymaster General is invariably fair, and I think she would agree that it is right to put it on the record that there are tax consequences in making distributions out of companies to individuals. However, I sincerely hope that she will deal with the point that I raised. If incorporated sub-contractors pay full employee national insurance contributions, surely they should qualify for full employee benefits.
Dawn Primarolo: The hon. Gentleman teases me back to the debate that is at the heart of the changes known as IR35: does the individual operate as a shareholder or an employee of his or her own company? If they operate as an employee of their own service company, they get all the rights that all employees get.
As for opinions within the relevant employment sector, it is interesting to note what is said in an article in Professional Nanny. The article asks whether nannies are being urged to become directors of their own companies and says that
- "if all nannies saw themselves as young Richard Bransons, eager to make their first million, then maybe running their own service company might be an irresistible prospect. But in reality, many nannies are in their first or second job, dedicated to the children they are responsible for, and looking to the parents to protect their interests both as an employee and as a new member of the family."
2.30 pm
Mr. George Osborne: The right hon. Lady would accept that the driving force behind the provision is the high cost of child care. I received a copy of the letter that she read out, but resisted the temptation to take up the offer, because a friend of mine who is a tax barrister told me that the Treasury would close that particular avenue. However, does she accept that dealing with what she calls tax avoidance is likely to cause an increase in tax evasion? Has the Treasury analysed whether there will be an increase in the already large number of working nannies who will be outwith the tax system altogether?
Dawn Primarolo: I am glad, but not surprised, that the hon. Gentleman decided to resist that temptation on the sound advice of his friend—that clearly supports the case that I have put to the Committee this afternoon. The position of nannies as people who are employed by a family or supplied by agencies remains unchanged, but we have removed any driver that might change that relationship. He will remember that, in the letter to which he referred, the company made it clear that it expected the Government to close the loophole because it was neither reasonable nor fair. For those reasons, it is inappropriate, to put it mildly, to accept an amendment that leaves in place, even for a specific period, the arrangements that gave rise to that loophole. I urge the Committee to reject it and support the clause.
Mr. Stephen O'Brien: Much of the Paymaster General's riposte concerned nannies, but let us not lose sight of the fact that the provision will affect cooks, gardeners and many others in domestic service, not all of whom are subject to the arrangements that she sought to pray in aid. As we predicted, she sought to defend the provision as an anti-avoidance measure. The Treasury, having found out from its scouts in the City that somebody, somewhere had come up with a clever wheeze and was beginning to market a new product, decided to put a stop to it.
The Paymaster General has missed the point. We oppose the provision not because it is an anti-avoidance measure but because it lets down people on relatively low incomes who, encouraged by last year's Budget, acted in good faith. They are now being slapped down and face a regulatory burden of two self-assessed tax returns in the current tax year. The amendment would reduce that regulatory burden. Furthermore, the Paymaster General never bothered to answer my serious question about why there is no requirement for a regulatory impact assessment because, I dare say, she would not like the answer that she would have to give.
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