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Schedule 3 agreed to.

Clause 57


Question proposed, That the clause stand part of the Bill.

7 pm

Mr. Prisk: Mr. Deputy Speaker—

The Chairman of Ways and Means (Sir Alan Haselhurst): Order. I remind hon. Members that when we are in Committee, the correct forms of address to the Chair, which apparently have not been widely observed today, are "Mr. Chairman" or by name.

Mr. Prisk: Thank you, Sir Alan.

Clause 57, together with schedules 11 and 12, introduces fundamental changes to the running of the construction industry scheme, which is a special tax deduction scheme that reflects what one might describe as the traditional cash basis of the construction industry. The changes that the Government propose have significant ramifications for subcontractors—

The Chairman: Order. I am sorry to interrupt the hon. Gentleman again. May I ask members of the Committee who are not staying for the debate to withdraw and have their conversations elsewhere, as they are disturbing those who are taking part?

Mr. Prisk: You are very kind, Sir Alan.

The revisions that the Government propose, which will affect subcontractors, mainstream contractors and deemed contractors, include stiff penalties for non-
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compliance once the new scheme commences in April 2006. Conservative Members welcome the extensive consultation that the Treasury has engaged in on this complex matter. It is clear from my discussions with, among others, the Construction Confederation and the British Property Federation that the final proposals make important concessions to the concerns of those affected. We welcome that.

As I understand it, the Government have set out three broad aims that they feel that the revised scheme should meet: first, that it should reduce the regulatory burden of the scheme on construction businesses; secondly, that it should improve construction businesses' compliance with their tax obligations; and thirdly, that it should help construction businesses to get right the employment status of their workers.

In judging the Government's plans, we sought to measure them not only against those aims, but against several practical concerns in the industry. The first main change that is proposed is that subcontractors who are holders of valid CIS4 registration cards, or CIS5 or CIS6 gross payment certificates, on 5 April 2005 will be automatically migrated to the new scheme. Indeed, a unique taxpayer reference number, or UTR, will be allocated to each subcontractor, which will dispense with the need for them to hold cards after the relevant date.

Secondly, the current system of registration cards, certificates and vouchers will end on 5 April 2006, to be replaced by a verification procedure via the telephone or correspondence or over the internet. Will the Minister confirm that this verification procedure will not apply to contractors who make a payment after the beginning of the new scheme, but who have made a payment to the subcontractor in the current or previous two years?

In the absence of the detailed rules, which will be introduced in secondary legislation, it is quite difficult to assess how bureaucratic this process could prove to be. Can the Minister provide the House with some assurances as to the scope and length of those rules, and will she tell us what progress has been made on their preparation?

David Taylor (North-West Leicestershire) (Lab/Co-op): I should declare an interest in this matter, in that, in a past life, I dealt extensively with subcontractors in the construction industry. Does the hon. Gentleman believe, as I do, that despite the very welcome rationalisation of the structure of payment for subcontractors, the burden for very small subcontractors of employment status verification checks will be very significant? Medium-sized and larger companies will be set up and able to carry out the checks routinely, but the smaller firms will not. Some of them could have their future jeopardised, if we are not very careful indeed.

Mr. Prisk: As usual, the hon. Gentleman makes a very good point, and it is one to which I am very sensitive. We must ensure that the smallest of our enterprises—this might be difficult for the Government to see, let alone to understand—which are trying to ply a legitimate trade are able to do so, particularly in the construction industry, where they might have, shall we say, less legitimate competitors. I would like to add a further question to the Minister. What rights of appeal will there be in cases involving genuine mistakes?
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Through the periodic returns, contractors will have to verify the employment status of subcontractors, which they will do by certifying that none of the payments in the return relate to a contract of employment. There will be a penalty of £3,000 in cases of non-compliance. I understand that the Revenue will be providing a web-based tool to help contractors to decide whether a subcontractor is employed or self-employed. However, in the light of the previous debate and many other discussions that we have had on employment and self-employment, and given Treasury Ministers' own considerable difficulty in being able to apply their highly academic minds to the question of who is and who is not self-employed, does the Paymaster General not recognise that asking small contractors to make these assessments could prove an excessive burden to people who are, after all, not employment lawyers?

Further to those points, the industry has highlighted a number of practical issues, to which I shall refer briefly. First, there is the question of the registration of subcontractors for gross payment, to which the clause refers. The draft regulations currently prescribe a minimum turnover test of about £30,000. Does the Paymaster General accept that this could prove to be an issue for some of the smaller businesses that we were discussing earlier? Is she therefore prepared to reconsider that figure?

Next, we come to the impact of the scheme's compliance test on joint ventures and special-purpose vehicles. In order to register for gross payment, subcontractors will need to meet a compliance test and a turnover test. This could prove quite an issue for joint ventures and SPVs that cannot qualify for a certificate under the current rules, even though their members have exemption certificates. The danger is that this measure could affect private finance initiative schemes, if a joint venture or SPV were set up and gross payment status could not be achieved because there was insufficient turnover in that entity. Will the Paymaster General assure us that the Government will be able to accommodate such joint ventures and SPVs, given the practical difficulty that I have described?

Next, we come to the individual verification for each legal entity. Under the current rules, a parent company or managing agent can inspect the certificates held by a subcontractor, and is able to do so on a once-only basis in relation to one certificate. That allows them to satisfy themselves that any company within a group is appropriately registered. The new rules that we are discussing prescribe individual verification for each legal entity, not per group. Clearly, that is far more onerous than the situation at present. Can the Paymaster General tell us whether that is strictly necessary?

Lastly, the strict application of the compliance test provides for one mistake, and the certificate will then be removed, admittedly subject to appeal. There is a real danger that that could penalise innocent errors, especially during the initial year or so, as the new scheme is introduced. Has the Paymaster General considered whether there is a case for a three strikes rule? Can she set out exactly what she means in the legislation by the term "reasonable excuse"?

In updating the scheme, and this clause, it is extremely important that the balance is struck carefully between tackling systematic tax avoidance and creating such a
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bureaucratic burden for legitimate companies that their costs rise and they find themselves undercut by black market firms. If that happens, it would be bad for the construction companies, their clients and customers, and for tax revenue. In that context, I hope that the Paymaster General will respond positively to the points that I have raised.

Dawn Primarolo: In responding to the hon. Member for Hertford and Stortford (Mr. Prisk), I need to point out a couple of things.

First, the scheme for which we are legislating was introduced by the previous Government in 1995. That scheme came under sustained criticism for its complexity with regard to implementation of the arrangements. After long discussions with the industry, to remove some of what were perceived as, and what were, burdens on the industry—which I shall explain briefly—it was agreed that the Revenue would move to an electronic system.

In relation to clause 57 and the rest of the clauses with some small changes that are beneficial to the construction industry, many of the arrangements are the same as those for the existing scheme. At this time, the Government have not made any significant changes to the scope of the scheme, as regards either who or what is within it. The hon. Gentleman could therefore have asked the same questions in 1995 of the Conservative Minister at that time. The issue at present is how we can try to move forward.

Some form of scheme has been existence for more than 30 years, and that is because the industry has a poor record in complying with its tax obligations. Unfortunately, that has not changed much. But the world has of course moved on, and more businesses want to engage with government electronically and move away from paper records, and the revised scheme facilitates that. It is the same scheme, but it moves away from paper towards electronics, as the industry wanted. The current paper-based scheme of certificates, cards and vouchers will therefore be replaced by a scheme that offers an Inland Revenue-run verification service, which will inform contractors how they are to be treated in relation to particular subcontractors, and which will inform the contractor if that subcontractor's status changes.

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