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We discussed and analysed very closely with remote gaming operators and their association the sort of commercial decisions that might be affected by tax rates and the rates of the new gaming duty. As the hon. Gentleman and other members of the Committee will understand, remote gaming operators are located in tax havens. Even operators that have parent companies in the UK, are interested in the UK and have been following the development of the social regulation that my hon. and right hon. Friends at the DCMS have been establishing, or are well disposed toward the UK—what might be called UK-facing operators, which would be most likely to consider coming onshore with their online offshore operations if the structure and incentives were right—have told us that the value of being regulated in the UK is only about 2 per cent.
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of gross profits from remote gaming. Set that alongside even the total amount of irrecoverable VAT that would be present in any operation that came onshore, which would be about 4 per cent. of gross profits from remote gaming, and members of the Committee will see that even a zero rate of remote gaming duty would not, in itself, attract the industry to this country. We concluded that there was no tax rate solution to the question of how to encourage such operators to consider making the UK their base for future operations, in line with the new social regulation.

At different points in his speech, the hon. Gentleman advanced different arguments regarding the yield from the package of tax changes. Those changes will raise only about £30 million extra; that is set out in the Red Book. They are designed to complement the Government’s social policy on gambling and, as I have consistently and clearly said over the past couple of years, to adapt the tax regime to enable it to adjust for developments in the casino market and the regulatory regime. We calculate that clauses 7 and 8 combined will yield an extra £30 million in a full year. That is hardly either a tax bonanza, when set alongside the £143 million raised from casinos in 2005-06, or a tax bone, given to operators to secure a massive expansion of casinos in this country or to tempt offshore operators into the UK.

Both the hon. Gentleman and my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) raised what they described as the “Mecca bingo” question. That is a little beyond the scope of the clauses and the schedule under discussion, but if you will allow me, Mr. Gale, I shall comment on it. As the Committee would expect, I regularly meet representatives of the Bingo Association and bingo operators, including Mecca. I am acutely aware of the situation that bingo operators face in Scotland after the smoking ban. They must make commercial decisions on whether to continue or to close the clubs. At root, this is not principally a tax problem with a tax solution; it is the product of a complex combination of changing demographics and changing tastes in leisure activities. In addition, the policy of applying VAT and duty to bingo participation fees is entirely consistent with our treatment of other player-to-player games in licensed premises, such as poker played in casinos.

My hon. Friend asked some specific questions about the provisions in the Bill. The reference in the schedule to those who provide “facilities for remote gaming” is intended to identify and define companies that provide that type of gaming. After all, the new tax regime is designed to apply to those very companies. He had concerns about ensuring that the taxation regime would apply to companies that provide online services to players in the UK but are based abroad, particularly outside the European Union, in the tax havens that the hon. Member for Wycombe mentioned. The reality is that those companies are beyond the reach of UK regulation and our taxation regime. I agree with my hon. Friend the Member for Wolverhampton, South-West, that it would be an advantage to be able to regulate and tax such operators and operations, but part of the reason why they operate from those tax havens is that it places them beyond the reach of our taxation system. I hope that those points of explanation have been useful to the Committee, and I hope that it accepts that clauses 7 and 8 should stand part of the Bill, and schedule 1 should be agreed to.

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Mr. Paul Goodman: It is a pleasure to see you in the Chair, Mr. Gale. The Financial Secretary’s response on clause 8 was, in essence, “We’ve consulted a lot and we’re really trying to get this right.” His response on clause 7 was, “We’re trying to arrange things in such a way that we can’t be accused of stifling the industry with a colossal tax burden, or of giving it inducements in the form of a tax bonanza that is unreasonable and unfair to other parties.” I did not hear him give specific answers to the questions that I asked about the effect on jobs, investment, profitability and, in particular, the future of the super-casino issue. The Government’s proposals on super-casinos have now been rejected by the House of Lords.

John Healey: The hon. Gentleman is right to say that I did not touch on the points that he mentions, and I apologise to the Committee for that, but Ministers at the Department for Culture, Media and Sport have made it clear that they are considering the nature of the debate, and the views being expressed, in the House, and they will make their announcement on the subject in due course.

Mr. Goodman: I am grateful to the Financial Secretary for making that clear, and he brings me neatly to my concluding point, which is that more information on clauses 7 and 8 is yet to come to light. I am sure that the record of this debate will be read with interest by many people who have an interest, commercial or otherwise, in the issues. We will not oppose the clause, but I tell the Financial Secretary and the hon. Member for Wirral, West (Stephen Hesford) that we may wish to revisit the issues on Report.

Rob Marris: This might be referred to as the debate of the four Ws, as it involves the Member for Wolverhampton, South-West, my hon. Friend the Member for Wentworth (John Healey)—the Financial Secretary—my hon. Friend the Member for Wirral, West (Stephen Hesford), and the hon. Member for Wycombe (Mr. Goodman). I urge the Financial Secretary to look again at schedule 1, particularly proposed new section 26A(3) of the Betting and Gaming Duties Act 1981, regarding facilities. It should be considered together with proposed new section 26B(b), which refers to the provision of equipment and so on, because I think that the wording would cover credit card companies that had a piece of equipment, such as a computer, that was used in transactions in the United Kingdom; he should consider that issue before Report.

John Healey: Of course I will reflect on my hon. Friend’s contribution to the debate, as I always do. He refers to proposed new section 26B(b), which mentions

but that will be defined by the Gambling Commission, as part of its role is to set out the terms of the regulation of such activities.

Rob Marris: I do not wish to prolong the debate, but I have to say to my hon. Friend that it is news to me that the Gambling Commission has the power to interpret primary legislation, and that is what the provision will be. However, I think that I understand
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the spirit of the Government’s approach to schedule 1, which is that credit card companies and other such companies should not be covered. One way forward might be to consider a definition of “facilities” in proposed new section 26A(3).

Question put and agreed to.

Clause 7 ordered to stand part of the Bill.

Clause 8 ordered to stand part of the Bill.

Schedule 1 agreed to.

Clause 25

Managed service companies

7.45 pm

Mrs. Villiers: I beg to move amendment No. 1, in page 17, line 15, leave out from ‘Schedule’ to end and insert

(3) No Order shall be made under subsection (2) unless the Treasury has compiled and laid before the House of Commons a report on the likely consequences of bringing into force the provisions contained in Schedule 3.

(4) A report under subsection (3) shall in particular include the Treasury’s assessment of the implications for—

(a) the overall level of tax revenues accruing to the Exchequer;

(b) the cost impact and regulatory burden of the measure;

(c) the United Kingdom labour market;

(d) the competitiveness of the United Kingdom economy and the encouragement of enterprise.’.

The Temporary Chairman (Mr. Roger Gale): With this it will be convenient to discuss amendment No. 14, in page 17, line 15, leave out from ‘Schedule’ to end and insert

Mrs. Villiers: Amendment No. 1, which is in my name and the name of my hon. Friends, would postpone the application of schedule 3 and the measures in it until there has been time for a thorough consideration of the effects of the legislation, and time for the Government to report formally to Parliament on the impact of the provisions proposed on tax revenues, the labour market, the competitiveness of the UK economy, and the cost burdens that the provisions will impose. In particular, I would like the report to dwell on the impact on freelance workers, contractors and small companies.

According to the Professional Contractors Group, there are just under 1 million freelance workers and contractors in the UK, and they make a significant contribution to gross domestic product, particularly in the information technology industry, where they play a pivotal role in keeping the country competitive. Paragraph 2.1 of the Government’s consultation document on the proposals acknowledges the importance of varied working patterns in giving

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The Opposition’s view is that imposing unreasonable new administrative burdens on the freelance and contractor community, as the Bill threatens to do, could significantly damage the ability of British business to compete in the globalised world economy. The Opposition believe that the proposals implemented in schedule 3 by clause 25 are flawed, and that they need to be significantly revised if they are to achieve the Government’s stated goal of cracking down on abusive schemes without penalising legitimate freelance and self-employed workers.

It goes without saying that the Opposition support moves to crack down on illegal tax evasion with respect to freelance and self-employed workers, and as I acknowledged on Second Reading, we also support attempts to stop abusive tax schemes. Indeed, we, like a number of people who have commented on schedule 3, have a degree of sympathy with some of the Government’s goals in the schedule. If, in reality, a worker is an employee, and a service company is being used simply to reduce the amount of tax payable, there is a case for measures to tax the substance of the relationship, rather than the label that the parties choose to give it for tax-motivated reasons. We would certainly be happy to work with the Government on reforming IR35 and on amending schedule 3 to try to target such situations and ensure that the workers in question pay their fair share of tax. However, as I shall explain, schedule 3 as currently drafted has a much wider impact.

The schedule will place significant limits on the administrative functions that a genuine freelancer, in business on his or her own account, can outsource to advisers. It will force them to deal directly themselves with much more of the red tape that comes with incorporation, rather than delegating it to others.

Stephen Hesford: Does the shadow Chief Secretary to the Treasury not accept that her amendment is inconsistent with protecting revenue, despite what she says?

Mrs. Villiers: As I shall come on to say, I think that a pause for reflection, thought and analysis of how we can get the legislation right could have a positive impact on tax revenue. The first thing to note about schedule 3 is that the proposals are a clear acknowledgement that IR35 has failed. If the Government had got IR35 right, they would not need to bring further complex legislation before the House to attempt to police the borderline between the employed and the self-employed.

Many hon. Members will remember that in 1999 the Government caused significant controversy in the freelance and contracted-out community with their proposals on IR35—so-called because they were not announced in the Chancellor’s Budget speech, but in Inland Revenue press notice 35. The Government said at the time that that would raise £300 million for the Exchequer, and cost it just £55,000 a year ongoing to implement. However, of the IR35 investigations known to the Professional Contractors Group, 1,405 concluded that the taxpayer in question was outside IR35, and only three concluded that the taxpayer was within its provisions.

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The Government have repeatedly refused to publish any figures on the amount of revenue collected under IR35 or on its ongoing cost impact for contracts. The truth is that IR35 has been a hugely expensive failure. It has left thousands of freelancers in an uncertain tax position and created serious difficulty in planning ahead. It has cost untold millions in compliance checking, and whole galaxies of the blog universe have been devoted to the intricacies of IR35 compliance. We appeal to the Government to postpone the implementation of schedule 3 to assess the reasons why its predecessor—IR35—failed; to consider the steps needed to ensure that schedule 3 is not a costly failure in the same way as its predecessor; and to establish whether the Treasury will undertake to measure the revenue raised by schedule 3, despite its refusal to do so in relation to IR35.

That investigation would provide an opportunity, too, to see whether IR35 is still necessary. If schedule 3 is adopted, there will be an even more complex tax framework for the taxation of freelance workers who have incorporated than there was before. Companies outside IR35 will be on one regime; companies inside IR35 will be on a second regime; and there will be a third regime for companies covered by schedule 3. Yet again, the Government have introduced highly complex and controversial legislation that is not properly thought through. They have found that it does not work properly, and to try to fix some of the problems that they created in their first round of tax law they are introducing more complex legislation that is not properly thought through either.

I should like to take the opportunity to explode a myth peddled in relation to both IR35 and schedule 3. The proposals are not about employment protection. The impact of schedule 3 will be to change the tax status of individuals working through companies that fall within the definition of a managed service company. It will not change their employment status. Of course, it is wrong for people to be forced to give up their employment rights by being pushed unwillingly into managed service companies, but the proposals will not have any impact whatever on that problem. If the Government wish to deal with it, that is not the way to do it.

A fundamental problem with schedule 3 is the collateral damage that it will cause. As drafted, the provision could hit many genuine freelancers who operate entirely legitimately and are genuinely self-employed—they are not employees. The consultation document asserts that the “underlying nature” of the relationships established by workers in MSCs is “almost invariably” one of employment. No evidence is given to support that assertion in the consultation document, and the Professional Contractors Group has challenged it:

The Chartered Institute of Taxation has looked at the problem, too, and it says:

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Freelancers who outsource part of the financial and administrative functions relating to their company to advisers are in danger of being caught by the provisions of schedule 3—that is a key point. Outsourcing routine administrative work to allow the worker in question to concentrate on what he or she does best, whether it is IT, engineering and so on, could walk them straight into the clutches of schedule 3. The nature of their working practices and their relationship with their end client is wholly irrelevant to their tax status under schedule 3.

The key question is posed by proposed new section 61B (1) (d) of the Income Tax (Earnings and Pensions) Act 2003—ITEPA—which is part of schedule 3. We must ask whether

That is the issue that determines tax status, and it is the relationship with specialist advisers that is critical to the whole framework. Any company involved with an MSC provider is caught by schedule 3, whether someone is genuinely self-employed and in business on their own account or not. Their factual relationship with their end client is wholly irrelevant under schedule 3.

The Law Society expressed concern that the test of involvement is “enormously wide”. The question that every freelancer up and down the country must ask is whether her professional advisers could fall within the category of an MSC provider under the meaning of paragraph (d), and it is not an easy question to answer. It is highly likely that, under the provision as drafted, it would take at least a couple of cases going through the courts to determine the answer, and the uncertainty surrounding the meaning of paragraph (d) is a critical reason for supporting amendment No. 1 and postponing the implementation of those proposals until they have been fully thought through.

Without qualification, paragraph (d) would hit any freelancer who uses an accountant to draw up her company tax returns, so its scope is narrowed by proposed new section 61B(3), which states:

The meaning attributed to that carve-out will be critical in determining the reach of the legislation. There are at least three possible approaches to the carve-out and the type of services that are relevant in the context. First, under a narrow approach, the carve-out would provide safe harbour only for basic, traditional accounting services such as book-keeping. Secondly, the widest definition could cover any services ordinarily provided by accountants. The third approach would apply to accounting services ordinarily provided in the course of an accountancy business.

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