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We need much greater clarification—that is why we need a delay and a report—about the range of services that are currently outsourced and whether they would
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trigger the operation of schedule 3. Those are services such as setting up and registering companies; invoicing; company secretarial services; IR35 compliance checking; routine tax advice such as guidance on the different rules governing companies and sole traders; and other assistance on regulatory compliance. Almost all those services are frequently performed by accountants, so it would not cause a problem if the second, wide interpretation is the correct one. However, if the third, middle way—the more restrictive option—is correct, the setting-up of companies and company secretarial services may fall outside the carve-out for an accountant. They are services provided by accountants, but they are more closely associated with lawyers than accountants, so they could be treated as MSC-type services if provided by an accountant, but not if provided by a lawyer.

The Institute of Chartered Accountants has expressed concern about the issue, and it says:

Her Majesty’s Revenue and Customs has indicated informally that such activities should not turn accountants into MSC providers. However, as the Institute of Chartered Accountants points out, there is no substitute for a legal definition, and we propose to table amendments in the Public Bill Committee to clarify the operation of the safe harbour in proposed new section 61B(3).

The Opposition believe it is unfair and unwise to impose the new regime on freelancers while such uncertainty attaches to the scope of proposed new section 61B. The Chartered Institute of Taxation points out that there is a real danger that

The IR35 precedent is not a happy one. Susie Hughes, founder and editor of the specialist contractor website Shout99, said:

Members should be aware that the Government maintain that these rules are in force as we speak. Despite the fact that they are unclear, they were due to come into force on 6 April.

8 pm

There is another twist in the tail. A freelancer might have an entirely compliant relationship with her professional adviser that does not go beyond the provision of accountancy services within the meaning of proposed new subsection (3). However, she could still end up with MSC status if her accountant was providing non-compliant services to other companies. Her accountant’s work for other companies would taint all their clients, and in assessing whether she is at any risk of falling within the scope of schedule 3, a
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freelancer therefore has to look not only to her own relationship with her professional advisers, but at the services that they might be offering to other people.

This uncertainty is made even more problematic when one turns to the new section 688A of ITEPA, which is also introduced by schedule 3. That gives the Treasury the power to introduce secondary legislation to impose liability for the tax debts of an MSC and levy them on third parties. The Law Society described this section as “extremely wide” and stated that it

The Chartered Institute of Taxation has also expressed the concern that the proposals are “unnecessarily wide”.

The third parties potentially caught by the provisions are set out in proposed new section 688A(2). They include any person

The phrase

indicates the potential for a much wider application of the provisions than the consultation document suggests is the Government’s intention. The provisions pierce the corporate veil, leaving directors, employees and payroll clerks in the firing line. The Chartered Institute of Taxation expressed the concern that although the HMRC says it wants to target the controlling minds of a scheme provider, ordinary employees of those providers might well be hit with tax debts, as they could be seen as encouraging and facilitating the provision of services through an MSC.

There is also no firm guarantee that I can see in proposed new section 688A that someone who works as a contractor through a managed service company will not end up becoming liable under this section. Furthermore, there is every chance that the end-client might be viewed as having encouraged the provision of services of the worker via an MSC. According to the Law Society,

The Law Society goes on to point out that leaving end-clients on risk for the tax debts of the freelancers and contractors that they take on could have a highly disruptive effect on outsourcing in Britain.

Mr. Newmark: I strongly agree with all my hon. Friend’s comments. Is it not the case, as with other legislation with which the Government try to tackle specific problems, that they end up using a sledgehammer to crack a nut? It would be much better if the legislation were far more focused than schedule 3.

Mrs. Villiers: My hon. Friend hits the nail on the head. Far too many people who are legitimately in business on their own account as genuine freelancers will be hit by the legislation, which is designed to target abusive schemes.

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It is critical that we do not produce legislation that makes it difficult for companies to take on freelancers and contractors. That could significantly damage our competitiveness as an economy and the flexibility of the UK labour market. As on the third-party debt provisions that I outlined, and in the same way as for section 61B, there is a carve-out aimed at removing professional advisers and recruitment firms from the scope of the provisions. However, the carve-out suffers from a number of the same uncertainties that I outlined earlier in relation to the definition of a managed service company provider. There is a real risk that recruitment firms and professional advisers might still fall foul of the encouragement or active involvement tests set out.

Ann Swain, chief executive of the Association of Technology Staffing Companies, stated:

The Opposition believe that the recruitment industry is a vital part of ensuring a flexible and efficient labour market, and that much more time, reflection and thought are needed to ensure that the industry is not damaged by the proposals in schedule 3. We hope to table amendments in Committee to bring that about. I have received representations pointing out that the potential liabilities under the third party debt provisions are uninsurable, and that public companies involved in working with freelancers and small service companies are being advised that they would have to set so much aside as a contingency as to have a significant impact on their share price. The debt transfer provisions could also involve considerable litigation risk, as companies might end up blaming one another for being dragged within the scope of schedule 3.

David Taylor (North-West Leicestershire) (Lab/Co-op): I declare an interest as a member of the Chartered Institute of Public Finance and Accountancy. The hon. Lady complains about the possible impact on recruitment companies of a liability to ensure that taxation falls where it should, but surely that is a prosperous, profitable and reputable section of industry on quite a grand scale. What on earth is wrong with expecting those companies to live up to the professional responsibilities that they should have in the role that they are performing? People watching the debate will be astonished by those comments.

Mrs. Villiers: I agree that one should expect recruitment companies to exercise high standards in the way that they conduct their business, but that does not mean that they should necessarily be liable for the significant tax debts of the people with whom they do business. I do not see how the hon. Gentleman can make that connection. It is one thing to require companies to behave well and in a reputable manner, but why should they be liable for other people’s tax bills?

The third party debt provisions are draconian. They seem substantially harsher than the rules that govern
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the limited context where directors are held personally liable for the debts of their companies. Those connected with or giving advice to contractors operating through service companies will be on risk for potentially huge liabilities, and liable to the last penny of their personal wealth, yet the final version of the legislation is not even in the Bill for us to consider today. Key parts of the legislation that will put the third-party debt rules into effect are to come in via secondary legislation, and we do not have the final version of that.

It is unacceptable that such significant risks should be imposed on reputable firms without the certainty of the final version of the legislation. We are supposed to take on trust the promise by the Government that they will take a proportionate approach. Some are not prepared to do so. The risks surrounding the debt transfer rules are a key reason why some people are already winding up their businesses and handing out P45s to their staff. Further detailed consideration is needed of the impact of schedule 3 on tax revenues—the point raised earlier. As I have explained, one of the obvious effects of the provisions is to limit the extent to which freelance workers can outsource the management of their tax affairs. Moving those workers out of companies that are managed by specialist providers and into companies that they run directly themselves could make it more difficult, rather than easier, for HMRC to collect the tax that is due.

Mr. Newmark: Again, my hon. Friend is making a lot of excellent points, but I do not think that she has hammered home the point about the extra bureaucracy that will be imposed on a lot of these small businesses. The Government talk a lot about stimulating the IT sector—we are a leading force in that—but the bureaucracy that the clause will impose on small businesses will be a great dampener on trying to stimulate that sector.

Mrs. Villiers: My hon. Friend is right to pull me up on that point. It is unacceptable that, given the significant increase in red tape that we have seen under the Government, including a huge increase in the complexity of the tax system, the Government want to hammer small business people who want to outsource the hassle that comes with that extra burden of red tape. It is unfair and it is not justified by the proposals.

To return to the point about tax collection, instead of having to monitor and deal with 150 specialist providers, HMRC will have to deal with thousands more individual personal service companies as the provisions that prevent outsourcing bite. Those individual contractors may, I am afraid, prove far less efficient at paying HMRC the tax that they owe than the specialist advisers were.

We need further consideration of the impact of the loss of VAT income where the rules result in freelancers being taxed as employed people rather than self-employed people. It would be wise, too, to assess the impact of schedule 3 on departmental budgets. I am informed that the national health service and HMRC make substantial use of workers operating through personal service companies and managed service companies. Concerns have been expressed by organisations such as the Recruitment and Employment Confederation that the proposals could have a big impact on projects such as
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the NHS IT programme and the Olympics. We do not believe that the Government have properly thought through those issues, and that is why we have tabled amendment No. 1.

A delay in implementing schedule 3 could also give a chance for other options to be considered. A possible alternative would be some sort of licensing system for managed service company providers. HMRC is clearly concerned about that part of the service sector. Instead of drafting wide tax provisions, why not just tell the companies that they cannot operate unless they are licensed and that if they are caught using MSCs to disguise employment-based relationships they will be fined or shut down? In that way, we can get to the problem on which the Government are focusing—the small number of companies that operate abusive MSC schemes—but will not burden the entire freelancing and contractor communities with unintended extra costs, extra hassle and legal uncertainty, not to mention the thousands of lawyers and accountants who provide advice to those freelancers and small companies.

The last point in favour of amendment No. 1 is the most obvious. More time should be given for consultation with those affected by the provisions. There was a short window between the end of the consultation on 2 March and the publication of the Finance Bill and the start of the new rules on 6 April. The statutory element of the third-party debt provisions went into the Bill even before the consultation period was finished. Surely that suggests that the Treasury proposes to take only limited notice of the representations that have been made. IR35 had many problems, as I have outlined, but at least the Government took a lengthy period to finalise and implement that measure. During that time, the Revenue carried out in-depth discussions with many people who were affected by the legislation. People had time to understand the rules and to make preparations to ensure that they and their companies were compliant.

In contrast, the Government have decided to implement the proposals with effect from only four months after their first announcement. The Professional Contractors Group has stated that

It went on to say:

Ann Swain of ATSCo described the deadline for implementation as unworkable and way beyond anything she had ever seen before.

8.15 pm

In conclusion, this evening we call on the Government to think again about schedule 3. I know that the Financial Secretary is a reasonable person, and I appeal to him to listen to what we have had to say. There is a risk of collateral damage, with many legitimate, genuine freelancers and contractors and their professional advisers hit by
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the fallout caused by the Government’s attempt to shut down abusive schemes. We think that the Government should take time for further reflection, consultation and analysis on how the proposals should be amended to prevent that unfortunate consequence. People from firms that advise small service companies are already winding up their businesses and handing out P45s as a result of the Bill.

Given the risks involved, we call on the Government to take time to get this right, to consider the alternatives, to work out and clarify what these complex provisions mean, to try to avoid the mistakes of IR35 and to ensure that the provisions do not end up clobbering genuine, hard-working freelance workers who are merely trying to make an honest living and are already struggling with rising inflation, falling living standards and rising mortgage rates.

The Temporary Chairman: Before we proceed, I have been acutely aware listening to the debate that the hon. Member for Chipping Barnet (Mrs. Villiers) is to some extent a prisoner of the drafting of the Bill. The amendment relates, of course, to clause 25 but its basis is schedule 3, which, for various reasons, has not been committed to the Committee of the whole House. I have no desire to inhibit the debate on the Floor of the House, but I propose that I and my co-Chairman on the Bill should take cognisance of the debate here when considering the depth of debate in Public Bill Committee later. Right hon. and hon. Members might wish to consider that when bearing in mind what they talk about this evening and for how long they talk.

Dr. Cable: I want to introduce amendment No. 14, which stands in my name and that of my hon. Friend the Member for Falmouth and Camborne (Julia Goldsworthy), and to support amendment No. 1, which tries to achieve the same thing in a somewhat different way.

The hon. Member for Chipping Barnet (Mrs. Villiers) has talked in some detail about the technical and legal issues, and I do not want to duplicate that. The value that I can add relates primarily to being a gnarled veteran of the IR35 debate in the 1997 to 2001 Parliament, when we went through these arguments in Committee and on the Floor of the House. Clause 25 is in many ways a successor to that. In her introduction, the hon. Lady raised many fundamentally important questions, including whether IR35 has failed, whether clause 25 is a substitute for it or a complement to it, and how the two things interact.

Having been involved in the IR35 debate, it was clear to me that we are in inherently difficult territory. We are dealing with an economy with a great deal of ambiguity; with the fuzzy borderline between employment and self-employment. That presents fundamental problems for any Government when it comes to avoidance, because there is quite a big margin of difference between the marginal tax rates paid by the employed and the self-employed through national insurance. A lot is at stake.

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