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At the same time, we have an economy where some people are not easily pigeonholed as in employment and in self-employment. The hon. Lady mentioned one of the most important groups—the IT industry. That industry, which will be primarily affected by the clause,
is important not only for the economy in general but for Government finance and contracts, and for delivering IT contracts on time. The clause seriously affects the oil industry; large numbers of people in the offshore oil industry work with such a contractual relationship. It also affects the national health service. The biggest group of contractors who will be affected by the clause are temporary workers within the NHS. The ability to maintain the supply of those services when there is a shortage of NHS staff hinges critically on a sensitive tax treatment.
So I revert to the question that the hon. Lady posed of whether IR35 has failed. She asked whether the Government could tell us how many people were brought within the standard tax-paying employment bracket through IR35, how much revenue it generated and how many people fell outside it as a result of the growth of management service companies. I do not have much of a feel for the quantitative background to the provision—perhaps the Financial Secretary can provide it for us.
Clause 25 introduces a fundamentally new concept, which I want to understand a little better. When IR35 was introduced, the key distinction between the employed and the self-employed was provided through a control test—an attempt to ascertain whether the management of the company that hired the contractor had effective control or whether the self-employed were in control of their work. Control is a difficult concept in taxation, but at least everyone was working with it.
We now have a new idea of “being involved with” as opposed to “control”. An MSC provider is involved with a company if it
“benefits financially on an ongoing basis from the provision of the services of the individual...influences or controls the provision of those services...influences or controls the way in which payments to the individual (or associates of the individual) are made...influences or controls the company’s finances or any of its activities, or...gives or promotes an undertaking to make good any tax loss.”
The clause and schedule 3 therefore introduce the idea of “influence” as opposed to “control”.
What is the distinction between those two important words? If somebody is regarded as self-employed under the IR35 definition but employed under the MSC definition, what happens? What happens if the definitions clash? How will the ambiguity be resolved?
Mr. Newmark: The hon. Gentleman is making an excellent case about definitions. The distinction between “control” and “being involved with” is important—indeed, it is the nub of the problem. Does not he believe that we are considering yet another mechanism whereby the Government are trying to reach even further to draw people into providing more and more stealth taxes to the Chancellor, who is desperate to find money through any possible means? The wide definition gives him another opportunity to try to pick the pockets of hard-working IT professionals and others.
Dr. Cable:
I was not going to go that far. I assume that the Government are acting in good faith and at least trying to deal with tax avoidance. I am concerned about the practical difficulties that might result from
the two different definitions. I am not here to speculate on the ultimate motives—I did that in the Budget debate.
One can place a charitable interpretation on what the Government are trying to do. In the evidence that was given to the Treasury Committee, John Whiting, a PricewaterhouseCoopers adviser, whose name has been mentioned several times in the discussions, said of clause 25:
“Whilst the announcement of proposals to tackle Management Service Companies was seen as controversial at the time of the pre-Budget report, the Treasury and HMRC are undoubtedly right to tackle this area. Consultations on the proposals have been constructive and the refined proposals, focusing on MSC providers, are a good way forward, though more discussion is needed to ensure the targeting is precise with no collateral damage.”
It is therefore possible to make the case that the hon. Lady and I are making more sympathetically than the hon. Gentleman suggested.
The key point is how we distinguish in practice between MSCs and companies that fall outside the definition. The distinction is crucial because, as the hon. Member for Chipping Barnet said, companies that fall within the new definition are liable for tax debts, which can be astronomical. As I understand it, some progress has been made in narrowing the definition of the professional groups who are likely to be involved. Accountants are now excluded, but as the hon. Lady asked, what is an accountant? Are company secretarial services included? There is a spread of possible professions.
The hon. Lady cited another definition, which she did not complete. It raised the possibility that the spread of responsibility could become wide. For example, a spouse’s clause could be involved and extend to cover more distant relationships, perhaps even business partners. The limits of the liabilities are far from clear despite the moderate success of the consultation process, at least in narrowing the definition to some extent.
It is worth citing some of the professional bodies. The hon. Lady has done that and I shall not simply repeat all her cases. The Institute of Chartered Accountants in England and Wales is a reputable organisation that has no obvious axe to grind. It stated:
“Many of our members provide a variety of services for MSCs but are acting properly and within our ethical code and professional conduct rules. They are concerned that if the exclusion is not clarified, they could become liable for debts incurred by their clients when they have been acting entirely within the law and the professional conduct rules that govern their services.”
That professional body is trying to get on the right side of the law and not push the boundaries. It simply wants to be crystal clear about who falls within the definition of the schedule.
I therefore believe that the sensible way forward is to provide for limited delay. I appreciate that prolonged delay can simply open the way to evasion and people finding a new way around the provisions, so I do not suggest that. However, the method that the hon. Lady proposed of a specific targeted study is one way of achieving the objective. We suggest a six-month delay to give the relevant organisations an opportunity to assimilate the secondary legislation, which we have not seen.
The Professional Contractors Group said that it would welcome a six-month delay because the proposals had caused much confusion among legitimate small businesses, especially the question whether accountants could be deemed to be scheme providers under the Bill. The PCG is an important voice in the debate.
Stewart Hosie: I am comfortable with a delay or a specific study. However, should not we consider more than exemptions and definitions? Should not we also include provision for a cost benefit analysis? If we are right and a tax liability may fall on a third party, which, as the hon. Member for Chipping Barnet (Mrs. Villiers) said, is uninsurable, the costs would be put on to the final user—largely Departments and local authority departments. Should not such consideration be made in the study during the suggested delay?
Dr. Cable: That is eminently sensible and amendment No. 1 is designed to provide such a cost benefit study. I emphasise the six-month delay because the six-month contract is the standard period for many contractor-type relationships. If we are to avoid a position whereby MSCs have to redesign all their payroll arrangements in mid-contract, they need a period in which to phase them in. That was the origin of the proposal for six months, but amendment No. 1 also appears entirely sensible.
I hope that the Government will reconsider the matter. I reiterate that we appreciate that there is a genuine problem of tax avoidance. We understand that the Government are responsible for dealing with that and that avoidance—and, indeed, serious criminal evasion in some cases—is happening with the rapid growth of MSCs. Something must be done, but we want to provide a limited opportunity for phasing in and conducting a study and analysis. That is the sensible way in which to deal with the sensitivities of the companies involved.
8.30 pm
Stephen Hesford: You really hit the nail on the head for this debate, Mr. Gale. Of the two amendments, amendment No. 14 is slightly better than amendment No. 1, in the sense that it is less disingenuous. If what the hon. Member for Chipping Barnet (Mrs. Villiers) said is to be taken at face value, the debate that we should be having—but which we cannot have, because schedule 3 is not before us, as you quite correctly pointed out, Mr. Gale—is on a group of amendments to schedule 3, not this one.
Mrs. Villiers: The amendment concerns the implementation date of schedule 3, which is dealt with in clause 25. It is entirely in order to talk about clause 25, because it implements schedule 3.
Stephen Hesford: I am not addressing technical reasons why one could not move the amendment. I am talking about having a proper debate on a matter of substance, and I am questioning whether this is a genuine debate to have at this point.
Although I do not agree that there should be any pause or delay, the reason I say that amendment No. 14 is slightly better than amendment No. 1 is that it at least has the merit of being time-specific, in proposing a six-month delay. As well as not grasping the details of schedule 3—we have had a discussion about that—amendment No. 1 is designed to make implementation almost impossible. Proposed new subsections (4)(a) to (4)(d) in amendment No. 1 list the things that the report should deal with, but it is wholly unrealistic that the House would want to see those matters dealt with in such a report. The amendment is set out in such a way as to make the report so complex and compiling it take so long that the delay in getting to schedule 3 would almost last for ever.
Mrs. Villiers: The hon. Gentleman does not have a lot of confidence in his own Government if he thinks that they cannot produce a report on the fairly simple matters that I detailed in the amendment.
Stephen Hesford: The hon. Lady says that they are fairly simple matters. I shall not read out the list, but if the amendment were passed at face value and a report was produced, I suspect that she would then say that proposed new paragraph (a), (b), (c) or (d) had not been looked into properly. She would then again want to set in motion a debate about whether those issues had been looked into sufficiently, before the matters that my hon. Friend the Minister will want to talk about in due course could be dealt with. The amendment is really an exercise in kicking the process into the long grass.
Why are the Opposition trying to kick the whole process into the long grass? I probably have far less experience of Finance Bills than most hon. Members here, but in my limited experience, the words that are guaranteed to set off Opposition Members are “anti-avoidance”. That is the one matter that consistently gets them exercised. Every time we have such debates they trot out the same arguments, no matter what anti-avoidance scheme is proposed. Their argument is that they are of course in favour of anti-avoidance and protecting the Revenue; but they then disparage, blow-for-blow, the anti-avoidance schemes that my hon. Friends on the Front Bench have put forward, and this debate is no different.
Mr. Newmark: I understand the spirit in which the hon. Gentleman is making his point, but our point is that every time the Government come forward with legislation, their tax remit becomes wider and wider and they end up hurting people whom they do not mean to hurt. Our party is trying to deal with those unintended consequences, not stopping people who should be paying tax from paying their fair share.
Stephen Hesford: I am grateful to the hon. Gentleman for that intervention, because it enables me to reiterate the point that I made earlier. If he is going to make a contribution in this debate—
Stephen Hesford:
The hon. Gentleman nods, and I look forward to hearing what he says. He therefore may wish to reflect on this point. If the amendment is a
genuine attempt to take issue with the substance of schedule 3, the debate should be about the contents of schedule 3, not about its start date, as I have indicated. What I am saying is that this is a peculiar and artificial debate. The debate that we need to have is on the detail of schedule 3, which I am sure we will come to in due course.
The hon. Member for Chipping Barnet also said that there need to be further discussions. In my limited experience of reviewing such matters—I shall of course be corrected from the Front Bench if I am wrong—HMRC does just that, always keeping them under review and always being prepared to seek further discussions as events unfold. Her point is therefore not really an argument for delay.
Mrs. Villiers: It is my understanding that HMRC has refused to give anyone any advice at all on how the provisions will operate until the Finance Bill has completed its passage through Parliament. I shall be interested if the Minister contradicts me, but the reality is that people are not receiving the advice that the hon. Gentleman says they are.
Stephen Hesford: The hon. Lady misunderstands what I was saying, although I do not think purposely. I was not talking about advice so far, but about ongoing discussions as to how the legislation will affect people. If as a result of experience the legislation needs to be reviewed in due course, I have no doubt that my hon. Friends on the Front Bench will do just that.
Stewart Hosie: If the consequences are increased costs to users, particularly the Government, a tightening of the labour supply, inflexibility in the labour market and chaos for possibly tens of thousands of contractors in many sectors, does the hon. Gentleman not think that we should conduct the review in advance, rather than doing so down the line, after the damage has been done?
Stephen Hesford: I am grateful for that intervention, because I shall come to that very point in my concluding remarks. In a sense, the hon. Gentleman has hit another nail on the head—there are lots of nails.
Mr. Newmark: With a sledgehammer.
Stephen Hesford: Yes, absolutely—cracking the nut with a sledgehammer. However, I shall address that point in my concluding remarks.
The other matter that worried me when I listened to the hon. Member for Chipping Barnet was that of the three institutions that she chose to quote in support of her argument—I am not talking about schedule 3, and she will tell me if I have miscounted—two were not related to the industry. One was the Chartered Institute of Taxation and the other was the Law Society. They are removed from the issue, because they are just practitioners.
Mrs. Villiers:
They are not removed. Accountants will be directly affected by this legislation. They are potentially at risk, as huge sums could be involved in
relation to the tax debts of their clients. These are reputable organisations with an extensive knowledge of tax and legal matters.
Stephen Hesford: I accept that those organisations have an indirect, ultimate connection to these matters in a professional sense. The odd thing is, however, that the people that the hon. Lady prays in aid are not the ones that she says that she is trying to protect.
Mrs. Villiers: If the hon. Gentleman wants to hear what the contractor community thinks about these proposals, he should just go and visit Shout99 or one of the IR35 websites. He would experience a lively discussion and hear some trenchant views on this Government’s performance on tax matters.
Stephen Hesford: I thank the hon. Lady for that intervention, because it brings me to my next point. Von Clausewitz said that war was the continuation of diplomacy by other means. The hon. Lady seems to be seeking to have the whole argument about IR35 over again, having lost that battle — [ Interruption. ] She is nodding. If she wants to intervene on me, she may do so.
Mrs. Villiers: Schedule 3 is an admission that IR35 has not worked. If it had worked in the way that the Government had intended, we would not need schedule 3.
The Temporary Chairman: Order. This is not about schedule 3 at all. We are becoming slightly detached from the amendment before the Committee.
Stephen Hesford: Of course I shall adhere absolutely to what you have said, Mr. Gale.
I did not count the number of times the hon. Lady said “IR35”, but it must have run into double figures. She seems to be replaying all those arguments, which I did not accept at the time. The reason why I did not accept them is that a number of self-employed constituents came to see me when the IR35 debate was going on, and they were worried about the effect that it would have on them, in advance of its introduction. A furore had been whipped up, no doubt to some extent by the arguments adopted by Conservative Members. Of all those constituents who expressed concern about what the effects of IR35 might be, however, none came back to tell me that their fears had been borne out and that we were now doing this, that or the other to them. I would argue that the fears about IR35 were to a great extent oversold, and I put it to the hon. Lady that the fears that she is now expressing are being oversold in exactly the same way, and for exactly the same reasons. This all goes back to a lack of willingness to support my hon. Friends on the Front Bench in their efforts to sort out tax avoidance.
8.45 pm
From my short experience of Finance Bills, I have observed that one of the documents that is often referred to in great detail—because it rescues many of us—is the explanatory notes. Neither of the two
Front-Bench spokespersons who have spoken in this debate have mentioned them. I find that extremely interesting. The hon. Member for Dundee, East (Stewart Hosie) raised a point earlier about consultation and asked whether there should be a delay. The explanatory notes state that in 2006—by my calculation, that is a year ago—the pre-Budget report announced that the Government would take
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