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We have therefore had one year’s notice—

Mrs. Villiers: December? That is not a year ago.

Stephen Hesford: Forgive me. We have had six months’ notice.

The explanatory notes go on:

It seems strange that that consultation document was never referred to by either Front-Bench spokesperson.

Mrs. Villiers: I referred to the consultation document at least twice, possibly three times.

Stephen Hesford: They must have been the very briefest of references, because I missed every one of them.

This is an apparent row, rather than a real one, and we are having it for a time-honoured reason in Finance Bill debates: Conservative Members do not like the anti-avoidance schemes. The Government are putting forward legislation to protect the Revenue. That is what my hon. Friends on the Front Bench are doing tonight and I support clause 25.

Mr. Newmark: Thank you for calling me to speak, Mr. Gale. I am delighted to see you in the Chair.

I have three points to make. First, there is agreement over the broad principle that managed service contracts should not be allowed to exist as a cynical tax dodge—as I believe the hon. Member for Wirral, West (Stephen Hesford) might describe it—but there seems to be some question over the real scope of the existing problem. I was uneasy when I heard John Whiting of PricewaterhouseCoopers give evidence to the Treasury Committee on this subject. He said:

That alone should be sufficient justification for my hon. Friends’ cautious amendment proposing deferral while further study takes place.

Julia Goldsworthy: Is not there another reason for the Minister to be cautious? The number of people registering as personal service companies in recent months gives some indication of the number who might previously have been working in managed service companies. Given that tax offices are being reviewed and the scaling back of staff is being considered, should not the Government examine the ability to
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manage at local level the burden of the tens of thousands of individuals now registering as personal service companies? It would be for their own benefit.

Mr. Newmark: The hon. Lady makes an excellent point. I do not want to detract from it, but the Treasury Committee also considered the issue of the Government closing down tax offices and letting go experienced tax officers who could track down the very avoidance that they are seeking to deal with by centralising everything. That, in itself, creates problems.

If the Minister believes that he already has the answers to the questions posed by the amendment, he has an opportunity to set them out for the Committee now. I look forward to hearing his comments.

Rob Marris: I understand that the hon. Gentleman has asked the Minister to set out further evidence. Has he read the consultation document, “Tackling Managed Service Companies”, or the publication that followed that document, “Managed Service Companies: Transfer of Pay as You Earn and National Insurance contributions debts”? If he has not read those documents, I suggest that he do so before peppering the Minister with questions, the answers to which might be in the documents.

Mr. Newmark: As always, I very much appreciate advice and guidance from more experienced Members of the House, but I will go on.

In the absence of firm data about those who are likely to be affected, let us take time to undertake a thorough study, and hold off on a potentially damaging change until we are fully informed of its consequences. I am not advocating complacency as a solution, and neither is the amendment, but year after year we see well-intentioned changes fall victim to the law of unintended consequences. There is a proverb involving fools and angels that is probably of some use in this instance, and if the Government claim that they have not rushed in, the Minister will already be able to answer all the questions posed by the amendment.

My second point is about the adequacy of the proposed solution. In his written evidence to the Treasury Committee, John Whiting, to whom the hon. Member for Twickenham (Dr. Cable) referred, commented instructively that,

That “collateral damage” is of most concern to the Opposition. IT contractors often work through managed service contracts, and the industry will feel the full force of the changes. As one contractor said in his response to a poll by an industry website:

As we all know, small business people, unlike large businesses, have much less mobility: they cannot go overseas; they are stuck here with whatever the Government throw at them.

We are quickly into dangerous territory, because anti-avoidance measures sooner or later come down to subjective moral judgements about “fair shares” or “genuine” companies and so on. But when the “collateral damage” is ordinary people—the constituents of the
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hon. Member for Wirral, West (Stephen Hesford), the hon. Member for Twickenham, my hon. Friend the Member for Chipping Barnet (Mrs. Villiers) and even mine in Braintree—who may be blissfully unaware that they have transgressed against the Revenue, there is surely some room for caution, if not for outright forbearance.

That leads me to my third point, on the problem of publicity and awareness of changes that, by any estimation, will affect a great number of people. The amendment proposes a delay for further study—a delay that will also offer the Treasury a further opportunity to ensure that all those who work through managed service companies are fully apprised of the changes. I appreciate that the Treasury needs to prevent forestalling when dealing with anti-avoidance provisions, but that need must be balanced against the potential impact on a large class of ordinary workers.

The Treasury’s consultation document admitted that there are cases in which workers do not benefit from operating through managed service companies and do not understand the implications of doing so. It admits:

There is also a further warning on the infringement of employment rights represented by coercing workers into managed service companies. As the Institute of Chartered Accountants submitted to the Treasury Committee,

It cannot be right to press on regardless, with the prevention of forestalling the only justification, and I have no hesitation in supporting the amendment tabled by my hon. Friends pressing for a full report on the various impacts of schedule 3.

Rob Marris: The hon. Member for Braintree (Mr. Newmark) said that he was “not advocating complacency as a solution”. A couple of very good points that he made at the end of his speech concerned vulnerable workers, whether migrant workers or otherwise.

Another part of the economy in which we have had a problem for a long time is the construction industry. I think that action is overdue. The hon. Member for Braintree is too young to remember “the lump” on building sites, but it was operating when I was a teenager, and there is now an updated version of it among construction workers. Not only can it rip off the Treasury and therefore other taxpayers; it can rip off the individual building worker. Worse than that—because of the grey area in which the individual worker finds himself—it can have implications for safety. Some safety legislation covers only employees, as opposed to workers. I therefore suggest to the hon. Gentleman that the amendments that he supports are, in fact, an expression of complacency about a problem that we face in terms of tax revenue and in terms of individual safety.

Mrs. Villiers: Does the hon. Gentleman acknowledge that schedule 3 will not give one person extra employment rights? It will have no impact on the
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serious problems that he has described. It will give no extra health and safety or employment protection.

Rob Marris: I hope that you will allow me to stray from the amendments for a couple of sentences, Mr. Gale. Schedule 3 specifically uses the term “worker”—I cannot tell the hon. Lady exactly where, because we are not debating schedule 3 so I had not prepared myself—in contradistinction to the term “employee”, and it has a different implication for certain health and safety measures. If the hon. Lady wishes, I will dig out—later, of course, Mr. Gale—the phrase that includes the term “worker”.

The second issue on which I think the hon. Member for Braintree was complacent, despite having said that he was not advocating complacency as a solution, relates to the timing of the introduction of these measures, with which both the clause and the amendments deal. Not only is he complacent about what is a growing problem; he seems, complacently, to want a Treasury Minister to take up the Committee’s time by providing all kinds of information that might well be in the two reports to which I referred in an intervention that he kindly allowed me to make but which apparently he has not read. He certainly did not confirm to the Committee that he had read them, and implication was that he had not.

Julia Goldsworthy: The hon. Gentleman said that individuals could be exploited when they did not realise that they were part of a managed service company. Unfortunately, trying to deal with those problems creates a set of further problems. The Institute of Chartered Accountants said that it had seen correspondence from managed service companies to their customers offering them an alternative service, and advising them to set themselves up as personal service companies of which they would be sole shareholders. They would then be asked to certify whether they were within the rules of IR35. If people do not know that they are part of a managed service company, they will be vulnerable when asked to self-certify on something of which they are not adequately aware. Dealing with managed service companies might create a further problem.

Rob Marris: The hon. Lady might be right. However, I did not refer to those vulnerable workers in the way she suggests. I did not say that they did not realise that they were part of a managed service company.

What I would describe as bogus self-employment—not in an “illegal” sense—has existed for many years. Under Margaret Thatcher’s Government, milk deliverers were pushed into what most would regard in a moral sense, though not in a legal sense, as bogus self-employment. There was a fad for it, because of the tax regime. The milkmen realised what they were doing, but they were effectively given no option by those who had hitherto employed them. It is a scandal that has continued for years, and clause 25, along with schedule 3, will help to deal with it.

I do not think we should delay any longer. Both amendments suggest that we should, but I think that there has been enough consultation and enough knowledge of these problems for a long time, and that we should reject the amendments.

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9 pm

John Healey: We have had a useful debate on clause 25. The clause introduces measures to tackle the problems set out in the consultation document entitled “Tackling Managed Service Companies”, which we published last December. As you rightly pointed out, Mr. Gale, schedule 3 contains the detailed provisions, to which we will return in the Public Bill Committee. I look forward to your chairmanship of that Committee, and I have enjoyed your chairmanship tonight.

I am glad that we have been able to arrange to debate the clause today, uncomfortable as it is for our discussion in this Committee of the whole House. It is an arrangement that the Opposition wished for, and I am glad that we have been able to accommodate them. Many of the detailed points that the hon. Member for Chipping Barnet (Mrs. Villiers) raised clearly relate directly to schedule 3. We will return to and deal with them in detail in the debate in the Public Bill Committee, rather than tonight.

The Opposition amendments would delay the date on which the legislation takes effect. Before I consider those, and the legislation in general, perhaps it would help the Committee if I reminded hon. Members of the rationale for legislating in this sector and outlined the consultation that we have undertaken. I hope that it will help to reassure hon. Members that we are not acting in haste, that we have considered the measures in some detail, and that what we propose is the necessary and right response to the problem that we increasingly face with managed service companies. The questions are significantly different from the questions that we may have considered with IR35 and personal service companies.

Managed service companies are corporate structures through which workers provide labour services. What is notable is that managed service company schemes are mass marketed, and it is not appropriate to use the intermediaries legislation to try to deal with them. In the vast majority of cases, workers in managed service companies are not in business on their own account and the nature of their engagements is equivalent to one of employment.

Mr. Gale, you and the House will remember that the House has taken action not just in the last decade but in previous decades to maintain a clear policy intent, which is that those who are, in substance, employed should be treated by the tax system as being employed. For example, between 1988 and 1996, six separate pieces of legislation were introduced by the Conservative party to counter the use of what were then termed readily convertible assets specifically to avoid class 1 national insurance contributions. The steps that we are taking in respect of managed service companies should be seen in the context of that clear and consistent intent, endorsed on occasions by the House, both in the past decade and previously.

Those mass marketed schemes are almost always promoted on the basis that the worker will pay less tax. Let me refer to one or two such schemes and quote the sort of publicity that those companies were issuing before the pre-Budget report announcement in December. Nova Corporate Services said:

Around the same time, before the pre-Budget report announcement, Brookson detailed the advantages of working through a managed service company:

and it goes on to detail precisely how the company will, essentially, take away any suggestion that an individual, through an MSC, is managing their own affairs or involved in that. It then says:

I could refer to a number of other examples that I have brought into the Chamber with me. If I could read Polish, I could quote similar provisions set out in Polish to attract foreign workers, binding them in from the start of their employment—disguised employment—in this country in this way.

Let me give Members an idea of the scale of the tax benefit, and therefore of the artificial tax arrangements and their impact. Currently, an employee earning £30,000 who incorporates for tax purposes will pay £4,290 less tax and national insurance than other employees on the same salary. It is important to be clear that such workers are being encouraged to use incorporation as a means of disguising their real employment status. We are trying to tackle that.

Workers in MSCs are shareholders in the company, formally. Generally, they are paid a combination of salary at the level of the national minimum wage and dividends, on which a lower rate of income tax applies and on which no national insurance is levied. That is the nature of the tax gain, and it shows the artificiality of the tax arrangements.

Under existing rules—the intermediaries legislation, often known as IR35—employed levels of tax and national insurance should be paid, but in most cases the rules are not followed. That a large and growing number of workers are involved in these mass marketed schemes makes it difficult to enforce them. That is why we need fresh legislation in this area. The use of MSCs has grown sharply in recent years. It is estimated that in 2005-06 240,000 workers were in MSCs. As I hope Members appreciate, there are obvious difficulties in quantifying the impact and the figures, but the Government consider this to represent a significant and unacceptable risk to the public purse, which we cannot allow to continue. The estimated yield from this proposed legislation in 2007-08 is about £350 million. Furthermore, we aim that it will deter future use of MSCs and protect the Exchequer against future losses.

Mrs. Villiers: I would be interested to learn whether the Financial Secretary would plan to publish regular figures on the increase in tax take resulting from the application of schedule 3, as he has never been prepared to do that in relation to IR35.

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