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John Healey: There are reasons why it is difficult to isolate any tax impact from IR35, which no doubt we can explore, along with the hon. Ladys points on schedule 3, in the Public Bill Committee. However, let me say that when we introduce the provisions we will closely monitor, and report on, how they work. If any revisions are requiredI hope that they will not bewe will introduce them; we will explain, and consult on, any proposals, as we have done in respect of this scheme.
It is important to recognise that workers will still be able to work flexibly. Many employment agenciesand in particular their representative body, the Recruitment and Employment Confederationsupport the measures, because the agencies are being undermined by MSC providers that do not enforce the current rules properly. Workers can continue in MSCs as long as they pay the right level of tax and national insurance. That is the right approach.
Rob Marris: Will my hon. Friend confirm that because of the national insurance implications, some of those workerswho, in lay terms, are in a bogus situationwill not get disability benefits if they are injured at work, will not get jobseekers allowance if they are made unemployed, and will not have pensionable years of contribution toward a basic state pension?
John Healey: My hon. Friend has a pointand to be fair to the hon. Member for Chipping Barnet, so did she when she said that this legislation was not specifically about employment rights. However, when workers are signed up to, and sometimes obliged to operate through, managed service companies, as a consequence they forfeit certain employment rights and protections, and are not aware that in operating in that way, they are doing so. That is not surprising, given that the publicity and the appeal is directed, as I have suggested, specifically at the tax advantage, and therefore to the weekly or monthly take-home pay advantage that certain workers may see.
Stewart Hosie: How, therefore, will HMRC define as different and genuinely self-employed the legitimate and ambitious individuals who wish to be flexible and work on their own, who go through reputable recruitment agencies to find their contracts, and who work with management accountant-type firms to do their books, compared with someone who happens to be working through one of those companies? Moreover, although those companies are mass marketed and might have lots of such people, could there not also be innocent people genuinely working on their own who happen to use such outfits because it suits them to have their books and accounts done in that manner? How will those different types of people be distinguished?
John Healey: The short answer is that the distinction will be made by applying the proposed definition set out in schedule 3. Given that in previous years, the hon. Gentleman has made a really important contribution to Standing Committee proceedings on Finance Bills, I hope that he will be willing to serve on the Public Bill Committee for this Bill, too, and that we can deal with these matters.
Mrs. Villiers: I am grateful to the Financial Secretary for giving way again. Is he prepared to acknowledge that there are freelancers genuinely in business on their own account who operate via managed service companies?
John Healey: If someone is genuinely operating on their own account and essentially running their own affairs and engaging their labour through a managed service company, they clearly will not be caught by the provisions before us. I answered many of the questions that the hon. Lady raised about freelancers on Second Reading, and she will have the opportunity to probe this one in a lot more detail and depth in the Public Bill Committee. I am happy that we should do that, but the intention behind the legislation is clear, and it is not to catch those genuinely in business on their own account and managing their own affairs [Interruption.]
David Taylor: Will the Minister make it absolutely clear, as my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) is attempting to do from a sedentary position, that the terms freelance and self-employed are not interchangeable and equivalent? They are necessarily different in many aspects.
John Healey: My hon. Friend, who brings a lot of experience to our debate thanks to his professional capacity before he joined this House, is right: freelancers is a colloquial not a legislative term. The test will be whether individual workers run their own company to gain the advantage of taking the profits out of it as dividends. If workers are not running their own business they are likely to be employees, and are therefore likely to be disguising their employment status and not paying the tax that they ought to be paying, as other employees do. It is clearly unfair if two workers carrying out the same work pay different levels of tax and national insurance because one is operating through a structure provided by a third party that fails to apply the rules correctly. There is also the further concern that some workers are encouraged, or even forced, to use MSCs without understanding that they may lose their employment rights. The Government therefore set out objectives and detailed proposals for change in the pre-Budget report in December.
During the consultation, almost all those who commented agreed that the existing rules are not being applied and that action on MSCs is necessary. In its response, the Chartered Institute of Taxation said:
We acknowledge that some MSCs are responsible for significant underpayments of Pay as You Earn and National Insurance Contributions...we further acknowledge that this is a serious issue that HMRC cannot ignore.
Some respondents commented that their businesses were being undercut by those who did not comply. An employment agency for teachers wrote:
This has put us at a considerable commercial disadvantage to other employment businesses which have used MSCs to pay their workers...As we also pay employers NIC on our teachers earnings our margins are significantly lower than those recruitment businesses which choose to use MSCs.
As I said earlier, I am dwelling on the consultation process to emphasise how deliberate we have been in
formulating our proposals. During the consultation, officials from the Treasury and HMRC met a wide range of interested parties, and the provisions in clause 25 and the related schedule reflect many of the key concerns raised during that process. I express my appreciation, and that of the Government, to the many people who have offered us technical advice and support, and indeed challenge, to get our proposals in good shape and ensuring that they are targeted on meeting the policy objectives we set out.
As we pointed out in the consultation document, getting the definition of MSCs right requires great care. On the one hand, we are determined to end the abuse of the tax system by MSC schemes, while on the other we recognise the advantagesnot least in the performance of the British economyof a relatively flexible labour market. Legislation should ensure that contractors can continue to operate through appropriate structures and obtain the professional services and support they need. People genuinely in business on their own account providing services through service companies will not come within the MSC definition.
Mrs. Villiers: Will the Minister acknowledge that someone operating through a personal service company that was entirely compliant with the provisions to be enforced by clause 25 could be brought within the scope of the MSC definition merely because their professional advisers were offering other clients non-compliant services?
John Healey: From the outset we have constantly made it clear that our intention is that the legislation will not hit those working through personal service companies. The legislation was drafted with that intention and it remains our clear purpose, so I hope during this debate and in the Public Bill Committee to convince the hon. Lady that that will be the effect of our proposals.
At the pre-Budget report, when we published the draft definition of MSCsthe starting point for the provisions in clause 25it focused on the question of who controlled the company and its finances. The hon. Member for Twickenham (Dr. Cable) was interested in that point. As the hon. Member for Falmouth and Camborne (Julia Goldsworthy) mentioned tonight, and in more detail on Second Reading, we soon realised that some MSC providers were intending to move their MSC workers to companies as directors to give the impression that workers were in control of the company. The hon. Lady claimed that the setting up of such new companies was evidence that the MSC measures would not work. However, the fact that some MSC providers act in that way because they are determined to get around the legislationcombined with the comments of some of the respondents to the consultation that the definition needed to be tougher and more robustis precisely why we revised our approach, instead focusing more on the business of the MSC provider. That will be more effective because it will enable HMRC to focus on the smaller number of MSC providers.
I hope that the hon. Lady will accept the views of David Heaton, a tax partner in the Baker Tilly accountancy firm and employment consulting group. Writing in a tax journal in April, he said:
This looks to be a very elegant solution to the difficulty that seemed likely to undermine the new rules. The Treasury is to be congratulated on its consultation exercise and, more importantly, on being prepared to listen and change tack to produce workable new law.
That, indeed, is what I hope that we have producedworkable new legislation. Clearly, we await what happens in practice, but I am encouraged that we are moving in the right direction.
There is a specific exclusion from the definition of an MSC provider of those merely providing legal and accountancy services in a professional capacity. Let me make it clear that even where this specific exclusion does not apply, the purpose of the legislation is not to include within the definition of an MSC provider accountants, tax advisers, lawyers and company secretaries, who provide advice or other professional services to companies and individual clients. Those parties are not in the business of promoting or facilitating the use of companies to provide the services of individuals. Nor are they regarded as involved with the company in the way that the legislation envisages. In other words, simply because someone is not exempt by virtue of proposed new section 61B(1)(b) does not mean that they are caught by the legislation.
The legislation specifically excludes employment businesses and agencies from the definition of an MSC provider. That is because we accept that some of the activities that employment businesses and agencies undertake legitimately as part of the business of placing work seekers superficially resemble what MSC providers do in running their clients companies. In that respect we recognise the important and legitimate role that those businesses play in the temporary labour market, and it is not our intention to disrupt that.
The hon. Member for Chipping Barnet spent some time on the transfer of debts provisions, so I would like to say a few words of reassurance to members of the Committee about them. The legislation aims to deal with a further problem that we identified with MSCs: that they have often escaped payment of tax and national insurance contributions because they have no assets. Where a debt is established, MSCs are often simply wound up and then begin to trade again. They trade again because their workers are transferred to a new MSC by the MSC provider. Respondents to the consultation were consistent in agreeing that the wider package of measures would be ineffective without debt transfer provisions.
Where the MSC does not pay, the legislation will allow the PAYE debts of MSCs to be transferred to appropriate third parties, such as the MSC provider or the director. Those parties are clearly involved and clearly benefit from the arrangements. If payment cannot be obtained from those parties, the debts may be transferred to others who have
encouraged, facilitated or otherwise been actively involved in the provision by the MSC of the services of the individual.
Without a provision to transfer debts, the entire purpose of the legislation would be lost. Those benefiting from the arrangements would simply be able to continue promoting and using these schemes with no financial risks. Of course, transferring debts to third parties is not a new principle in our tax system.
For those concerned about the transfer of debt, there is, frankly, a simple answer: not to operate through or encourage others to operate through MSCs. I recognise that there are nevertheless some concerns and I am sure that we will return to schedule 3 in greater detail in the Public Bill Committee. The regulations for the PAYE provisions were published for comment back in February and the consultation closed today. We will consider any comments very carefully and take full account of them in finalising the regulations, which we aim to publish in June. The regulations will contain a number of safeguards and grounds for appeal. The debt transfer provisions are intended to be effective for PAYE and national insurance contributions incurred from 6 August in respect of MSC directors and MSC providers, and from 6 January next year for other parties.
I have dwelt for a moment or two on how the provisions might work, because I thought that it was necessary to do so to reassure Members that the Government have considered the issue in detail and have discussed it in detail with the relevant parties. I also wanted to try to allay the concerns and correct some of the misinformation and the misunderstandings that have been evident. I hope that what I have said has helped to reassure Members that the amendments are not necessary, or desirable.
Let me elaborate briefly on those points specifically in relation to amendments Nos. 1 and 14. The amendments are not necessary because the legislation was published for consultation last December, alongside a partial regulatory impact assessment. During the course of the consultation, officials dwelt in detail on the proposals with a wide range of parties. We received 81 written representations and we set out the points that were made in a summary of the consultation responses, which I published last month. Not only did the consultation confirm our analysis of the problem and the need to tackle it, it provided the further evidence that we needed to inform the full regulatory impact assessment, which was published at the same time as the Finance Bill and which covers many of the issues that the hon. Member for Chipping Barnet is concerned about in her amendment. Importantly, the responses to the consultation have allowed us to refine the approach that the legislation takes in a way that enables us to deal with the key concerns that have been raised.
Finally[Hon. Members: Hooray!] I am sure that Opposition Members would not wish me to treat in a cursory way the detailed points that have been raised in the Committee proceedings this afternooneven though I missed the contribution made by the hon. Member for South-West Hertfordshire (Mr. Gauke).
The recruitment and MSC sectors have already responded to the announced changes and are operating the new rules. I have been encouraged by the willingness of many in the industry and their representatives to work to make the measures effective. Introducing a delay would mean that companies that are already operating the new rules would be thrown into confusion and uncertainty. It would send a signal to those seeking to exploit the use of MSCs that we may not be serious about tackling the abuses. I have to say to the hon. Member for Falmouth and Camborne and the hon. Member for Twickenham that delaying
the implementation of the provisions until November, as amendment No. 14 envisages, would constitute a loss of anticipated revenue to the public purse of about £50 million.
In conclusion, we set out clearly in the consultation the serious and growing problem of mass marketed MSCs. We consulted widely. We discussed our proposals in depth. We altered the approach, as set out in the Finance Bill. The clause will help us to tackle bogus companies and it will restore more even conditions. Currently, those observing the existing rules lose out. It will protect the public purse from the sort of artificial tax arrangement that means that people who should be employed, and are in effect employed, are not paying the levels of tax that they should be paying as employed people. I commend the clause to the Committee.
Mrs. Villiers: Taking the decision to become a contractor or a freelancer does not make one a tax dodger. I am not reassured by the Financial Secretarys response. The clause remains flawed and I wish to press amendment No. 1 to a Division.
Question put, That the amendment be made:
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