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“I think that hon. Members would accept that there is a difference—between a person who provides independent, tailored advice to a client, who is then able to consider that advice before accepting it or rejecting it, and the person who simply supplies a client with a standard solution or product that the client accepts. It is not the intention that the former situation—the provision of advice—be considered to be influencing in this context. However, the latter situation— supplying a standard solution or product—is regarded as influencing.” ——[Official Report, Finance Public Bill Committee, 15 May 2007; c. 175.]
There are two reasons why amendments are still needed despite those assurances. The first concerns the practical difficulties. They are outlined by Institute of Chartered Accountants:
“We are concerned that the definition of ‘involved’, as explained by the Financial Secretary...is difficult to apply in practice. This relies upon the client of the MSC Provider receiving advice rather than a ‘solution’ which the client accepts without fully understanding the consequences. This may be determinable if HMRC were present at the conversation with the client but there will be little evidence that can distinguish between the two situations after the event.”
Any accountant, particularly one specialising in a particular area, may offer a fairly standardised package to a significant number of clients if they have similar requirements. After the event, it may be difficult to determine whether individual tailored advice has been given but the similarities between the customers has resulted in the same arrangements being made, or whether a standardised solution has been provided into which the adviser has pushed the customer.
The second and more serious problem with relying on the Financial Secretary’s statement is the same as before: it is simply not consistent with what the legislation actually says. The explanatory notes say that “influences” should bear its normal meaning. The OED defines “influences” as “to affect the condition of” or “to have an effect on”. The Minister’s interpretation of “influence” as involving essentially a take it or leave it situation in which the client has little say over the nature of the structure or how it operates is a gloss on the statute and is at odds with the common-sense interpretation of the word.
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Amendments Nos. 11 to 13 seek to take what the Minister has said and insert it into the legislation, so that the provision of a standardised service will trigger the MSC provisions but not a bespoke one. While not ideal, such an approach would at least reduce the risk that contractors who use accountants will inadvertently bring their service companies within the MSC provisions.
Another important reason to amend subsections (1) or (2) or both is that the safe harbour proposed in subsection (3) for those who provide only
“legal or accountancy services in a professional capacity”
gives inadequate protection to advisers and their contractor clients. There are of course several concerns about what is included in the term “legal or accountancy services” and they were aired in Committee. However, a further worry is revealed when one examines what the explanatory notes have to say about the words “in a professional capacity”, which is that
“professionally qualified persons normally would not be considered to be an MSC provider except to the extent that they are in the business of promoting and facilitating the use of companies to provide the services of individuals.”
So in looking at the meaning of subsection (3) one is simply thrown back on to subsection (1). It seems that subsection (3) will be of limited use unless the problems with subsection (1) that I have outlined are resolved.
If the Minister will not accept the amendments to subsections (1) and (2), I hope that he will at least address the questions that I put to him in Committee, which he was unable to answer then, about the scope of the safe harbour for professional services.
First, is it the nature of the services provided that determines whether someone is an MSC provider, or is the question determined by the qualification or the professional status of the person providing the service? Is it possible for anyone who is not part of a regulated profession to use the subsection (3) safe harbour? Do people need a current practising certificate to use it? What about accountants and other tax professionals, who are not registered, but who are employed in-house? And to what extent can service providers outside the remit of the traditional professional set-up use the safe harbour?
In the past, I understand that the Government have always been resistant to attempts to control or regulate the term “accountant” on the grounds that that could be anti-competitive. It certainly restricts competition if the outcome of the legislation is that freelancers and contractors can no longer outsource accountancy services to specialist providers but are forced to use only traditional accountancy practices. There is at least a risk that differentiating tax treatment on the basis of whether one holds a qualification from a professional body might be either anti-competitive or breach EU discrimination law.
This debate also gives the Minister an opportunity to address some of the other questions that he did not answer in Committee about different service providers and how they are dealt with by subsections (1), (2) and (3), including in particular franchise advisers; factoring and invoice discounting houses, which help to follow up unpaid invoices; and back-office companies which provide services relating to payroll, supplier payments and so on. Those firms provide some of the very services the legislation uses to identify MSC providers. For example, they often pay the worker’s tax and trade creditors. Is it the intention to turn all the clients of back-office service companies into MSCs even when the workers in question are clearly in business on their own account?
I turn now to the second limb of the Government’s proposals on MSCs, which is the third party debt rules contained in proposed new section 688A. Those are far reaching and leave professional advisers potentially on risk for thousands of pounds of their clients’ taxes, even if they have no avoidance motivation and their involvement with the MSC is inferential or unwitting. Section 688A could leave accountants and other advisers up and down the country liable to the last penny of their personal wealth. In making directors liable, the rules are much more powerful than the normal circumstances where such people are liable for the debts of their companies, never mind the tax debts of people with whom their companies might be loosely connected.
Even a lowly payroll clerk working for a scheme provider could be bankrupted should the Revenue proceed against him or her as someone “actively involved” in the provision of services via an MSC within subsection (2)(c) of section 688A. The Financial Secretary said in Committee that he did not intend ordinary employees of either MSCs or relevant third parties to be caught. However, whether he likes it or not, they are in scope and so their protection will be the tenuous one of a few words in Hansard and the discretion of Her Majesty’s Revenue and Customs.
That degree of discretion is a hugely powerful tool in the hands of the Revenue. Serving notice, for example, on a company’s employees that they are in danger of having to pay out thousands of pounds in tax debts for their employers' clients could have a startling effect. It could certainly force the employer to pay up to the Revenue in double-quick time, regardless of whether the demand for payment was justified.
“So much the better,” the Minister might respond, but there, I think, we have the truth of it. It seems to me that these provisions have been drafted in a deliberately wide-ranging and ambiguous way in order to scare people away from a particular type of service provision, regardless of whether a tax avoidance motive is involved or not.
To use tax legislation to deter and punish in this way raises some significant constitutional concerns. That is not what the tax system is supposed to be used for, and this is no victimless constitutional question. Already, some contractors are finding their work drying up because third parties are afraid to engage them for fear of falling foul of the third party debt rules.
Many of the concerns about section 688A flow from the fact that paragraph (c) of subsection (2) provides that any party who “encourages” the provision of the services of a worker by an MSC could become liable for the tax due on the deemed employment payment imposed by the legislation. That is why we have tabled amendment No. 15 to delete “encourage” from paragraph (c). This probing amendment is designed to elicit some clarity for the many businesses potentially affected by the MSC legislation and deeply worried about whether their day-to-day activities might be viewed as “encouraging” within the meaning of paragraph (c).
For example, by providing companies to be used by contractors an accountant or company formation agent could be said to have encouraged the provision of the services via MSCs. Any accountant who provides advice on the appropriate corporate structure could also, as a matter of logic, be said to be encouraging the use of that structure and hence the provision of services by the MSC. If accountants advertise or promote corporate services to contractors, that surely would amount to encouraging people to use these services. If the legislation were targeted on those who encouraged individuals to use MSCs, one could perhaps see the logic, as that would more accurately focus section 688A on those actively pushing workers into MSCs.
I think that they are the people whom the Government want to target, but that is not what section 688A says, as it refers only to encouraging the provision of the services by the MSC. So as long as a person encourages the company to provide the services, it seems to me that that person is at risk of being caught by section 688A, regardless of whether he or she knew that the company was an MSC.
Arguably, that means end-clients may find themselves liable for the tax debts of the contractors and freelance workers whom they engage. Surely by paying a company to provide services, an end-client is encouraging that company to provide them. What clearer example of encouragement could there be than direct financial inducement? Equally, a worker who
finds other contractors to take part in a project could be said to be encouraging the provision of services by those companies.
A further anxiety surrounding the term “encourage” is that it could prevent recruitment businesses from holding an approved list of company suppliers and advisers. Any recommendation or advice regarding a company supplier given to a worker could constitute “encouraging”, and the Financial Secretary confirmed in Committee that holding such a list could give rise to problems under the legislation—contrary to the indications given by HMRC on that point. The unfortunate effect of that would be to remove a useful compliance check that at present serves to steer contractors away from dubious operators in the market.
Many of the problems surrounding the concept of “encouraging” fall away if we could insert a requirement of culpability, and that brings me to amendment No. 16. As I have said, these are very powerful provisions and there are very important arguments in favour of restricting those caught by them to people who bear a degree of blame for, or at least had an idea of, what was going on.
In particular, it is critical to remove the risk that I have highlighted—that end-clients could be liable for the tax debts of their contractors—since that risk could have a seriously damaging impact on the flexibility of the UK labour market. The Government seem to think that the use of the term “actively facilitate” imports an element of deliberation or culpability, but that is simply not clear. A person could be actively involved, on a daily basis, with the provision of services but not know much about the corporate structure through which they were provided. As long as someone was actively involved with the provision of services by the company, they could be caught even if they had no knowledge that the company was an MSC or was being used to avoid tax.
Amendment No. 13 would remedy that situation by ensuring that section 688A catches only those who knew, or could reasonably be expected to know, that the company through which the services in question were being provided was an MSC. In Committee, the Minister was unable to explain why he resisted the amendment despite the fact that the Treasury’s own consultation document on the provisions indicates that that is exactly how HMRC believes that section 688A will apply in practice.
That was confirmed in a letter to me from the Financial Secretary, dated 10 May this year. He stated:
“Our clear objective is that those who don’t know or could not reasonably be expected to know that they are dealing with an MSC should not be within scope of the debt transfer provision”.
How does he reconcile that statement with his statement in Committee, when he rejected a defence based on ignorance? By doing that he in effect accepted that it is possible for unwitting third parties to be caught by the third party debt rules. Nor did he explain in Committee why such provisions are acceptable in other areas of legislation, such as the Insolvency Act 1986, but not in this context, where they could do so much to clarify the legislation and reassure people who are connected with freelancers and contractors.
As for amendment No. 14, the Financial Secretary has taken steps to remove almost all reference to “HMRC thinks” in the Bill. The amendment would see the back of “HMRC considers”, which suffers from the same defects. Either a tax debt is due or it is not. What HMRC considers to be the case should not be relevant. What should count is whether the situation falls within the scope of the legislation. If we were to grant HMRC the power to levy taxes when it considered them to be due, that would give it far too much discretion and would undermine yet again the principle that it is for Parliament, not the Executive, to determine whether citizens should be taxed. If the Minister is prepared to junk “HMRC thinks”, why does he continue to inflict “HMRC considers” on the public?
Amendment No. 17 is designed to prevent local tax inspectors from using section 688A as a shortcut to collect taxes from third parties simply because it is easier than pursuing the taxpayer directly. I have received a number of representations on this point. The Professional Contractors Group is understandably anxious, given the unhappy experience that many of its members have had with HMRC’s heavy-handed approach to IR35. It says:
“PCG feels uncomfortable with the prospect of HMRC being able to ‘pick low-hanging fruit’ by transferring debts to an easier target if the first transferee seems unlikely to pay.”
Amendment No. 17 would limit HMRC’s discretion in this area and essentially require it to adopt the sequence set out in section 688A(2) in pursuing the different parties. Given the powerful nature of the new power to impose a liability to pay other people’s tax debts, it would give huge comfort to know that constraints are in place to require HMRC to pursue the real offenders first, before coming after those whose involvement was inferential and unwitting.
In conclusion, contract working is of key importance to thousands of workers, who value the freedom and flexibility it gives them. I am sure that Treasury Front-Bench Members would agree that it is also critical when competing in a global world economy. The reality is that many hard-working, law-abiding contractors could be hit by the legislation even when they are not dodging taxes or misrepresenting the nature of their relationship with their end clients. It is also clear that the cost of the professional advice that they need could be driven up by the flaws in the legislation and that the uncertainties generated by the Bill could significantly undermine the flexibility of the UK Labour market, about which the Chancellor has frequently boasted.
Above all, the legislation will provide yet another set of complex tax hurdles for small start-up businesses to try to jump over. We should remember that today’s one-man service company could easily become tomorrow’s Apple, Amazon or Google. If we smother these enterprises at birth, the only people who will gain will be the entrepreneurs of China and India, who are already anxious to move in on our service industries. I urge the House and the Minister to take this final opportunity to grapple with the flaws in the legislation and to deflect the blow that is about to land on so many small services businesses across the nation.
Rob Marris:
I am sure that the whole House will be just as pleased as me that the hon. Member for Chipping Barnet (Mrs. Villiers) has done her homework. She
referred to outsourcing and back-office service companies. While there is an issue to address, I should put this in context. The Treasury must take all reasonable steps to ensure that tax and national insurance are paid. Apart from anything else, social justice requires that, as does the provision of public services to the people of this country on which the Government have such a good record. Those services must be paid for, so tax must be collected.
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It is entirely appropriate to clamp down on loopholes because we do not want to support tax dodgers. However, the loopholes must be plugged in a way that does not penalise unduly legitimate and compliant managed service company businesses that attempt to assist entrepreneurs by dealing with their administrative or accountancy needs—those are the back-office functions. Of course, the Treasury must always examine the impact in practice of the legislation that it implements. It must also ensure that people do not get away with dodging taxes, which has undoubtedly been happening in some sectors of the managed service company industry. Schedule 3 is somewhat controversial. Fear has been expressed that the provision might drive people from managed service companies to personal tax companies, which, paradoxically, might decrease the tax take because some people would try to avoid making national insurance payments.
I have received representations from an established managed service company that rejoices in the name of No Longer Limited. The company offers a tax planning and administration service for contractors on a fixed or percentage fee, regardless of their IR35 status, and the self-employed who can join its limited liability partnership. Every contractor undertakes a full compliance check with the company. If that is successful, NLL pays tax and national insurance on its profits on its behalf into a quarterly self-assessment account and ensures that the due dates of 31 January and 31 July are met timeously. For contractors that are businesses in their own right, the alternative to the back-office functions provided by organisations such as No Longer Limited is to set up their own personal service company. Under the classic model for such a company, contractors pay themselves, as employees, a small salary—perhaps just the minimum wage—while the remainder is paid as a dividend, which avoids national insurance and cuts the tax take. That is not in the spirit of what I would like to see.
NLL is owned by Mr. Colin Howell. Part of the purpose of his business is to ensure that there is full compliance and that the right tax bills are paid quickly. He tells me that the new law could have the perverse and unintended consequence that such back-office companies would become no longer viable, which would mean that No Longer Limited would become “No Longer There”, which would lead to the loss of up to 40 jobs. It is clearly not for me or the House to adjudicate on such claims today, but I wanted to convey Mr. Howell’s representations.
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