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I understand that Mr. Howell will be seeking an exemption, given that that is allowed under proposed new section 61B(3) and (4). If he does that, Her Majesty’s Revenue and Customs officials will make a
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judgment with the full facts in front of them. It would be wholly inappropriate for me to ask my hon. Friend the Financial Secretary for a direction or a decision today—he would not give one; I would not seek one—but I would ask companies such as Mr. Howell’s to be given full consideration if and when they claim an exemption to ensure that the law does not result in rough justice. If Mr. Howell’s claims are correct, it would be likely, perversely, that the measure would result in a lower tax take and that jobs would be lost as companies moved away from managed service companies. In such circumstances, his firm would have to close down.

I hope that my hon. Friend the Financial Secretary will reassure us about how back-office companies, in contradistinction to the legal and accountancy companies covered by the exemption under proposed new section 61B(3), would be able to obtain an exemption so that a company such as No Longer Limited would not have to close down because its business had migrated elsewhere. I stress that I do not want a decision on that company’s case. I am merely citing it as an example of a company providing back-office services that feels that it might be adversely affected by the Bill, yet unable to obtain an exemption. It would be most helpful if my hon. Friend would give us a rough indication of the exemption procedure.

Mr. Colin Breed (South-East Cornwall) (LD): It is fairly obvious that, even after extensive debate in Committee and the speeches made tonight, considerable uncertainty remains about the proposals. The aim is to protect legitimate managed service companies, which do a fine job, while seeking out those who use that as a means of avoiding tax and national insurance. Our senses are heightened by the debate in the broad industry that surrounded IR35; we anticipate the same sort of problems arising now.

It is perhaps impossible to get the drafting exactly right, but the amendments represent a valiant attempt to tackle some of the problems that remain even after the assurances that the Minister gave in Committee. We are also concerned about the guidance, because we know that guidance cannot be relied upon, especially when cases are pursued as far as the courts. Guidance is therefore rather insecure. It is Parliament’s job to make legislation as accurate as possible and not provide scope for wide interpretation by HMRC personnel. Interpretation is inevitable, and I believe it will be interpreted differently in different parts of the country, which will create problems. I acknowledge that Ministers have striven to improve the clarity, but much uncertainty remains. A number of professional advisers have spoken or written to us and lobbied us.

I assure the Minister that the Liberal Democrats understand the principle and support what the Government are trying to do. However, we are concerned that unless the legislation is tightened—perhaps along the lines set out in the amendments—it will prove to be problematic and may endanger some legitimate businesses that will not wish to continue as managed service companies. The legislation may well prove to be difficult to interpret and be applied differently in different parts of the country.

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We support the amendments. I accept that some of them are probing, but the Government must answer them if we are to achieve legislation that is as accurate as we can make it.

Stewart Hosie: I thank the hon. Member for Chipping Barnet (Mrs. Villiers) for going through the amendments in considerable detail. I know that it is late and we have been through this debate in Committee, but it is important because of the potential scale of the impact of the measure.

I share the concerns voiced by many people, including the hon. Member for Wolverhampton, South-West (Rob Marris), that some companies, particularly legitimate recruitment and accounting services companies, as well as other back-office firms, may be defined as managed service companies when they are not. I shall go through the definition of an MSC, but first I shall talk about the amendments.

Amendment No. 8 would amend the description of an MSC by tightening the criterion in proposed new section 61B(1)(d) of the Income Tax (Earnings and Pensions) Act 2003, changing the wording from

to a person

MSC services. That is a useful safeguard to avoid the legitimate back office-type of operation being deemed to be an MSC merely by association. It would also offer some comfort to legitimate recruitment firms, which may be deemed to be MSCs by association with genuine MSCs, because they present as a candidate for a legitimate contract job someone who may not even know their own employment status but who may have been used by an MSC—a real one—that was no more than a gangmaster operation.

Amendment No. 9 would leave out “involved with the company” and tighten the provisions by including the words

That change offers real protection to companies that place people from an MSC who are presented as bona fide contract workers, but who, as I have said, may not even know their own employment status. That is an extremely important protection.

Amendment No. 11 would leave out “influences or” from proposed new section 61B(2)(b), and would require control to be the criterion that determines whether an MSC provider is involved with the company. Amendment No. 13 would specify in proposed new clause 61B(2)(c) that the company must be required to exert

Amendments Nos. 11 and 13 are necessary to protect third party companies that are not MSCs from being defined as such; that is particularly important for recruitment firms or accounting companies that facilitate contract employment. By that I mean a recruitment firm that offers any other services—even advice on the nature of payment, on how to invoice or on which contract to take—or an accounting services
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company with a recruitment arm that assists in the final negotiation of a contract once the contract is put forward by a recruitment firm.

It is easy to see that a third party firm could be defined as an MSC without that protection. The description of an MSC in proposed new section 61B(1)(a), (b), (c) and (d) is clear. Paragraph (a) says:

A recruitment firm would come under that, and an accounting services company might do so if it had any input into the negotiation of a contract. Paragraph (b) says:

That concerns payment. Paragraph (c) says that a company is an MSC if the way in which the payments are made would result in the individual receiving more than they would if they were a normally employed member of staff, but that is the reason why many people become self-employed contractors; they take a risk and go it themselves, but there are tax advantages, and the income received may be slightly greater. Paragraph (d) mentions

That is the whole purpose of a recruitment firm. The paragraph would possibly catch an accounting services company with a recruitment arm, too.

Of course there are some protections, but I do not believe that they are sufficient. That is why I will support the amendments tonight. A protection is offered in proposed new section 61B(4), which says that the only time when a person does not fall within subsection (1)(d)—that is the description of an MSC—is when they only place individuals with persons who wish to obtain their services. As a recruitment firm may well provide assistance with visas for an overseas contract, or specialist training for an offshore contract, or accommodation for a contract in a strange place, they are not only placing individuals; they are doing other things, too, so the protection in new section 61B(4) does not necessarily apply, as subsection (5) allows an opt-out.

Subsection (5)(a) excludes the protection in subsection (4) if the person or associate does anything in subsection (2)(c)—that is, anything that

If a recruitment firm or an accounting services company suggests that the individual contractor invoices weekly, fortnightly, monthly, or three-monthly, according to what suits the contractor, that influences the way in which payments to the individual are made, and therefore the protection in proposed new section 61B(4) does not apply.

Reference has been made to the safe harbour in subsection (3), which says:

At face value that sounds fine, but if the firm, particularly in an accounting services company
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context, has a recruitment or personnel arm that offers advice on visas, training or accommodation, or that assists in any way with the final negotiation of a contract, that safe harbour would not apply.

As the hon. Member for Chipping Barnet said, the Minister gave the Committee certain assurances, and it will be useful to hear what he has to say today. The volume and detail of representations, however, in the real world outside the Chamber are such that he may wish to toughen up what he is going to say or, indeed, tell us that he is prepared to reconsider the Bill’s provisions so that we do not have to rely on guidelines and regulations in future.

9.45 pm

Mr. Speaker: I call Mrs. Villiers to reply. [ Interruption. ] I call the Minister to reply.

The Financial Secretary to the Treasury (John Healey): Thank you, Mr. Speaker. I would hate to miss the opportunity to respond to the debate.

The hon. Member for Dundee, East (Stewart Hosie) is right that we have been through this in some detail more than once. He is right, too, that it is an important matter, as hon. Members have emphasised. The hon. Member for Chipping Barnet (Mrs. Villiers) recognises—and I am glad that she did so so clearly—the need to tackle the avoidance that undoubtedly results from the existence of MSCs. She supports our proposals on two conditions: the provisions should be clearly drafted and appropriately targeted. I hope that I can give her that reassurance tonight, as I have tried to do in previous debates on the Bill. I hope that that reassurance will help the hon. Member for South-East Cornwall (Mr. Breed), too, as well as my hon. Friend the Member for Wolverhampton, South-West (Rob Marris). I am glad of my hon. Friend’s support in principle, as well as his recognition, which was shared by the hon. Member for South-East Cornwall, of the difficult need to balance provisions to catch those whom we want to catch against the need not to bring into the net those whom we do not want to catch or indeed, introduce provisions that will have perverse consequence.

I shall try to deal with concerns about back-office companies that offer administrative services and, in so doing, tackle the question of exemption and whether or not provisions that have been in place for some time have had an effect on employment. I shall then deal specifically with the amendments tabled by the hon. Member for Chipping Barnet so that, without delaying the House unduly, I can deal with hon. Members’ concerns. The hon. Lady reiterated, as she has done consistently, understandable concerns about the position of freelancers. Freelancers who outsource any part of their administration are not, and should not be, in danger of being caught by the legislation, which is not intended to, nor does it, catch persons genuinely in business on their own account who receive help to run their company. The legislation catches those who have simply been provided with a company as a means to an end. In achieving that end, they need the company to be run for them.

The legislation therefore does not prohibit small contractors from outsourcing the administration of their companies. They can obtain the support services
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that they need, but there is a distinct difference between someone who offers back-office services to client companies generally and someone who is in the business of promoting or facilitating the use of companies to provide the services of individuals who, as part of that business, offer support services. Of course, such people can operate through MSCs if they choose—that is not a problem, and we do not discourage it—but they will have to pay the proper employed levels of tax and national insurance.

Let me try to make the point slightly differently so as to pick up a set of associated concerns. Simply because someone is not exempt by virtue of proposed new section 61B(3) does not mean that they are caught by the legislation—a point that I have made in previous debates. If that is to happen, someone must fulfil wholly the criterion of proposed new subsection (1)(d), which links directly to proposed new subsection (1)(B), too. They must first be in the business of promoting or facilitating the use of companies to provide individuals’ services.

HMRC will give careful consideration to requests to consider the application and qualification for exemption, but I stress that those providing corporate solutions to persons seeking to disguise employment use a wide variety of structures. Any examination should not provide scope for MSC providers to exempt themselves from the legislation.

Let me tackle the question whether people are going out of business. It seems that some MSC providers are winding up or changing their businesses because there is no longer a tax and national insurance advantage from operating an MSC scheme. That reinforces the point that such schemes existed only to avoid tax and national insurance, and now that that has been stopped, they have no real reason to continue in business.

Mrs. Villiers: I did not have in mind people being laid off by MSC providers. I was concerned about the contractors who have written to me saying that their source of work is drying up, and about people who organise and provide recruitment services for contractors and who are laying people off because there is so much anxiety about the legislation that they are afraid to get involved in providing services to contractors in case they get caught by the third party debt provisions.

John Healey: The hon. Lady caught me in mid-sentence. Perhaps I should not have been so generous or ready to give way. I was going on to say that as she would expect, we have been watching carefully the impact of the legislation in the sectors that it might affect, and we have no evidence that it has had any adverse effects on employment. Our assessment to date is that the new rules have been operated by many providers since April with no apparent disruption to the labour market.

I turn to the specifics of the amendments. Amendments Nos. 8 and 9, which deal with the definition of an MSC provider, would enable MSC providers determined to sidestep the definition to seek to run a dual business, of which the provider element comprised only 49 per cent. Hon. Members will see immediately that that is an obvious way of
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restructuring the business to sidestep rules if they were amended as proposed. For the same reason the term “sole” would provide even greater scope for circumvention. Far from tightening the definition, as hon. Members have argued, the amendment would loosen the scope for avoidance—the very problem that we are trying to deal with.

On the tests for involvement with the MSC, amendments Nos. 11 to 13 seek to change these tests, creating tests which would be easy to circumvent. There is no reason why a person purportedly providing business services to a company through which a worker provides their services should seek to influence the way in which a client company provides the worker’s services. I explained that clearly and on the record in Committee.

The question of influence, as I explained, is clearly distinct from independent tailored advice which is normally given by accountants and other advisers. Importantly—this is the proposition in the amendments—if the test were merely control, it is likely that many providers would take steps to ensure that their arrangements gave the impression that control lay with the company. Influence would be less easy to disguise.

Amendment No. 13 would remove three of the five tests, and import terms such as “substantial degree of influence” in reference to a standardised product. The weakness with these amendments is that to prescribe involvement in this way would inevitably result in MSC providers claiming that their services did not fall within the detailed strategy description, creating significant risk to the aims of the legislation.

Amendment No. 14 is presumably an attempt to remove the possibility of an officer of HMRC using his discretion to transfer an amount that in other situations would not be considered due. That is not necessary. An HMRC debt can arise only by virtue of one of the existing provisions in the PAYE legislation.

On amendments Nos. 15 and 16, we have listened carefully to the concerns expressed about the scope of the debt transfer provisions. We have already made amendments to ensure that there is greater clarity and certainty about who is or is not involved. Amendment No. 15 would substantially undermine the effectiveness of the transfer of debt provision. The removal of the word “encouraged” would enable those third parties to continue to encourage workers into MSCs without themselves facing financial risk. Amendment No. 16 would open the door to abuse by allowing ignorance as a defence. Finally, amendment No. 17 contains detail that would be more appropriate in the guidance.

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