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Session 2006 - 07 Publications on the internet General Committee Debates Finance |
Finance Bill |
The Committee consisted of the following Members:David
Doig, Hannah Weston, Committee
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attended the Committee
Public Bill CommitteeTuesday 15 May 2007(Afternoon)[Mr. Eric Illsley in the Chair]Finance Bill(Except clauses 1, 3, 7, 8, 12, 20, 21, 25, 67 and 81 to 84, schedules 1, 18, 22 and 23, and new clauses relating to microgeneration)
4.30
pm
The
Chief Secretary to the Treasury (Mr. Stephen
Timms):
On a point of order, Mr. Illsley, and I
welcome you to the Chair. This morning, when Mr. Gale was in
the Chair, it came to light that Committee members had not received
copies of the draft regulations that were relevant to our discussions.
We had sent copies of them to you, Mr. Illsley, to
Mr. Gale and to the hon. Members for Chipping Barnet and for
Falmouth and Camborne, but not to other Committee members.
Copies of all
letters sent to date about the Bill’s secondary legislation and
accompanying draft regulations have in the past few minutes been sent
to members of the Committee to ensure that everybody has the
information that they need. Copies of my letter of 9 May are also being
sent. It included information on the regulation-making powers in
schedule 3, which we shall debate this afternoon. I shall ensure that
all future letters on secondary legislation are sent to you,
Mr. Illsley, and copied not only to the shadow spokespeople
but to all Committee members. I apologise to all Committee members for
the inconvenience that they were caused this
morning.
The
Chairman:
The Chair is grateful to the Minister for
addressing the concerns that Committee members raised this morning. As
I understand it from what he said, the relevant documents have been
circulated to Committee members.
Schedule 3Managed
service
companies
Amendment
moved [this day]: No. 38, in
schedule 3, page 90, line 16, after
‘payments’, insert ‘for a year of
assessment’.—[Mrs.
Villiers.]
The
Chairman:
I remind the Committee that with this we are
discussing the following: No. 39, in
schedule 3, page 90, line 19, after
‘services’, insert ‘for that year of
assessment’.
No.
40, in
schedule 3, page 90, line 21, leave
out from ‘person’ to ‘the’ in line 22 and
insert
‘whose sole or
main business is the provision and facilitation
of’.
No. 41, in
schedule 3, page 90, line 23, leave
out ‘involved with the company’ and insert
‘regularly involved with all or
most aspects of running the company on an ongoing
basis’.
No.
42, in
schedule 3, page 90, line 24, at
end insert—
‘(1A) In considering whether a company is a
managed service company within the meaning of subsection (1), no regard
shall be had to any other companies with which the MSC provider is
involved’.
No.
43, in
schedule 3, page 90, line 35, leave
out ‘subsection’ and insert
‘subsections’.
No.
44, in
schedule 3, page 90, line 35, after
‘(1)(d)’, insert ‘or
(2)’.
No. 45,
in
schedule 3, page 90, line 36, leave
out from ‘providing’ to end of line and insert
‘services of a nature provided by
advisers in a professional capacity, including legal, accounting and
company secretarial
advice.’.
No.
46, in
schedule 3, page 90, line 36, at
end insert—
‘(3A) For the
purposes of subsection 3, accounting advice includes, but is not
limited to, advice and assistance
concerning:
(a) preparation or
provision of records, returns, financial statements, reports or
financial information concerning
accounting;
(b) auditing,
insolvency or taxation
matters;
(c) communication and
representations made on behalfof a client to third parties in
matters concerning accounting, auditing, insolvency or
taxation.
(3B) The Treasury may
by order provide for a non-exhaustive list of professional services
which fall within the meaning of subsection (3) and (3A)
above.
(3C) The Treasury may
not make an order under subsection (3B) unless a draft of it has been
laid before and approved by a resolution of the House of
Commons.’.
Government
amendment No. 97
No.
47, in
schedule 3, page 91, line 2, at
end insert—
‘(3A) An MSC
provider may be a partner in a partnership (other than the individual
referred to in section 61B(1)(a)) and may, for the purposes of section
61B(1)(d), carry on, through the partnership, the business of promoting
or facilitating the partnership to provide the services of
individuals.’.
No.
48, in
schedule 3, page 92, line 2, leave
out ‘mentioned in section 61D(1)(b)’ and insert
‘which satisfies both section
61D(1)(b) and section
61D(1)(c).’.
I had just started to address
the position of staffing and recruitment companies and employment
agencies in the schedule. The purpose of the Opposition’s
amendments to the definition of a managed service company provider is
to focus on those people
“whose sole or main business
relates to the provision and facilitation
of”
use
of service companies. If the amendments were agreed to, they would
remove the threat of liability from staffing and recruitment and
employment companies, because they would be only incidentally involved
with managed service companies. Their main business would be related to
placing individuals, which would be different.
Proposed new
section 61B(4) of the Income Tax (Earnings and Pensions) Act 2003
provides some protection for staffing companies, but its ambit is
unclear, and I hope that Government amendment No. 97 will provide
further assurance to the recruitment sector. It is vital that we
clarify the position of recruitment companies in the schedule, because
damaging the recruitment industry could have a negative impact on the
flexibility of the UK labour market.
The key concern is that if a
recruitment company has any influence over the choice of service
company or the professional adviser through the workers with whom it is
involved, the company could be liable for “promoting or
influencing” within the meaning of new section 61B. That is a
particularly strong concern when staffing companies have contractual
control over the freelance worker, as many do. Furthermore, many
staffing and recruitment companies influence the way in which payments
are made to the worker, and again, such influence might trigger the MSC
provider status that we were discussing before the Committee
adjourned.
I make it
clear that the Government’s response to the recruitment
industry’s concerns is welcome; many of its representatives are
pleased by their movement on that issue. However, we still need more
clarity and we need to asses what risk mitigation steps the recruitment
industry can take to avoid inadvertently falling within the scope of
proposed new section 61B. The feedback that I have had is that the
recruitment industry wants to be compliant, but it does not know what
compliance looks like.
It would be
useful, for example, if the Chief Secretary could confirm whether
holding a list of approved company suppliers and advisers is sufficient
to amount to “promoting and influencing” within the
meaning of paragraph (d). It would be unfortunate if the changes that
we are considering under schedule 3 were to encourage staffing and
recruitment companies to take no interest in the contracting
arrangements of their contractors and workers, as that would remove an
important quality control that is currently exercised. The absence of a
tax status review by staffing or recruitment companies could increase
the likelihood that less reputable operators—the kind of people
about whom Her Majesty’s Revenue and Customs is
concerned—have more, not less, scope to supply their
services.
Amendments
Nos. 42 to 44 concern the problem of tainting, about which I have
received a number of representations. The anxiety is that if an adviser
has a sufficiently close relationship with a client to be deemed to be
“promoting or facilitating” under paragraph (d), it will
become an MSC provider in relation to any client and any company with
which it is involved. The Bill does not specify that the promotion or
facilitation must relate to one particular company. Provision of
services within the meaning of paragraph (d) could taint all the
companies with which the adviser deals. The upshot will be that a
freelancer will be faced with the hassle not only of ensuring that the
relationship between her company and her professional advisers is
compliant and does fall not within paragraph (d), but that her adviser
does not provide any non-compliant services to other clients. Frankly,
that will be difficult in practice.
It will also be difficult for
end clients and staffing companies that are anxious to comply with the
legislation to ensure that they are not brought within third-party debt
rules, via an indirect connection to a company that has a non-compliant
relationship with another adviser or client. There is a real danger of
litigation if someone finds their tax bill suddenly increasing because
their adviser entered into a non-compliant relationship with other
clients.
The
amendments are intended to deal with such tainting. Amendment No. 42
proposes a new subsection (1A) to make it clear that one should
consider only the
relationship between the scheme provider and the company whose tax
affairs are under consideration. It is important to bear in mind that
this is a serious problem, which could have a significant impact on how
the proposals are enforced. If HMRC believes that a particular company
falls within the MSC provider definition, for example, it will
presumably inform not only that company, but all its clients. They will
immediately leave, because they will be worried about being tainted by
the activities of that particular scheme provider. That could trigger
an instant cash-flow crisis and, quite possibly, put the provider out
of business instantaneously. We therefore need to deal with the issue
of tainting. The Bill might not be intended to have that effect, but I
fear that that is the effect that it might have. It could cause
significant inconvenience for freelance
workers.
Amendments
Nos. 38 and 39 are essentially tidying-up points that were suggested by
the Law Society in its useful briefing on the Bill for the Committee.
They would amend proposed new section 61B(c), which specifies one of
the triggering factors for a situation to be categorised as one
involving a managed service company. A situation would be considered as
such if the way in which payments are made to the worker would result
in her receiving payments that exceed those amounts that she would
receive, even if every payment made in respect of the services provided
were employment
income.
Committee
members will see from the briefing that the Law Society welcomes
paragraph (c) as helpful, because it prevents the mere provision of
services of individuals from giving rise to MSC status even when
employee tax is paid. It makes the sensible point that the Bill does
not specify the period for which test is to be applied, however. The
amendments would makeit clear that the relevant period is the
year of assessment.
Amendment No.
47 was also a useful suggestion by the Law Society. It is designed to
remove a possible loophole in the framework. The provisions seem to be
somewhat unclear as to how they impact on partnerships. The amendment
is intended to go with the grain of the Government’s proposals
and ensure that they operate effectively in relation to partnerships
and also to ensure that a partnership structure cannot be used as a
loophole. So the amendment would extend the reach of the proposals to
make them bite in a situation where the scheme provider is a partner in
a partnership, which amounts to the MSC. The Government’s
drafting seems to be largely based on a corporate model and it does not
seem to work exactly in relation to partnerships. The amendment might
help to achieve greater clarity and ensure that the measure operates
more clearly in relation to partnerships.
Amendment No.
48 is another tidying-up amendment. It is essentially a technical point
to ensure that any payment taken into account for the extra MSC taxes
does not include payments that have already been taxed as earnings
elsewhere. The consequence of the application of the MSC legislation is
that various payments are treated as if they were the earnings of an
employeefor tax purposes, and therefore they are subject to
PAYE and national insurance. Where the Bill applies, these payments
become part of what is referred to as the deemed employment payment.
That is calculated using a series of steps set out in the
proposed new section 61E(1). Step 1
defines
However, new section 61D(1)(b)
covers all payments received by the worker, including those that have
already been taxed as employment earnings. Therefore, if that measure
is left unamended, there is a danger that extra taxes would be applied
to earnings thathave already been taxed as employment
earnings. By adding, as this amendment would, a reference to new
section 61D(1)(c), payments already taxed as earnings are excluded from
the scope of the deemed employment payment.
I would like to turn to
amendment No. 49, which focuses on a concern raised by the Private
Contractors Group.
The
Chairman:
Order. The hon. Lady is speaking to amendment
No. 49, which is in the next group of
amendments.
Mrs.
Villiers:
I apologise, Mr. Illsley. That was an
error on my part; I must have got the number of the amendment
wrong.
In conclusion
on this group of amendments, the Committee has listened patiently,
which I appreciate, to my lengthy submission on the potential problems
caused by schedule 3 and the best way, in our view, to deal with those
potential problems. I have spoken at length about the position of the
professional advisers. I have done so partly out of concern for the
position of those professionals, but my main reason for doing so
concerns their clients—hard-working, hard-pressed freelance
workers, who are just trying to make an honest living. It is their
relationship with their professional advisers that the Government have
chosen to focus on in determining how much tax those people will pay
and whether their company is treated as a MSC. That is why I have dwelt
on the relationship with advisers.
I emphasise that being a
freelance worker does not make someone a tax dodger. Yes, the tax
system for freelancers is different to that for employees, but one must
factor in the fact that those workers get no sickness pay, no holiday
pay and no employer-funded pension schemes. With IR35, the Government
have hit those people with hassle and huge compliance costs. The hon.
Member for Wirral, West may not be worried about IR35, but thousands of
contractors are. The Opposition are proud of the stance that we took on
IR35. If the hon. Gentleman has not had many e-mails so far, I suspect
that he might get a few more in the future. Now the Government, to add
insult to injury, are not only imposing the hassle of IR35, but they
want to prevent contractors from getting professional help with
navigating the bureaucracy caused by IR35 and other regulations
produced by the
Government.
4.45 pm
I close by reading an e-mail
that I received from an IT contractor, Steve Birchall, which sets out
just how disruptive schedule 3 is proving to be even before it is on
the statute book. He
said:
“I used
to use a MSC simply because they made sure that all required tax, VAT
and legal requirements were met. In particular they ensured that I had
a clear and full understanding of how much of the money my company had
in its accounts was mine
and how much needed to be paid to the various government bodies, VAT,
NI, Income tax. Corporation tax etc.
etc.
I
DID NOT use this as a vehicle to avoid
tax.
If I wanted to do
this a normal Ltd company option provided more tax savings due to the
ability to reclaim more VAT and claim certain additional expenses. I
simply wanted someone to look after the finances of the company so that
I did not personally spend any money that should have been put aside
for taxes etc. I just wanted a clear indication of what was MY money to
spend and what had to be paid over or put
aside.
Due to the
recent changes relating to MSCs, I have now been robbed of that option.
I have tried to find a company that would help with the financial
running of the business, but in every case they have stated that they
cannot now do this, for fear of being seen as having some control of my
company and in so doing, incur risks and
penalties.
So I now
find myself being responsible for running a company (that I don't want
to run) and having full responsibility for the tax, NI, VAT etc, bills,
with no help from anyone. I have the use of my accountant, but they can
only do so much to help because they fear that they might be held
responsible for any tax claims from HMRC should that situation
arise.
It does seem
crazy to me that I now cannot use a professional body to help me
control my finances, this would seem to be a responsible thing for me
to do and yet I risk financial penalty just for trying to act
responsibly.”
On behalf of Mr.
Birchall and the thousandslike him, I urge the Minister to
think again about schedule 3 and accept the Opposition’s
amendments.
Stewart
Hosie (Dundee, East) (SNP):
I support
the principles behind the schedule. It is right and proper that the
Government seek to stamp out the misuse of managed service companies,
particularly when employees are unaware of the situation, by
self-employed contractors and organisations that are, to some extent,
no more than posh gangmasters. It is right and proper that such misuse
is sorted out. In the light of my own experiences, however, I do not
think that some of the provisions in the schedule will work. I think
that its impact will be much wider and broader than the Government
intend.
I was a
self-employed contractor working with recruitment companies and using
an accounting service company, although I suspect that they were not
called that in those days. I have been a departmental manager, a
project manager and an operations manager in large private and public
well-funded start-up companies and have employed contracting companies
and individual contractors, both directly through those companies and
through recruitment agencies. I know that many of them, and many others
in various sectors at the moment, manage their affairs through
accounting and managed service companies for the very reasons that the
hon. Lady described in the e-mail that she
quoted.
From my
experience and that of those with whom I have spoken, I find it
difficult to understand how the legislation would not have an
unintended impact on any of the professional bodies currently assisting
those people. I would like, therefore, to go through the Conservative
amendments and make a few points about some flaws in the
Bill.
As the hon.
Lady said, amendments Nos. 30 and 39 would simply clarify the year in
which calculations are to be made. That is a tidying-up matter.
Amendment No. 40 would replace the words in the schedule
with:
“whose sole or
main business is the provision and facilitation of”.
That is a key amendment, because it
narrows the scope of the provisions in relation to third-party
companies carrying out their business, and excludes thosewho
might facilitate an MSC as a consequence of almost any relationship,
even those that might be unintentional.
Amendment No. 41 would replace
“involved with the company” with the words:
“regularly involved with all or
most aspects of running the company on an ongoing
basis”.
The
“ongoing basis” element of the amendment is incredibly
important. Someone beginning a contracting career or starting a new
contract significantly different from their last one might have a huge
amount of additional requirements—for accountancy, legal and
financial advice, recruitment, new invoicing formats and time scales,
new requirements for different tax returns and the practical advice
that I mentioned earlier. If it is an overseas contract, assistance
might be needed with accommodation and visas. Whether the recruitment
agency or managed service company is a preferred supplier to the
employing company or not, it might be retained to provide additional
services over and above the services that might be allowable under the
schedule or with the Government’s
amendments.
Adam
Afriyie (Windsor) (Con): The hon. Gentleman is making some
good points that are deeply relevant. Does he share my concern that, as
highlighted by the e-mail that my hon. Friend read a moment ago, people
with learning difficulties, such as dyslexia, and all sorts of other
difficulties would choose the route that he sets out because it is an
easier way for them to navigate through the tax system, rather than
having a separate accountant and legal adviser and trying to do it all
themselves?
Stewart
Hosie:
I have been in the self-employed sector, too, and
retained an accountant to do that work, and it is much easier to use a
managed service company or an accounting service company. It is worth
reflecting on the point that the self-employed contracting route is
taken by many individuals to get into proper business when they do not
want to—or cannot—raise the funds to recruit people
initially. If it succeeds, they prosper and the money that they
make—the rewards can be higher if they have taken the
risks—is a good route into becoming a proper business that
employs people. People go down that route for many reasons, most of
which are honest and fair.
Amendment No.
42 suggests that MSC definitions must exclude reference to any other
companies that an MSC might be involved with. My reading of that, and
of the Bill, is that that must apply or else proposed new section
61B(2)(a) would catch legitimate recruitment companies if they were an
associate of the MSC provider. They might also be caught by the
influence clauses in proposed new section 61B(2)(b) and (c),
particularly that which regards influence over the provision of
services. If a recruitment firm is a preferred supplier to a company
and that company requires a particularly skilled individual, the
recruitment agency might say, “Well, we have this person for you
but we cannot provide him for two or three weeks a month for two
months.” In that sense, it would be directly influencing the
provision of the service. It could also influence how payments were
made, under
instruction from the contractor or by offering advice to the contractor,
by saying that it was better to invoice and be paid weekly,
fortnightly, monthly, three-monthly or whatever. That is a direct
influence on the way in which payments are made and would allow the
companies to be caught under proposed new section 61B(2)(c). The
influence clauses are far too wide.
There is an
exemption in proposed new section 61B(4). However, it applies only if a
company’s business consists “only of placing
individuals.” However, if advice is offered to a contractor in
addition, such as, “Go to company A rather than company B
because they always pay well and they pay on time”, or
“Go to company C rather than company D because our experience is
that the contract is likely to be extended”, the provision of
that advice would breach the definition of only placing individuals
with a third-party company and those companies would be caught. Let us
think about the consequences, on which I hope the Minister will
comment. An individual contractor might have a relationship, possibly
with a prime adviser or principal adviser, and certainly with his or
her bank, and as they were not providing legal and accountancy services
and were certainly not providing a recruitment service or the service
of only placing an individual, they might also be caught.
Amendment No. 43 refers to a
new subsection and amendment No. 44 excludes legitimate recruitment
firms by exempting them from falling into the facilitating trap of
proposed new section 61B(1)(d), which I have described. Amendment No.
45 extends the description of support activities, which is a useful
description of professional services and so on. That may have to go a
little further, but the amendment at least extends the protection to
some extent. Amendment No. 46 describes the key activities that one
would expect in new subsection (3A) but it, too, may need to go a
little further. I hope that the hon. Lady will explain a little further
the issue addressed in amendment No. 47, which is on partnerships. I
did not see a particular issue in that regard, but I may well have
missed it.
Amendment
No. 48 deals with the calculation of the deemed employment payment.
Should I have this wrong, I would be open to correction, but I
understand that it would change the calculation of the money that a
worker receives; it would involve proposed new section 61D(1)(b) but
would exclude proposed new section 61D(1)(c), other than in respect of
the commission fee that an agency would receive. It would not take into
consideration any of the elements of the real earnings of the
contractor, which is what I believe it is meant to do and which strikes
me as correct. Amendment No. 49 is in the next group, and I shall not
discuss that.
There
are a number of weaknesses. The first part that we are
discussing—the definition of MSCs, the exemptions and how people
might be caught—is too wide. I have examined Government
amendmentNo. 97. If I read it correctly, it will remove some
of the safeguards offered by proposed new section 61B(4), because
should an individual do anything in relation to 61B(2), which relates
to influencing the provision of services, they may be caught.
Government amendment No. 97 reduces and weakens the safeguards in an
unintentional way.
I have described the issue of a
preferred supplier influencing the provision of service. I hope that
Ministers will examine Government amendmentNo. 97 and convince
me that I am wrong, but I suspect, having read it any number of times,
that it weakens the safeguards in an unintentional
way.
Mr.
Colin Breed (South-East Cornwall) (LD): It is a privilege
to follow the hon. Gentleman, who clearly brings a wealth of personal
experience to a complex area of policy. The Liberals support the
principles behind clause 25 and schedule 3, but share many of the
concerns expressed. The amendments are valiant attempts to address some
of those concerns, but perhaps they do not go as far as will be
necessary to allay fears that are shared by a considerable number of
people both inside and outside the House.
The amendments principally
address the employed/self-employed area, which has become much blurred
in recent times. I must profess a certain dÃ(c)jà vu because
of the exchanges that we had on IR35 in previous Finance Bill debates.
When IR35 came out, I, perhaps like a number of hon. Members, had a few
constituents writing and telephoning me, although that has gone away in
recent years. It may be that the professionals have found other ways of
addressing some of the concerns, which is perhaps why we are in this
situation.
Let us
consider whether or not IR35 was successful. Presumably it has not been
so successful—why else would we be confronting some of the
proposals in schedule 3? Many hon. Members have mentioned that in any
anti-avoidance legislation it is essential to try to target the
proposals properly, so as to reduce the number of people or businesses
that might be included despite their being perfectly respectable and
honest in their transactions and despite their managing their
businesses perfectly properly. It seems to us that there is a distinct
danger of the measure drawing the net so wide as to include a
considerable number of businesses and people whom we would not wish to
catch.
5
pm
Many of the
problems seem to relate to the definitions and tests. Surely one of the
most important aspects of legislation is to try to ensure that the
definitions, terminology and tests are as exact as they can be.
However, I am afraid that some of the terminology and proposed wording
does not provide that directness and
clarity.
It
is also important not to create excessive administrative costs or
disproportionate penalties. The unintended consequence of much in
schedule 3 could be excessive administrative costs for people who,
frankly, should not have to face them and businesses having to make
considerable changes to their administrative procedures. The penalties
that can be exacted upon businesses could sometimes be disproportionate
to both the amount of business that they do and the degree of actual
control that they have over their clients’
businesses.
I have
some sympathy for the Government in trying to tackle a difficult issue.
The amendments that the hon. Member for Chipping Barnet and
Conservative Members have tabled have been helpful, in the main, in
trying to narrow down how we tackle the problem, as have the
Government’s amendments, although I take what the hon. Member
for Dundee, East said about the possibility of their doing the reverse.
That perhaps serves to demonstrate the complexity of the situation. Is
the wording adequate to bring into being something that will address
exactly what we all want to address, or will its openness to different
interpretation create only
confusion?
It is also
important to be clear about the exclusions and exemptions. I find that
a difficult area, because some of the businesses affected are hybrid
businesses, offering a range of services. The experiences of business
people, even at this early stage, give a powerful demonstration of the
effects on businesses. Indeed, I suspect that there will be an effect
on many other businesses throughout the
country.
Perhaps the
most unclear area, as well as the one with the greatest potential to
cause disputes, is that of the unpaid liabilities rules. When I first
read the provisions, I almost could not believe what I was reading. The
idea of businesses being responsible for unclaimed and unpaid tax seems
quite incredible in its potential reach. Although I accept that far too
many businesses and organisations organise themselves so as to avoid
tax and then to make it unclaimable, trying to move the process into
other areas is fraught with dangers. The proposals are far too widely
drawn. Many innocent people could find themselves caught up in
something that the Government did not intend, yet the courts might
decide otherwise.
As I have
said, there are great difficulties and dangers in the future. I suspect
that there will be great anger if the proposals go through as drafted
with no further amendments. I can foresee many difficult situations and
discussions between HMRC, and businesses and other organisations. It is
right, of course, for the Government to tackle avoidance. However, the
provisions need to be properly targeted to ensure that we do not impose
excessive administrative costs. We need somehow to provide clarity of
operation for something that I suspect will be strongly opposed by
certain elements, particularly those who have perhaps already benefited
from organising their businesses so as to avoid paying tax and national
insurance.
We on these
Benches support the principles behind the proposals, but I remain to be
convinced that sufficient time or care has been taken to address the
obvious deficiencies and inadequacies, such as the ability of those
affected to amend their payroll procedures and change their paperwork.
Only time will tell whether schedule 3 will be a success or as much of
a failure as the ill-fated IR35. I feel that we may be in for another
bout of dÃ(c)jà vu in one year’s time, and the year
between now and then may be a period of considerable misery for many
people.
The
Financial Secretary to the Treasury (John Healey):
We have
had a detailed debate, and concerns have been reflected from a range of
interest groups and individual companies that either may be or feel
that they may be affected by the proposals. The hon. Members for
Chipping Barnet, for Dundee, East and for South-East Cornwall
consistently urged us to aim for clarity and certainty, as the
provisions intend to, and to minimise the unintended impacts as far as
we can.
In the spirit of the detailed
points that have been put to the Committee, I hope to provide a
detailed exposition that will reassure the hon. Member for Chipping
Barnet and other hon. Members who have contributed. I appreciate the
hon. Member for South-East Cornwall saying that he had “some
sympathy” with the Government over the task that we face, and I
welcome his saying that we are right to tackle that area.
The amendments relate
to the schedule, which introduces measures to deal with the problem of
managed services companies. When the Committee of the whole House
debated clause 25, I described in detail the problem that we face, but
it is worth reminding Committee members why action is necessary. I hope
the Committee agrees that the Government are right to be concerned and
to take action in that area, even if we may differ on whether the
provisions are quite right and quite clear
enough.
Our problem is
that managed service companies are corporate structures through which
workers provide their labour services. Those mass-marketed schemes are
promoted on the basis that the worker will pay less tax. As a
shareholder in the company, the worker is normally 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 paid.
In
the vast majority of cases, as HMRC’s compliance work has
confirmed, the nature of the worker’s engagement with the end
client is equivalent to one of employment. The hon. Member for Chipping
Barnet alluded to the current rules—the intermediaries
legislation, more commonly known as IR35. They mean that the amounts of
tax and national insurance that should be paid on income from such
engagements are computed on the basis that they are employment income.
However, in most cases, the rules are not followed, and there is a
considerable loss to the public purse. The action that we propose,
however, is not just about the loss of
revenue.
Mrs.
Villiers:
My anxiety over what the Economic Secretary has
just said about the old IR35 rules is his statement that they are not
enforced properly. What evidence does he have for that
statement?
John
Healey:
I did not say that they were not being enforced; I
said that they were not being followed. I also said that we are
confronting mass-marketed schemes for which the IR35 legislation proves
inappropriate and inadequate.
Members will accept that the
Treasury is right to be concerned about lost revenue, the impact on the
public purse and the shortfall that must be made up in other ways.
However, the issue is not simply about lost revenue. The measures aim
to deal with the unfairness that, as businesses have told us, those who
follow the rules and pay the required tax and national insurance
contributions are being undercut by those who do not apply the rules
correctly. There are concerns—Committee members on this side
will be conscious of them—that some workers are encouraged or
even forced to use managed service companies without understanding that
they might, at the same time, be losing some of their employment
rights. Although this
legislation does not deal with employment rights, by removing the tax
incentive for using MSCs and, therefore, reducing the likelihood of
mass-marketed schemes, it makes it less likely that employees will
enter such schemes without understanding the implications for their
employment status and their employment
rights.
The hon.
Member for Chipping Barnet suggested in the Committee of the whole
House and again this afternoon that IR35 had somehow failed. That is
not true. However, it is true that the IR35 legislation was not
designed to deal with mass-marketed schemes on the present scale. The
contract-by-contract approach of the legislative test makes it very
resource intensive for HMRC to police, so this Bill introduces targeted
action to tackle the wider
problem.
The
legislation defines MSCs and applies income tax on the basis of the
amounts of employment income of MSC workers. In due course, national
insurance contributions will also be charged on that income, although
that cannot happen until the Bill has Royal Assent. It also tackles the
problem of MSCs escaping payment of PAYE
debts.
It
is worth pausing and stressing—in case Committee members have
not been following the matter very closely since the pre-Budget
announcements in December last year—that consultation on the
legislation began last December. Many of the responses at that time
recognised the problem of MSCs and the need for the Government to act
to deal with them. It is clear that it will be a challenge to achieve
what is, I hope, a common goal—protecting the Exchequer from
those who want to bypass the rules for paying income tax and national
insurance, while ensuring that the legislation is focused specifically
at the abuse that it aims to tackle. I hope that the Committee will
accept that, with the constructive input of those involved in the
consultation throughout, we are going to achieve that goal with
schedule 3, and that the amendments proposed by the hon. Lady are
either unnecessary or would undermine the intent or application of the
provisions that we want to
introduce.
I reassure
the Committee that we are doing all that we can to deal with the
legitimate concerns that have been raised with us. No one would dispute
that the consultation has been thorough, that it has involved a wide
range of industry experts and interested parties or that the Government
have listened to the concerns and suggestions. We have made appropriate
amendments, where we think them right. The legislation has been
significantly revised since it was published for consultation in
December.
Since
the publication of the Finance Bill, dialogue, consultation and
discussion with industry has continued. Officials continue to meet the
representatives of accountants, tax advisers, businesses and employment
agencies, among others. The comments of Marcia Roberts, chief executive
officer of the Recruitment and Employment Confederation, help to
underline the consultation process that we have been trying to conduct.
In response to the Budget announcements, she
said:
“The
Treasury is right to tackle abuse within the MSC market...We
welcome the new definition of an MSC, which we have worked closely with
the Treasury on...there were very real concerns that the
legislation would adversely affect the flexibility of the UK labour
market...We are delighted that the Treasury has taken our concerns
on
board.”
5.15
pm
It is precisely
because the Treasury and the Government are keen to consult fully that
the regulations that will flow from the schedule are not provided to
accompany the debate. The draft regulations on the PAYE debt transfer
were published for consultation on 8 February, and the consultation
closed on 30 April. I think that hon. Members will agree that we should
consider the comments fully and in detail before proceeding. As was
explained in the letter of 9 May that the Chief Secretary wrote to you,
Mr. Illsley, your co-Chair, Mr. Gale, and
Opposition Front-Bench spokesmen, copies of which have been made
available to the Committee, we have committed to publish the PAYE and
national insurance regulations next month, which we will lay before the
House when the Bill has Royal
Assent.
Before I turn
to the detail of the amendments, I want to reiterate to the Committee
the significant amounts of tax and national insurance that are at
stake, and the scale of the threat to the public purse. Given the sharp
growth of MSC schemes in recent years, we estimate that the measures in
the schedule and its associated clause could take revenue of
£350 million in this year alone.
Our starting
point, which has formed the core of much of the debate today and in the
Committee of the whole House, is the definition of an MSC. There is,
understandably, much concern that there could be collateral damage to
those who are genuinely in business on their own account, and that
there might be increased burdens on them. There are also concerns that
people to whom the proposed legislation is not intended to apply will
be caught by the measures. I hope that we can remove some of the many
misunderstandings and that I can provide some certainty for members of
the Committee and the businesses that have made representations. I give
the undertaking that further guidance on the legislation will be
produced by HMRC next month, and HMRC will consult informally with
interested parties to ensure that the guidance gives the necessary
clarity that those groups
seek.
The
definition of an MSC in the draft legislation published in December
focused on who controls the company. As was discussed in the Committee
of the whole House, not least by the hon. Member for Falmouth and
Camborne, the subsequent response from MSC providers made it clear that
they were determined to get around the new definition. They rapidly
made MSC workers the directors of new companies to give the impression
that those workers were in control of those companies. Many people who
responded to the consultation pointed that problem out to us, and it
became clear that a tougher, clearer and stronger definition was
needed. The definition in schedule 3 is a response to those calls in
the consultation and to the actions of MSC providers who tried to get
around the definition that we proposed in
December.
Proposed
section 61B(1) sets out the four conditions that must be met for a
company to be defined as an MSC. They are, in summary: that the
business consists wholly or mainly of providing the services of an
individual to others; that payments made to the individual are equal to
the greater part or all of the consideration for the provision of the
services; that the way in which those payments are made would result in
them receiving,
net of tax and national insurance, an amount exceeding that which they
would have received if the payment were employment income; and that an
MSC provider is involved with the company.
Amendments Nos. 38 and 39 seek
to change the third of these conditions. We have deliberately framed
the provisions in a way that is not time specific or time related so
that each payment must be considered as and when it is made. These
amendments seek to apply the criterion on an annual basis, which would
have the effect that consideration of whether a company is or is not an
MSC could only be made on an annual basis at the end of a tax
year.
There is no
justification for these amendments and I hope to explain why they would
be detrimental to the intent of the legislation. The hon. Member for
Chipping Barnet may have adopted this from the intermediaries
legislation, but the approach that we are taking in this Bill is
deliberately different. Under IR35, the terms of engagements are
considered after the end of the year on the basis that many may not be
within IR35. By contrast, the Bill deems all income received by a
worker by means of an MSC to be employment income. As such it is liable
to the deduction of PAYE when received. There is no reason to wait
until after the end of the tax year to make that judgment. If the
amendments were adopted, there is a risk that the flow of PAYE to the
Exchequer could be impeded.
Turning to the fourth of the
conditions in proposed new section 61B(1), it is essential that this
subsection is read carefully and in its entirety. It may be that we
keep coming back to the point that I wish to make now. Proposed new
subsection (1)(d) states that a company is an MSC provider if
“a person who carries on a
business of promoting or facilitating the use of companies to provide
the services of individuals...is involved with the
company.”
The first element that
must be satisfied is that a person is carrying on a business of
promoting or facilitating companies to provide the services of
individuals, not a business to promote or facilitate companies
generally. For that reason, those promoting or facilitating companies
generally—for example, company formation agents—are not
MSC providers. The same would be true of training providers and a
number of companies that may provide
advice.
Some have
asked whether a person who promotes their business and who provides
services to those working through service companies is an MSC provider.
The answer is no. There is a clear distinction between a person who
promotes themselves or their business and someone who is, as a
business, promoting the use of companies to provide the services of
individuals. Even if a person fulfils the criterion of being an MSC
provider, it does not automatically follow that their client companies
are MSCs. That depends on the nature of their relationship with their
client companies—namely, whether they are involved with the
client companies. The word “involved” is separately
defined in the legislation and I will say more about that in a moment
as it was another
concern.
Amendments
Nos. 40 and 41 relate to the fourth condition set out in proposed new
subsection (1)(d). If they became part of the Bill they would undermine
its effectiveness by giving MSC providers the opportunity to sidestep
the definition of an MSC provider while
providing no additional safeguards for those merely providing
accountancy services. Amendment No. 40 would bring into the definition
of MSC provider the condition that the activity was their “sole
or main business”. Our legal advice is that the Courts may well
interpret the term “main business” as more than 50 per
cent.
For those
determined to sidestep the definition—we have seen ample
evidence of that since we published our draft proposals in
December—it is not beyond the bounds of possibility that an MSC
provider would seek to run a dual business of which the provider
element consisted perhaps of only 49 per cent. For the same reason,
therefore, the word “sole” would provide even greater
scope for circumvention. Similarly, substituting “promoting and
facilitating” for “promoting or facilitating”
would enable MSC providers to circumvent the definition of an MSC
provider by splitting the two constituent elements of their business.
The association rule, as some might describe proposed new section
61C(4), which seeks to counter the splitting of a business, would not
be effective in that situation because in order for it to apply there
needs to be an MSC provider before there can be an
associate.
I am afraid
that amendment No. 41 would also undermine the effectiveness of the
legislation. First, it would include in proposed new section 61B(1)(d)
a description of an MSC provider’s relationship with a client
company, which is set out already in proposed new section 61B(2). I
think hon. Members can appreciate that that structural change would
simply confuse those attempting to interpret the legislation and,
potentially, could mislead courts when they come to construe
it.
Secondly, and
perhaps more importantly, we are looking for greater certainty and
clarity, but the amendment would introduce what I am sure most hon.
Members would accept is a rather vague concept of
“most aspects of running the
company”.
Those terms,
allied to the proposed inclusion of the word “regularly”,
again would give MSC providers ample scope to challenge a claim that
they did not fit the criteria or to sidestep them in the first
place.
The hon. Lady
raised a serious concern about tainting, as she put it. I think that
that is what led to amendment No. 42, as she explained to the
Committee. My concern is that the amendment is not necessary or helpful
and could undermine the intent of the legislation. I understand from
what she said that it would ensure that an MSC provider’s other
client companies with which it is involved are disregarded when
determining whether an individual company is an MSC. To a large extent,
the legislation does that already by virtue of proposed new section
61B(1). Specifically, proposed new subsection (1)(d) refers to the MSC
provider being “involved with the company”. That links
directly to the opening words in proposed new section 61B(1), which
reads:
“A
company is a “managed service company”
if—”.
We
are aware, however, that MSC providers seeking to circumvent the
legislation will claim that each relationship with their thousands of
client companies is unique and does not constitute being involved. Let
me try and be clear about how HMRC will approach this. First and
foremost, it will look at the nature of the
product provided by an MSC provider. Where it is clearly a standardised
product constituting the MSC being involved with client companies, it
will take the starting view that all client companies are MSCs. The
onus will then be on the individual companies to demonstrate no
involvement.
If the
amendment were adopted, it would risk undermining the legislation
because in determining whether a person is an MSC provider it is
necessary to look at the nature of their business. Clearly, to do that
it is necessary to look at the services provided by the clients more
widely. There is the risk that an MSC provider would seek to challenge
the assertion that it is carrying on a business of “promoting or
facilitating” by arguing that in determining the nature of its
business, HMRC could not consider the nature of the services offered
widely. Clearly, that could constrain HMRC unduly and could undermine
the effectiveness of the
legislation.
Adam
Afriyie:
Will the Financial Secretary make some
observations about an MSC changing its behaviour by relocating
overseas? Is there a possibility that the tightening up of the
regulations, or the introduction of this legislation, would perhaps
drive some of these businesses to operate
overseas?
5.30
pm
John
Healey:
I suppose, particularly in this day and age, that
many companies of many types may consider the question of their
national base. I see no reason why this Bill should lead to that
response from MSC providers, but clearly there may be MSC providers
that consider such a move as part of their business planning.
I mentioned a few moments ago
the question of the definition of “involved” and that is
an important
point.
John
Healey:
I am happy to move on to my next point, which the
hon. Lady is concerned about, or I will give way if she wants to pick
up on previous points.
Mrs.
Villiers:
Amendment No. 42 is about tainting and the
provision that one should not have regard to the scheme
provider’s relationship with other companies. If the amendment
were adopted, it would not stop HMRC from examining the general
business of the scheme provider, assuming that other amendments were
not accepted. It would still be open to HMRC to examine whether the
scheme provider was in the business of promoting or facilitating the
use of companies. It would be possible to examine the general nature of
the product offered by the scheme provider under proposed section
61B(1)(d), even if my amendment, which would solve the tainting
problem, were to be adopted.
John
Healey:
That is not the view that we
take of the impact of amendment No. 42. As I think that I have
explained to the Committee, the risk is twofold: first, the amendment
would give grounds for the MSC provider to sidestep or challenge the
assertion that it was carrying on the business of promoting or
facilitating; secondly,
in determining the nature of the business, which is clearly one of the
factors that HMRC would have to take into account, the amendment may
prevent HMRC from considering the nature of the services that are
offered more widely, because it may constrain HMRC simply to examining
the specific company.
Turning to the question of
involvement, proposed section 61B(2) sets out five tests of
involvement. If one of these tests is met, the company is an MSC. It is
important to emphasise that this measure needs to be considered only if
there is an MSC provider. For example, a tax adviser providing tax
advice is not an MSC provider and therefore the tests set out in
proposed section 61B(2) are not considered.
The five activities defining
“involved” go beyond the services provided by
accountants. Some have suggested that the word
“influences” in proposed section 61B(2) captures all the
advice given by accountants and advisers, but there is a distinct
difference—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.
I hope that my statement on
this matter—I recognise that it has been a matter of
concern—will help to provide clarity and reassurance to those
who are interested.
Mrs.
Villiers:
The Financial Secretary is
generous in giving way and I appreciate it. However, I draw his
attention to the point that I made in my remarks on proposed section
61B(2)(d), that one “influences” if
one
“influences or
controls the company’s finances or any of its
activities”.
People do
not engage accountants and pay them fees unless they expect them to
influence their company’s finances or its activities. Otherwise,
why have an accountant?
John
Healey:
I thought that I had been quite clear. In the
majority of situations where concerns have been expressed to us, this
measure becomes relevant only if the company is an MSC provider. In
other words, as I tried to explain, it is only if an MSC provider is
established that the provisions and questions around the word
“involved” apply. In the vast majority of examples, that
will not be the case.
Let me turn
to new section 61B(3) and reinforce the fact that a person who merely
provides legal or accountancy services in a professional capacity is
not an MSC provider involved with their client. There is a specific
exclusion—this is the point about which the hon. Lady is
concerned—from subsection (1)(d) for those who provide such
services. Let me try to make this absolutely clear: even when the
specific exclusion does not apply, the purpose of the legislation is
not to include within the definition of MSC provider accountants, tax
advisers, lawyers and
company secretaries who provide advice or other professional services to
companies in general. Those persons 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 in which the legislation envisages.
John
Healey:
Perhaps I could just give this example, as it
might help the hon. Lady. When an individual asks a tax adviser for
help or advice in setting up a business to provide that
individual’s services to end users, the tax adviser considers
the individual’s position and might recommend a corporate
structure that includes the payment of dividends to the individual as a
shareholder worker. The tax adviser is not acting as an MSC
provider.
Mrs.
Villiers:
I am grateful to the Financial Secretary. Let us
take a different example, where an accountant specialises in giving
advice to freelance workers and contractors. Day in, day out,
contractors come to that accountant to get advice on the best way in
which to run their business. The accountant regularly sets up companies
and carries out services in relation to them. Do they not fall within
the scope of paragraph (d), so that there is a danger that they might
be construed as being in the business of promoting or facilitating the
use of companies to provide the services of
individuals?
John
Healey:
Freelancers or agency workers who are
engaged directly by any agency or who are in some way in business on
their own account and run their own affairs, either through a personal
service company or some sort of umbrella company, are simply not
affected by the legislation. Only those freelancers or agency workers
who operate through managed service companies will be affected by the
changes that we propose.
Stewart
Hosie:
On that point—it is my main
concern—when one considers new section 61B, which defines the
meaning of a managed service company, one could easily come to the
conclusion that a normal recruiting company or accounting services
company with a recruitment element would fulfil all the criteria in
subsection (1), whether it was wholly or mainly providing people or
whether payments were made in a certain way or were of a certain size.
It would certainly be promoting the business as if it were an MSC,
particularly in its involvement with companies, as I have described. I
am still not sure that the safeguards will be there for legitimate
recruitment companies. I have not heard anything to tell me that they
will not fall into this category and be punished in a way that I think
is unintentional.
John
Healey:
If the hon. Gentleman will allow me, I shall come
to employment agencies and recruitment companies in a moment.
Amendments
Nos. 43 to 46 appear to intend that the exclusion for the provision of
accountancy and legal services should apply to the tests of involvement
under
proposed section 61B(2) as well as the definition of an MSC provider. It
is the Government’s view that they are not necessary. As I have
said, the tests of involvement are considered only if proposed section
61B(1)(d) applies in its entirety, so only in the case of
“a person who carries on a
business of promoting or facilitating the use of companies to provide
the services of individuals”.
Amendments Nos. 45 and 46
attempt to expand and clarify the scope of the exemption for the
provision of accountancy and legal services in a professional capacity.
The difficulty with amendment No. 45 is that it would undermine the
legislation. Far from providing clarity, the terms that it would add,
such as “services of a nature” and
“including”, would simply render proposed new section
61B(3) of the 2003 Act so ambiguous that many MSC providers would
arguably claim that it exempted them. The reference to company
secretarial services is also unnecessary, since generic services such
as those and company formation do not fulfil the criteria that we have
set out in proposed new section 61B(1)(d), as they are not in the
business of
“promoting
or facilitating the use of companies to provide the services of
individuals”.
Amendment
No. 46 sets out a list of what accounting services might include and
provides for the Treasury further to provide a list of such services by
affirmative resolution. My judgment is that the services listed will
not help to tackle what we are trying to tackle and would not be
necessary. The reason for coming to that conclusion is as follows. To
reiterate, proposed new section 61B(3) explicitly excludes certain
categories of persons providing certain services from the scope of
proposed new section 61B(1)(d). Those providing the type of services
listed in amendmentNo. 46 would already be excluded, either
explicitly, by virtue of proposed new section 61B(3), or because they
are not in the business of an MSC provider as set out in proposed new
section 61B(1)(d).
I
apologise to the Committee for a mistake in the explanatory notes,
which we published on 29 March. The note on clause 25 and schedule 3
contained an error in paragraph 24, which provides the explanation of
proposed new section 61B(3). The error was helpfully pointed out to us
by a lawyer from one of the representative bodies—not by my hon.
Friend the Member for Wolverhampton, South-West, although I am sure
that he would have spotted it and been on his feet anticipating my
remarks if he was in Committee this afternoon. Unfortunately, the
original note misquoted the text, by referring to the
“business of promoting and
facilitating”,
rather
than the
“business of
promoting or
facilitating”.
Clearly
the hon. Member for Chipping Barnet also spotted that. Just to reassure
the Committee, we have amended the explanatory notes on our website,
although we have not published a new printed
version.
Before
turning to some other points, I should like briefly to mention
Government amendment No. 97. I said in the Committee of the whole House
that employment agencies and businesses have an important and
legitimate role to play in the temporary labour market and we would not
want to disrupt that. To ensure that employment agencies are not caught
by the definition of MSC provider, we have provided an exclusion in
proposed
new section 61B(4). However, given the potential for MSC providers
simply to re-badge themselves as employment businesses or agencies, the
exclusion in proposed new section 61B(4) was restricted, to the extent
that employment businesses and agencies do no more than would be
expected from such businesses.
Our amendment No. 97 corrects a
technical flaw in the legislation, which, if left unchanged, would have
resulted in the exclusion being too narrow and therefore bringing
employment businesses back within the scope of the definition, which
was clearly not our intention. Our amendment will allow an employment
business or agency to influence a worker’s company or its
finances to the extent that that relates to the placing of the
individual with an end client. That will mean that such businesses can
carry on their normal activities, as
intended.
I hope that
I have been able to make it clear to the Committee that the measures
have been subject to detailed and constructive consultation.
Underpinning our work has been a clear consensus that action is needed
to tackle the problems identified. The Committee has been indulgent
this afternoon. I hope that what I have said is helpful and will bring
a degree of certainty and clarity about who falls within the scope of
the legislation, which I recognise is important to businesses involved
in the sector.
I hope that I
have also explained why the amendments and arguments put forward by the
Opposition would not improve the certainty of the legislation in most
cases, and in some cases would cause greater confusion and more scope
for circumvention. I hope that the hon. Member for Chipping Barnet will
not press the amendment, but if she does, I shall have to ask my hon.
Friends to oppose
it.
5.45
pm
Mrs.
Villiers:
I remain concerned about the proposals. As I
said from the outset of the debate on schedule 3, the Opposition would
support appropriately targeted attempts to deal with what is a genuine
problem. Regrettably, the Financial Secretary is not prepared to accept
any of our amendments. I am not convinced that what he said about the
restrictive scope of paragraph (d) will be reflected in a court
decision in two or three years’ time, for example.
I do not think that there is
sufficient certainty, as we still have not heard enough of an
explanation of what “promoting and facilitating”
involves. All we have heard is that someone producing a standardised
product for the use of freelancers and contractors is likely to be
caught by the provisions, but people whose services are more tailored
are not. I remain concerned about tainting; I do not believe that the
amendment that I tabled would have the negative consequences that the
Financial Secretary suggested it would. I wish to press amendments Nos.
40 and 41 to a Division. I do not propose to press amendment No. 38. I
beg to ask leave to withdraw the
amendment.
Amendment,
by leave,
withdrawn.
Amendment
proposed: No. 40, in schedule 3, page 90, line 21, leave out from
“person” to “the” in line 22 and
insert:
“whose sole or
main business is the provision and facilitation
of”.—[Mrs. Villiers.]
Question put, That the
amendment be
made:—
The
Committee divided: Ayes 11, Noes
17.
Division
No.
1
]
AYESNOES
Question
accordingly negatived.
Amendment proposed, No.
41, in schedule 3, page 90, line 23, leave out ‘involved with
the company’ and
insert:
“regularly
involved with all or most aspects of running the company on an ongoing
basis”.—[Mrs.
Villiers.]
Question
put, That the amendment be
made:—
The
Committee divided: Ayes 11, Noes
17.
Division
No.
2
]
AYESNOES
Question
accordingly negatived.
Amendment made: No. 97,
in schedule 3, page 90, line 40, leave out from
‘services);’ to end of line 42 and
insert—
‘(5) Subsection (4)
does not apply if the person or an associate of the
person—
(a) does
anything within subsection (2)(c) or (e),
or
(b) does anything within
subsection (2)(d) other than influences the company’s finances
or activitiesby doing anything within subsection
(2)(b).’.—
[John
Healey.]
‘61K
Implementation, investigation and
enforcement
(1) The provisions
of this Chapter may be administered and enforced only by officers of
the Revenue and Customs acting with the authority of the Commissioners
for Her Majesty’s Revenue and
Customs.
(2) A certificate of
the Commissioners for HMRC stating that an officer of Revenue and
Customs has authority to act under this Chapter shall be conclusive
evidence of this
fact.’.
The
Chairman:
With this it will be convenient to discuss the
following amendments: No. 82, in
schedule 3, page 96, line 9, leave
out
‘an officer of
Revenue and Customs
considers’.
No.
50, in
schedule 3, page 96, line 10, after
‘Customs’, insert
‘, acting with the authority of
the Commissioners for Her Majesty’s Revenue and
Customs,’.
No.
51, in
schedule 3, page 96, line 12, at
end insert—
‘(1A) A
certificate of the Commissioners for Her Majesty’s Revenue and
Customs stating that an officer of HMRC has authority to act under the
regulations provided for in subsection (1) shall be conclusive evidence
of this
fact.’.
No.
52, in
schedule 3, page 96, line 16, leave
out ‘encouraged, facilitated’ and insert ‘actively
encouraged or
facilitated’.
Government
amendment No. 98
No.
53, in
schedule 3, page 96, line 20, at
end insert—
‘(2A) No person
shall fall within the scope of subsection (2)(c) above unless they knew
or should have reasonably been expected to know that the services of
the individual were being provided by a managed service
company.’.
No.
54, in
schedule 3, page 96, line 20, at
end insert—
‘(2B) Ordinary
employees of the MSC provider shall not fall within the scope of
subsection (2). For the purposes of this subsection, “ordinary
employees” means employees who are not involved with organising,
managing or directing the overall activities of the MSC
provider.’.
No.
55, in
schedule 3, page 96, line 20, at
end insert—
‘(2C) An
individual whose services are provided by the managed service company
does not fall within subsection (2) unless he knew or should have
reasonably been expected to know that his services were being provided
by a managed service
company.’.
No.
60, in
schedule 3, page 96, line 20, at
end insert—
‘(2D) A person
does not fall within subsection (2)(c) merely by virtue of contracting
with businesses who provide the services of individuals to it and which
may be
MSCs.’.
No.
61, in
schedule 3, page 96, line 20, at
end insert—
‘(2E) A person
does not fall within subsection (2)(c) merely by virtue of carrying on
a business consisting only of placing individuals with persons who wish
to obtain their services (including by contracting with companies which
provide those services); but this subsection does not apply if the
person, or an associate of the person, does anything within any of the
paragraphs (c) to (e) of subsection (2) of section
61B.’.
Government
amendment No. 99
No.
56, in schedule 3, page 96, leave out line
22 and insert
‘services
of a nature provided by advisers in a professional capacity, including
legal, accounting and company secretarial advice.’.
Government amendment No.
100
No. 57, in
schedule 3, page 96, line 22, at
end insert—
‘(3A) For the
purposes of subsection 3, accounting advice includes, but is not
limited to, advice and assistance
concerning:
(a) preparation or
provision of records, returns, financial statements, reports or
financial information concerning
accounting;
(b) auditing,
insolvency or taxation
matters;
(c) communication and
representations made on behalf of a client to third parties in matters
concerning accounting, auditing, insolvency or
taxation.
(3B) The Treasury may
by order provide for a non-exhaustive list of professional services
which fall within the meaning of subsection (3) and (3A)
above.’.
No.
58, in
schedule 3, page 96, line 22, at
end insert—
‘(3C) In
determining the amount sought to be recoveredunder these
provisions from any person, regard must be had to the degree of
involvement by that person in the activities of the MSC, the running of
the MSC or the provision of services of the
individual.’.
(3D) Any
notice given under this section must include details of all those
persons under subsection (2) from whom recovery is being, or has been,
sought.
(3E) The Treasury may
specify by order the sequence in which categories of persons against
whom recovery will be sought under this
section.
(3F) HM Revenue and
Customs may not pursue persons mentioned in subsection (2)(c) under the
provisions of this section unless, in the opinion of an officer of
Revenue and Customs—
(a)
it is impossible to recover the specified amount from persons mentioned
in paragraphs (a) and (b),
or
(b) it is impracticable to
recover the specified amount from those
persons.’.
No.
101, in schedule 3, page 96, leave out
lines 35 and 36.
No.
59, in
schedule 3, page 96, line 37, after
‘subsection’, insert ‘(3B), (3E)
or’.
The amendments in this group
are broadly focused on proposed new section 688A and the third party
debt transfer provisions in schedule 3. There is a concern that they
could be used to target the innocent, ranging from end users of
contractors to employment business and their advisers. The Committee
should be aware that the proposals are powerful. They are more
far-reaching, by some measure, than the rules that rendered company
directors liable for the debts of their company.
In this regard, I should cite
Blake Lapthorn Tarlo Lyons, a firm of solicitors to which I have
referred before. It has said:
“This is a fairly
revolutionary principle...People are now going to be liable for
the tax affairs of their suppliers (i.e contractors) even where those
suppliers are clearly self-employed but just happen to fall within the
new MSC regime...It is clear that ultimately staffing companies
and others who are some way from the day to day affairs of the MSC and
not directly interested (in terms of shareholding or profit share) in
the MSC, may become liable for the MSC’s unpaid tax and
NICs.”
More worrying, it points
out:
“Conceivably
a staffing company which fails to take appropriate steps may find
itself hit by an unprovided for tax bill for as much as 20 to 30 per
cent. of its turn-over”.
Ann Swain, the chief executive
of the Association of Technology Staffing Companies, described the
current situation bluntly,
saying:
“There
is too much risk...It’s
ridiculous.”
She
continued by saying that the
Chancellor
“is cutting
back on the flexibility of the workforce in a huge
way.”
It is not an
answer for Her Majesty’s Revenue and Customs to say that it will
only enforce the provisions responsibly and will not target the
innocent. If the legislation is too widely drafted, it must be
restricted by statute. It would be unconstitutional to leave the
problems identified in relation to proposed newsection 688A to
be resolved at the discretion of HMRC.
As I have told the Committee,
some legitimate consultants and contractors are finding that their work
is drying up because people are so anxious about these provisions that
they are becoming increasingly reluctant to deal with any small service
companies. The Opposition’s amendments in this group therefore
seek to achieve three important goals: to clarify the third-party debt
rules; to prevent their being used against innocent third parties who
are unaware that they are dealing with an MSC; and to provide important
safeguards in the way in which the rules are administered and
enforced.
I should
like to deal with the timing of the introduction of these proposals.
They have proved to be so controversial that their implementation has
been postponed from the start date of 6 April that applies to the rest
of the legislation. The HMRC website states that the debt transfer
provisions come into effect for MSCs and MSC providers from 6 August
and for other third party parties on 6 January 2008. As those dates do
not appear in the Bill, it would be useful if the Financial Secretary
would confirm, as I believe that he did earlier, that those are the
appropriate dates. It would also be useful if he would confirm whether
or not the clock is already running on tax debts that have accumulated
since 6 April? Given what he has said, I do not think that that is
likely to be the case, but I know that some people believe that it
might well be and clarification would be useful. It would be very
unfair if these penal liabilities could be building up now, even though
the legislation has not been finalised.
Even assuming that debts can
build up only from August or January, the timetable is a short
one—it is much shorter than the lengthy run-up to IR35.
Unpopular though that measure was, at least people who were affected by
it were given a chance to understand what it meant and to adapt their
systems to ensure that they were compliant with the new rules that the
Government were introducing.
The liabilities will kick in in
just two months, yet a major part of the relevant rules—the
final draft of the secondary legislation—has not even been
published, although we have the initial draft, which appeared in the
consultation. It is a matter for concern that the Committee does not
have sight of the final draft of the secondary legislation. It would be
inappropriate to
finalise the secondary legislation before considering the consultation
responses, but it would have been useful if the Government had timed
the consultation in such a way that it had closed earlier with
sufficient time not only for the Government to consider the responses,
but to produce the legislation in time for the Committee to consider
it.
Amendment
No. 49 focuses on a point of concern raised with me by the Professional
Contractors Group, and is linked to amendments Nos. 50 and 51. They are
probing amendments to give the Committee the opportunity to discuss the
approach that might be taken by tax inspectors with limited expertise
or experience in this technical and specialist area. They seek to
ensure that the managed service company provisions are enforced and
administered by specialist units at HMRC. I understand that HMRC has
indicated that that will be the case, and I think it is important to
ensure that those involved with enforcement of the provisions have
appropriate training and understanding.
The PCG has made
representations that the enforcement of IR35 has often been problematic
and that cases have often been withdrawn by HMRC after lengthy
wrangling when they were passed from local inspectors to specialist
units. It seems to be under the impression that it is fairly common for
non-specialist local inspectors to make errors in the difficult task of
implementing IR35, and it has justifiable concerns that that might
happen with the new legislation, which, as we have heard from this side
of the House, is difficult to understand. PCG members certainly feel
that local inspectors have not always understood IR35 correctly, and
giving statutory backing to the commitment to use specialist
enforcement in this area could reduce errors, as well doing something
to promote confidence in the new
measure.
Amendment No.
82 relates to the term “HMRC considers”. We will no doubt
come back to the matter, but it essentially raises the same concerns
that many have raised in relation to the term “HMRC
thinks” in other parts of the Bill. New section 688A permits
sums to be recovered under the third party debt provisions when HMRC
considers they should have been deducted by the MSC from payments to
workers.
My concern is
that either the law required the sums to be deducted by the MSC, or it
did not. The mental processes, views and opinions of what “HMRC
considers” should have been done should not be relevant in
determining the amount of tax to be paid. I hope that the Minister will
consider supporting the amendment to delete “HMRC
considers” or at least inform the Committee why the wording in
new section 688A(1) is necessary. How will a determination be made of
what “HMRC considers” to be the case, and how can that be
challenged? Does the Revenue’s opinion have to be based on
reasonable grounds, and are there any circumstances in which the tax
that HMRC considers to be due is not required to be paid under
statute?
Amendment No.
82 reflects serious worries raised by the Institute of Directors, which
states in its briefing on the
Bill:
“We have
a general concern about the underlying attitude, which we see as being
one of ‘trust me, I’m a Government
official’...It is not easy to square such legislative
recognition of
the significance of officials’ opinions with the spirit of the
Bill of Rights of 1689 or of the standard preamble to a Finance Act,
both of which make clear that decisions on who pays what taxes rest
with Parliament rather than with the
Crown.”
I hope that the
Minister will think again about the terms “HMRC
considers” and “HMRC thinks” later in the
Bill.
I
move to amendments Nos. 52 and 53 and Government amendment No. 98,
which address the heart of concerns surrounding the third-party debt
provisions that we are considering. The Opposition amendments seek to
restrict the wide reach of subsection (2)(c) of proposed section 688A,
which imposes liability on any
person
“who (directly or
indirectly) has encouraged, facilitated or otherwise been actively
involved in the provision by the MSC of the services of the
individual”.
Although
the relevant issues here are similar to those that we discussed
regarding proposed section 61B(2)(d), paragraph (c) of subsection (2)
is even
broader.
6
pm
Amendments
Nos. 52 and 53 are designed to answer some of the many concerns that
have been expressed about the wide-ranging scope of paragraph (c), and
should be read alongside amendments Nos. 54, 55,60 and 61,
which would provide clarity about the liability of specific groups.
Those groups are: the ordinary employees of the scheme provider; the
worker in the MSC; the end-client who engages the services of the
worker; and staffing and recruitment companies.
Before I
discuss our amendments in detail, Ishould like to make it
clear that I welcome Government amendment No. 98 to delete the word
“facilitated” from paragraph (c). I am pleased that they
have responded to the concerns that I expressed on Second Reading
andin the Committee of the whole House about the scope of the
third-party debt rules. The Committee has already considered the
problems with the concept of facilitation in relation to proposed
section 61B, and the issues here are similar. Accountants, company
formation agents and even insurance companies might be caught by the
third-party debt rules because their activities can undoubtedly
facilitate the use of companies to provide the services of
individuals.
In amendment
No. 52, I sought to qualify and restrict the scope of the word
“facilitated” by requiring active conduct before
liability could be established under paragraph (c). It is preferable
that the word should be deleted altogether, but that would not solve
the problems with the paragraph. The word “encouragement”
is still retained in the paragraph, and is, as the Law Society has
pointed out, very broad. Its briefing states:
“The focus of the
secondary liability rules should be persons who are involved in the
management of the activities of the MSC and who make money from those
activities. A person who encourages is someone who is on the sidelines
rather than someone who is involved in the
activity.”
Even with the
removal of the word “facilitated”, the Opposition believe
that more needs to be done to introduce an element of culpability
before liability can be established.
Amendment No. 53, which would
insert a new subsection (2A), would remove from the scope of the
third-party debt rules people who did not know or could not reasonably
be expected to know that they were dealing with a managed service
company. The
amendment is designed to remove from risk people who have unwittingly
been involved with an MSC by requiring deliberate conduct or complicity
with the MSC scheme. The Institute of Directors put this point well in
its submission, when it said:
“Subsection (2)(c)
encompasses too wide a range of people. It means that people could have
tax debts passed on to them even without culpability. This is a major
departure from the normal principle that people can only be penalised
when there is some fault on their part. We regard the failure to
include some culpability test as wholly unacceptable, and as reflecting
a desire to design a system to suit the convenience of officials. The
reference to active involvement does not amount to a culpability test,
and no permanent reliance should be placed on any Ministerial or
official expression of intent that it will be interpreted as a
culpability
test.”
The
final point is particularly telling. The word “active”
did not appear in the draft section 688A in the consultation document.
HMRC added the word “actively” to section (c) to turn
“or otherwise been involved” into
“or otherwise been actively
involved”,
and seemed to
think that that sorted out the culpability problems.
HMRC also seems to believe that
it has provided for the element of conscious wrongdoing that was
hitherto missing from the measures. I agree that the insertion of the
word “actively” is useful—indeed, my amendment No.
52 also uses that concept to qualify not only involvement but
encouragement and facilitation—but it is insufficient to inject
the element of culpability that is needed if we are not to catch people
who are innocent and unaware of their connection with an MSC in the net
of the debt transfer rules. That is why proposed new subsection (2A) is
necessary. The Committee should note that it would not protect people
who deliberately shut their eyes to what is going on, or those who,
given the facts that they knew, ought reasonably to have known what was
going on.
Let me
anticipate some of the concerns that I think that the Minister might
express. He might say that importing a knowledge requirement explicitly
into the statute could give rise to evidential problems. In response I
point out the reference in amendmentNo. 53 to:
“should have reasonably been
expected to
know”
To a
large extent that will deal with such evidential concerns. If a person
knew facts that would lead an ordinary person to conclude that they
were dealing with an MSC, that will suffice. I point out also that very
similar wording appears in other contexts in the law, particularly in
section 214 of the Insolvency Act 1986 in relation to directors’
liability for debts of their company. If the courts can cope with that
concept elsewhere, they should be able to cope with it in schedule
3.
My second response to
resistance to the amendment comes from the Treasury’s own
consultation paper, which states
that,
“the scope of the
provision is limited so the legislation is not intended to include
anyone who didn’t know or could not reasonably be expected to
know that they are dealing with an MSC”.
That was repeated by the Financial
Secretary in a letter to me dated 10 May. If that is the
Treasury’s intention, why not make it clear in the statute? If
he will not accept that amendment, it is critical that he clarify in
Committee what led him to believe that proposed new section 688A as it
stands produces the result set out in his letter and the consultation
paper. We need a further explanation of the meaning of the statement in
the consultation paper and of how the principle that it will establish
will operate in
practice.
I
shall turn to amendment No. 54, the first of the amendments on
different groups affected by the third-party debt rules. As drafted,
the ordinary non-director and non-shareholding employees of an MSC
provider could be caught by proposed new section 688A(2) as someone who
has
“encouraged,
facilitated or...been actively involved in the provision by the
MSC of the services of the
individual”.
For example,
a payroll clerk or secretary might well have facilitated or been
actively involved, but it seems pretty harsh to hold those people
liable for significant sums of money. The amendment is focused on
imposing the liability on the controlling minds of the MSC providers,
rather than just its junior staff. It would focus the statute and
liability on staff members who were
actively
“organising,
managing or directing the overall activities of the MSC
provider.”
Amendment
No. 55 raises slightly more difficult issues. It is a probing amendment
designed to highlight issues concerning workers operating through the
MSC and to get a clearer idea of the circumstances in which a worker
might be pursued under proposed new section 688A. The PCG is concerned
about that point. It is clear that workers could fall within the scope
of the third-party debt rules; they do so explicitly under new section
688A(2)(a) if they are a director or office holder. However, even if
they are not, presumably carrying out the work itself would bring them
within the remit of paragraph (c) as actively involved in the provision
of services via the MSC; providing those services must amount to active
involvement.
A concern
needs to be cleared up about whether a worker could end up with the tax
liability for all the other workers in the MSC. That point was raised
with me by the London Society of Chartered Accountants, which is
concerned that the provision would enable HMRC to claim PAYE and then
NICs from a contractor who had worked for an MSC in relation to all the
other co-workers in the MSC. That could lead to significant liabilities
for workers, and the society advocates steps to be taken to amend the
situation.
I think
that the answer the problem might be partly provided in new section
688A(2)(d), where it is required that acts of encouragement and
facilitation focus on the activities of “the individual”,
not “individuals” or “an individual”, so
the liability for a co-worker’s tax debts would come only with
encouragement in relation to the provision of their services. However,
if one contractor gets other contractors into a particular project, the
criteria might be satisfied. So there is a risk, and if the Financial
Secretary can eliminate it today, it would be
useful.
Even if new
paragraph (c) does not mean inevitably that a worker is liable for the
tax debts of other workers in the MSC, might the liability be imposed
if they were an associate of the company under paragraph (a)? The
meaning of “associate” is set out in new section 61I(3)
as
“a person connected
with the company”
and is defined in section 839 of the
Income and Corporation Taxes Act 1988 as someone who has control over
the company. A worker can certainly be said to have control over the
company in a case in which just one worker is entitled to all the
dividends. However, catching the worker on the grounds that he controls
the MSC rather contradicts the Government’s assertions that
workers in MSCs do not control their own companies. That lack of
control and independent operation by the worker is what the Government
say that they want to target and stamp out, so it would be useful if
the Minister could confirm that workers in MSCs are unlikely to be
liable as associates of the company.
Amendment No. 60 is critical.
It concerns the end client—the company that engages the services
of the contractor. The end client should not be at risk as a result of
new section 688A merely by virtue of having hired people who happen to
be operating via MSCs. Amendment No. 60 would make that crystal clear
by inserting a new subsection (2)(d) with a safe harbour for those who
engage the services of contractors. It provides that the end client
will not be liable merely because it hires a contractor who is
operating via an MSC. Without clarification, it might seem that that
conduct is enough to amount to encouragement of the provision of
services via an MSC. What could be clearer encouragement to provide
services via an MSC than paying the MSC to provide the
worker?
The end
client should not have to check details of contract workers’
relationships with their service companies or their professional
advisers. Any requirement to do so would significantly disrupt
outsourcing in this country and would have a damaging impact on the
flexibility of the labour market. There was an extensive debate on that
under IR35, and the Government eventually conceded that end clients
should not be targeted.
I understand that HMRC believes
that inserting the word “actively” in relation to
“or otherwise involved” would remove the threat from
innocent end clients. However, that would provide very uncertain
protection and could be interpreted in a number of different ways by
the courts. Given the large liabilities involved, it is vital that the
issue be cleared up, preferably by an amendment. Certainly, any
clarification that the Minister can give this afternoon will be very
much welcomed by those who are affected.
Amendment No.
61 is designed to clarify the operation of the framework in relation to
staff in recruitment companies. We have heard a number of concerns
expressed about that. The Institute of Chartered Accountants has raised
the point that recruitment agencies could be exposed to liability under
new section 688A. Again, I welcome the Government’s attempt to
tackle the issue through amendments Nos. 99 and 100. It is a matter of
concern that the Bill contains a degree of protection for the
recruitment industry in relation to new section 61B, but that that is
not repeated in relation to new section 688A. The amendment would
address the problem by lifting the wording from proposed new section
61B and inserting it in proposed new section 688A. We have already
discussed the concerns raised by the recruitment sector and it is
critical that those be addressed.
Amendments Nos. 55 and 56 track
the identical amendments tabled in relation to the safe harbour for
professionals. We have already discussed those at
length, so there is no need to look at them again in detail. However, I
would like to raise one point. Can the Minister clarify the difference
between the wording here and that in new subsection 61B(3)? Why does
the Bill refer to services there but to advice in new section 688A?
Advice seems to be a narrower concept than services. Does the Minister
anticipate that the safe harbour in new section 688A would have a
narrower remit than that in new section 61B? If so, what is the
justification for that?
Amendment No. 58 provides for a
number of important safeguards in relation to the operation of the
third party debt provisions, and amendment No. 59 is consequential. As
we have discussed, these are serious and powerful provisions. We
therefore need to ensure that they are operated and enforced in a
responsible and efficient way by HMRC. We are concerned about the
selection of people who could be pursued for the same debt. HMRC might
be tempted to go for the low-hanging fruit—the easiest target.
The amendment suggests a number of new subsections to deal with that
concern.
New
subsection (3C) seeks to make it clear that there is an obligation on
HMRC to take a proportionate approach when using the third party debt
provisions. It should be explicitly acknowledged that not all parties
potentially in the frame under the Bill are equally culpable. It is to
combat the deliberate winding-up of companies to prevent recovery by
HMRC that these provisions have been drafted. This type of deliberate
conduct should be taken into account in making decisions on
enforcement. Those who are unwittingly caught by the legislation should
not necessarily receive the same treatment as these deliberate
evaders.
6.15
pm
New
subsection (3D) provides that if someone is being pursued for a debt
under section 688A, they should know the other parties from whom HMRC
is taking steps to recover the debt. That seems to me a matter of
fairness. If HMRC wish to go for a scattergun approach and pursue
several people, it seems only fair that their targets should be made
aware of the other relevant parties and the sequence in which they are
being pursued.
Turning to
new subsections (3E) and (3F), again I have received representations
from the PCG on the matters covered and the sequence in which parties
will be pursued under section 688A. The informal indications from HMRC
seem to be that the MSC will be approached first, then its directors or
office holders, then the scheme provider and finally others who are
actively involved in the provision of services via an MSC within
paragraph (c). The amendment is designed to draw out the Minister to
make some formal comment on the approach that HMRC will take and the
order it will adopt. Will there be any formal sequence? If so, what
will it
be?
Rule
97B(6) of the draft secondary legislation provides for a restriction
along the lines set out in paragraph (3F). Third parties liable under
paragraph (c) will be pursued only if the debt proves irrecoverable
from the MSC provider or its directors. However, the draft secondary
legislation would override this sensible restriction on HMRC by adding
a get-out clause that the sequence set out can be set aside if the
protection of the Exchequer would be prejudiced. The amendment provides
the
opportunity to hear from the Minister what this restriction would
involve and why he feels it is necessary to include it in the secondary
legislation.
Last
of all I should like to comment on amendment No. 101, which deletes the
Treasury’s power to amend section 668A by secondary legislation.
In a number of amendments I have suggested that the Treasury should
have the power to look at particular aspects of the legislation that we
are discussing, but it is a matter of concern, given the seriousness of
these provisions, that HMT can have the unfettered power to amend
primary legislation using secondary legislation. Given the significant
liabilities and harsh nature of the provisions, I believe that if the
Government wish to amend section 688A, they should bring forward
primary legislation to bring that about.
John
Healey:
This is a large group of amendments. I will
concentrate most of my remarks on those that reflect the greatest
concern and are therefore central to the Committee’s
consideration. I hope that I can offer some further reassurance and
clarity to the Committee and to those with an interest in the Bill
about how it will operate in relation to
MSCs.
I shall deal
first with amendments Nos. 49 to 51, which deal with the
implementation, investigation and enforcement of the provisions. These
amendments seek to require that the measures we set out in schedule 3
should be administered and enforced only by officers of HMRC, acting
with the authority of commissioners for HMRC, and that a certificate
from the commissioners stating that the officer has this authority
wouldbe evidence of that. It is important to understand that
all officers of HMRC in exercising their statutory functions act with
the authority and under the direction of the HMRC commissioners and
that they do so after the appropriate training and in accordance with
the legislation and published guidance. Schedule 3 means that MSCs must
comply with existing PAYE legislation, including the resultant monthly
payments to HMRC and the filing of returns. To require the
administration of the PAYE system for MSCs to be dealt with by
different HMRC officers from those who deal with employers in general
seems an extraordinary proposition, which is rather impractical and
therefore not appropriate.
In terms of
the debt transfer provisions under proposed section 688A, the draft
regulations published for consultation in February make it quite clear
that an MSC debt can arise only by virtue of one of the provisions
within the PAYE legislation. If the amendments were adopted, that would
result in a wholly anomalous situation whereby employer debts that are
established generally would be dealt with by the trained staff in
whichever part of HMRC was most appropriate, but identical functions
related to MSCs would be vested in specially authorised officers who
would fulfil precisely the same role as their non-authorised
colleagues. The Committee should think carefully if it is urged to
consider those amendments.
Let me
reassure the Committee on the transfer of debt. Given that the transfer
notices are expected to be issued infrequently, HMRC intends to vest
such work in a central, specialised team that undertakes work of a
similar nature. I hope that the hon. Lady will recognise and welcome
that confirmation, but I should emphasise
that it is my belief the decision should remain operational and should
be made by HMRC, and should not be specified in legislation.
Let me turn to the core of the
concerns about the transfer of the PAYE debts. We have included the
provision because we have encountered a specific problem with MSCs. We
have found that when a PAYE or national insurance contributions debt is
established, the MSCs frequently escape from making payment by winding
up or ceasing to trade and moving workers into a new company, and
because MSCs are simply a vehicle through which workers’ income
is routed,they often have no assets and so HMRC is unable to
recover the unpaid tax and national insurance contributions.
Proposed new section 688A
contains provisions to enable regulations to transfer PAYE debts to
appropriate third parties when the MSC does not pay. It sets out, of
course, who those third parties are. As respondents to the consultation
confirmed, the provision for the transfer of debts is essential to
ensure that the wider aims of the legislation are achieved. Without it,
those promoting and benefiting from the schemes could carry on without
any financial risk.
As the hon.
Lady recognised, we made changes as a result of the consultation.
However, I am aware that concerns remain about the scope of the
transfer provisions, so the three remaining Government amendments
represent our considered response to dealing with those concerns. To a
large extent, they overtake some of the Opposition’s
amendments.
Government
amendment No. 98 will remove the word “facilitated” from
proposed new section 688A(2)(c) so that only those who have encouraged
or been actively involved in the provision by the MSC of the services
of the individual will fall within its scope. Both tests require the
third party to have an active role, so those who simply use MSC workers
will not be caught. If an end client did more than simply use MSC
labour, for example by telling those who it employed that they must
move to an MSC, it would fall within the scope of the measure as that
would be regarded as encouragement—the hon. Lady asked about
that point. That was the reason why we included the word
“actively”, which I am glad she welcomed. She asked for
clarification of whether the tax clock is ticking from April. I confirm
that debts can be transferred only for PAYE or national insurance
contributions from August or January, depending on which third party is
considered, not from April.
The hon. Lady also voiced her
concern about the notion of the power given to an officer who
“considers” being rather broad. It is not as broad as it
appears; it simply reflects that fact that under existing PAYE
legislation, debts may arise both as a result of an employer failing to
pay a sum declared as due, and on a sum estimated to be due by HMRC.
Proposed new section 688A does not provide for HMRC to create a PAYE
debt, but for regulations to enable the transfer of debts that have
been created by virtue of existing legislation.
Government amendments Nos. 99
and 100 reflect the consideration that we have given to concerns that
employment businesses or agencies might be within the scope of the debt
transfer provision, simply as a result of carrying on their normal
business of placing individuals. We have considered the risk that such
activity might be regarded as “actively involved” under
proposed new section 688A(2)(c), and have decided to remove that risk
by expanding the exclusion, as set out in proposed new section 688A(3),
so that the mere placing of individuals with clients is not within the
scope of the provisions. An employment business will be within that
scope where it is involved beyond such activity, perhaps by advising
workers to use an
MSC.
Mrs.
Villiers:
If a recruitment company holds a list of
approved suppliers and advisers that it makes available to the
contractors with which it works, such as a list of approved suppliers
of corporate structures, would that bring it within the scope of the
third-party debt
rules?
John
Healey:
I cannot be specific about the judgment to which
an HMRC officer might come in those circumstances, but they would
increase the potential for a company to fall within the scope of the
rules. The Government amendments address the Opposition’s intent
and concerns in amendments Nos. 52, 60 and 61.
I turn now to
amendments Nos. 53 and 55, which the hon. Lady stressed. Amendment No.
53 seeks to include as a condition of the transfer of debt to other
parties, or to workers providing their services, the concept that the
person
“knew or should
have reasonably been expected to know that the services...were
being provided by a managed service
company.”
My fear about
the amendment is that it does not deal with the evidential concerns, as
she argued, but may create them. She is right that dealing with those
concerns is the objective of the legislation, but including her wording
would open the door to abuse, as it would inevitably lead to legally
based claims of ignorance as a
defence.
The hon. Lady
was rightly concerned about the position of those she termed
“ordinary employees” of MSCs. Let me make it clear that
we do not intend ordinary employees of MSCs or third parties to be
caught by the debt transfer provision. Defining an ordinary employee
would be difficult, however, and her attempt to do so made that point
for me. Except for MSC directors, providers and associates, the debt
transfer provisions cover only those who have encouraged or been
actively involved with the supply of labour services through MSCs. It
is important to recognise that the transfer of debt regulations include
a specific right of appeal on the grounds that
“the amount specified in the
transfer notice does not have regard to the degree and extent to which
the transferee...has encouraged...or been
involved.”
On those
grounds, the special commissioners may reduce the amount specified in
the transfer notice to a level that, in their opinion, is just and
reasonable.
6.30
pm
Amendment No.
58 is an attempt to pre-empt a provision that is more appropriate for
the regulations. We set out in the draft legislation matters such as
the order in which debts may be transferred, the circumstances in which
they may be transferred and the rights of appeal against such
transfers. In response to the representations made through the
consultation, it is our intention to amend the draft regulations to
provide further safeguards. I can assure the hon. Lady and
members of the Committee that, as part of the process of preparing the
regulations for publication next month, I shall consider carefully the
point that she made this
afternoon.
I
hope that the hon. Lady will accept that the amendment would not
improve certainty. I also hope that she will accept that the Government
amendments take account of concerns that have been raised in
discussions and that they will make the legislation work as intended. I
hope that she will not press any of her amendments to a vote. She
described some as probing amendments, but if she does divide the
Committee on any of her amendments, I will ask my hon. Friends to
oppose
them.
Mrs.
Villiers:
I shall withdraw amendment No. 49, but I would
like to press amendments Nos. 53 and 60 to a vote. I am particularly
concerned that the Financial Secretary has not responded positively on
amendment No. 53. He is concerned about the possibility of legally
based claims and defences based on lack of knowledge. As I said, our
law deals with that kind of situation in other contexts—in
particular, the Insolvency Act 1986—without any problem, as I
understand it.
Nor did
the Financial Secretary explain why he is rejecting an amendment that
uses exactly the same wording as his letter to me. He seems to believe that the
Bill will have a particular impact, yet he is rejecting an amendment to
make it clear in the legislation. Sadly, he failed to explain how the
Bill will create that
result.
I remain
concerned about the provisions, in particular the potential impact on
completely innocent end clients and the possible disruption to
outsourcing in the labour market, so I will be keen to press amendments
Nos. 53 and 60 to a Division. I beg to ask leave to withdraw the
amendment.
Amendment,
by leave,
withdrawn.
Amendment
made: No. 98, in schedule 3, page 96, line 17, leave out
‘facilitated or otherwise’ and insert
‘or’.—[John
Healey.]
Amendment
proposed: No. 53, in schedule 3, page 96, line 20, at end
insert—
‘(2A) No person
shall fall within the scope of subsection (2)(c) above unless they knew
or should have reasonably been expected to know that the services of
the individual were being provided by a managed service
company.’.—[Mrs.
Villiers.]
Question
put, That the amendment be
made:—
The
Committee divided: Ayes 10, Noes
16.
Division
No.
3
]
AYESNOES
Question accordingly
negatived.
Amendment proposed: No.
60, in schedule 3, page 96, line 20, at end
insert—
‘(2D) A person does
not fall within subsection (2)(c) merely by virtue of contracting with
businesses who provide the services of individuals to it and which may
be MSCs.’.—[Mrs.
Villiers.]
Question
put, That the amendment be
made:—
The
Committee divided: Ayes 10, Noes
16.
Division
No.
4
]
AYESNOES
Question
accordingly negatived.
Amendments made: No. 99,
in schedule 3, page 96, line 21, after ‘by’ insert
‘virtue of—
(a)
’.
No.
100, in
schedule 3, page 96, line 22, at
end insert ‘, or
(b) placing the
individual with persons who wish to obtain the services of the
individual (including by contracting with the MSC for the provision of
those services).’.—[John
Healey.]
Schedule
3, as amended, agreed
to.
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