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Lord Goodhart: The noble Lord, Lord Higgins, is quite right. The point I was making is that we are now to have two quite different and quite distinct tests depending on whether or not there is an intermediate company. I shall read one last sentence of the letter,

These difficulties could be greatly reduced, if not eliminated, by accepting Amendment No. 137. This amendment was drafted by the tax faculty of the Institute of Chartered Accountants. It means that the use

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of personal services companies will be ineffective to save NICs where there is disguised employment, and nowhere else. It makes the law much simpler. It applies a test which has long been refined by the existing law. It reduces the power of the Revenue to impose tax by regulations--something which has always been regarded as a highly undesirable power. It hits the intended target and that target alone.

If this amendment is accepted or passed, we shall support Clause 70. Without it, or something like it, we are unable to support Clause 70. I hope that the Government will respond to the pressure coming from well beyond the lobby groups and those who are directly affected.

Lord Campbell of Croy: This clause was added to the Bill at Report stage in another place. It appeared to be an afterthought. That meant that it had little consideration in the other place. There was little time for it. In my opinion it would be more appropriate, or a version of it--because I do not agree with the present wording and intention--in a future Finance Bill.

I must make it clear that any avoidance of national insurance should be investigated and tackled. But this is a clumsy, blanket way of proceeding which would damage many businesses which should not be targets because they are not trying to avoid national insurance or disguise direct employment. It appears that there was no consultation with the sectors of business most concerned before the clause was introduced in the other place. The clause would allow the Inland Revenue to treat self-employed people working on contract as if they were employees of the companies for which they undertake the work. This would be particularly hard in its impact on the information technology industry.

The clause would apparently allow the Inland Revenue to deem any activity to be employment and to tax a company accordingly. The Government have been reported themselves as admitting that about 60,000 small businesses may have to close down. They no doubt announced that on the basis that all those employees would find work elsewhere. However, many will be in the IT sector. The Government have posed as champions and promoters of information technology in Britain to improve efficiency and to excel in competition abroad. Now there is this sudden blow to the IT sector.

I am reminded of the 1960s when I was in another place. The Prime Minister, Mr Harold Wilson, whom I knew well and admired, spoke about the "white heat of the technological revolution." However, about a year and a half later, the government, without any warning, introduced the selective employment tax, SET, which was of course subsequently abolished to general acclamation. Nothing could have been more counter to the spirit of the white heat of the technological revolution.

Now New Labour has given the impression that it understands that the United Kingdom's economic health and success depend upon industry and business thriving--"modernising", to use a favourite word of the Government--and exporting competitively. Over the past 20 years a considerable market has developed for

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the provision of skilled, temporary workers on contract. This is now common practice throughout the engineering industry. The advantages to the client are flexibility and the ability to find engineers with the right skills and experience for the duration of a project--and for no longer than that. This is particularly important in the IT sector where the work often relates to projects lasting between six and 24 months. Under those circumstances it is not practicable or desirable to take on full-time staff.

If it goes through in its present form, I believe that this proposal would have a devastating effect on small firms and an upsetting upheaval for the present framework and organisation of IT consultancies.

Lord McIntosh of Haringey: This has been really a debate on Clause 70 stand part and I must respond to it in that way. The noble Lord, Lord Campbell of Croy, was speaking specifically to a later amendment which we are not at present debating. Apart from that, before I respond to the specific points that have been made, it is necessary for me to set out our position on Clause 70.

Clause 70 provides an enabling power to make regulations which will prevent significant avoidance of national insurance contributions. The Chancellor announced his intention of doing so in the Budget. More than £200 million a year is being lost to the National Insurance Fund because of this avoidance. It would not be fair to other contributors if we were to allow it to continue.

The problem can be explained quite simply. A worker will normally pay a different amount of tax and national insurance contributions depending on whether he or she is an employee or self-employed. But some people who, if this distinction was applied to their circumstances, would count as employees, manage to avoid many of the consequences of employee status by setting up or acquiring an "off-the-shelf" limited company. That means that the engager, the client, who would otherwise be their employer, contracts instead with the company for the supply of their services. That engager then does not have to operate PAYE or pay employer's national insurance contributions.

The worker is then free to decide how to take the money out of his company. He can take it out in the form of dividends, which are not subject to national insurance contributions. Let me give an example of how this actually works. An individual with an income in the year of around £30,000 to £35,000, paid through a service company, might pay company taxes and running costs and expenses such as travel, subsistence and pension contributions of about £7,000; take out just over £3,000 as salary, just enough to qualify for state benefits; take out dividends of £11,000; and distribute £11,000 of dividends to his wife. By doing so, he would achieve a saving of £6,000 in tax and national insurance contributions when compared to the amount of tax and national insurance contributions he would pay if engaged directly as an employee of the client to whom he is selling his services. It is a very big saving.

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In his speech today and at Second Reading, the noble Lord, Lord Goodhart, made it clear that he recognised that there was a problem. He said:

    "I recognise that there is a tax abuse which needs to be stopped. A one-man company, where a shareholder simply hires out his or her own services and takes payment by way of dividend from the company rather than by way of salary is undoubtedly serious tax avoidance. It needs to be blocked".--[Official Report, 10/6/99; col. 1637.]

That is an excellent summary of what we heard from many business representatives.

It is not a new form of avoidance. As far back as 1981, the National Audit Office reported that avoidance and evasion by agency workers operating through service companies was generating a tax loss in the region of £40 million a year. But it is certainly growing. Anyone who looks at the advertisements in the freesheets will see very clear incitements to that sort of tax avoidance. One sees, for example,

    "Calling all Kiwis! Temping in London? Earning more than £4 per hour? Then we can help you MAXIMISE your EARNINGS by working through your own limited company".

That applies also to accountants, secretaries, PAs, doctors, nurses, teachers, IT consultants, and even labourers. They are invited to set up a company for a small quarterly fee of £103 plus VAT.

The issue is older than that. I ran a market research company for 30 years. A market research company employs part-time interviewers to carry out the fieldwork. It is a business that was, and still is, successful. We had 100 to 150 interviewers at any one time. In 1969 a case was brought, Market Investigations Ltd v Minister of Social Security. Market Investigations Limited was a competitor of ours. The judgment ruled that, because of the degree of control exercised by Market Investigations Limited over its interviewers, and because the interviewers could not be said to be performing their services as persons in business on their own account, the interviewers were employed earners. My interviewers were told whom they had to interview, they had to follow an interview schedule, a questionnaire, and if we did not like what they did, we did not pay them. They were definitely controlled.

So, as a result of that case, I set up a system for nearly all of my interviewers whereby we kept a separate payroll for interviewers; we paid national insurance contributions and PAYE. As far as I know, all of my competitors in the market research business did the same. That long pre-dates the attempt, when the noble Lord, Lord Jenkin was Secretary of State, of his officials to persuade him to introduce a control test.

But there was one defect in what happened when I was running that company. A number of my interviewers were already smart. They set up limited companies of their own and I did not pay national insurance contributions for them or deduct PAYE. They were undoubtedly the precursors of the kind of avoidance that we are trying to deal with in this clause.

As a result, I can assure the Committee that I have been familiar with the problem for a very long time indeed. Although I shall answer the particular criticisms that have been made of the clause, fundamentally I am unsympathetic. I am adamant about the need to get rid

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of phoney service companies intervening, as the noble Lord, Lord Goodhart, said, between the worker and the person who should be described as the employer.

Perhaps I may now turn to the points made by the noble Lord, Lord Higgins, and other noble Lords. First, the noble Lord asked why the matter was not raised in Committee in another place. He suggested that we were trying to avoid debate. The announcement was made by the Chancellor of the Exchequer in his Budget, when Committee stage was already halfway through. The provision was introduced on Report in May, two months after the Budget. There was not a great deal of delay, and certainly we did not avoid debate in this House.

The noble Lord then criticised us for not including the provision in the Finance Bill rather than this legislation. The first effect of including it in the Finance Bill would have been no detailed debate in this House. So again, it cannot be claimed that we are avoiding debate. But in any case, the convention that exists as regards Finance Bills is that they are concerned with moneys that go into the Consolidated Fund, and this is money which goes into the National Insurance Fund. Therefore, whether the Inland Revenue is doing it has nothing to do with the case. The convention in Parliament is that this should not be in the Finance Bill. The noble Lord went on to ask about consultation.

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