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Lord McIntosh of Haringey moved Amendments Nos. 158 to 164:

Page 133, line 41, at end insert--
(“( ) Regulations under this section shall be made by the Treasury."")
Page 135, line 9, after (“prescribed") insert (“by regulations made by the Secretary of State")
Page 135, line 11, after (“But") insert (“such")
Page 135, line 17, at end insert (“by such regulations"")
Page 135, line 49, after (“prescribed") insert (“by regulations made by the Secretary of State")
Page 136, line 1, after (“But") insert (“such")
Page 136, line 7, at end insert (“by such regulations"")

On Question, amendments agreed to.

Clause 71 [Earnings of workers supplied by service companies etc.]:

Lord Higgins gave notice of his intention to move Amendment No. 165:

Page 74, line 42, leave out from (“worker")") to (“and") in line 3 on page 75 and insert (“would have been an employed earner of a business carried on by another person to which he provides services (“the client") had he contracted direct with the client,")

The noble Lord said: My Lords, we have here a series of amendments relating to Clause 71. I do not know what noble Lords opposite or on the Liberal Democrat Benches think, but it might be convenient to take all of them which relate to this clause and the clause stand part matter together. If we have a single debate that might meet the convenience of the House.

Lord McIntosh of Haringey: My Lords, we are all happy to do that. I believe that the noble Lord, Lord Goodhart, disagrees with me.

Lord Higgins: My Lords, in that case, somewhat paradoxically, I do not move Amendment No. 165.

[Amendment No.165 not moved.]

Lord McIntosh of Haringey moved Amendment No. 166:

Page 75, line 5, leave out (“a contract between the client and a third party,") and insert (“arrangements involving a third person (and not referable to any contract between the client and the worker),")

The noble Lord said: My Lords, perhaps I may set out my stall. I am proposing to move this amendment and then speak to Amendments Nos. 168 to 180, 182, 183, 186, 188 to 200, 202 and 203. All these are government amendments. Then I shall speak to the Opposition and Liberal Democrat amendments because they all relate to the same issue.

My speaking notes begin to the effect that we have already debated Amendment No. 165. I shall have to start with what would have been that amendment. We last debated this matter at Committee stage on 20th July. A number of clear messages emerged during the debate. I believe that everyone agreed that there was a problem of tax and national insurance contributions avoidance where workers are hired through an intermediary. By using a one-man company and

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paying himself in the form of dividends rather than salary, a worker who would clearly be an employee but for that arrangement can avoid paying national insurance at all on his earnings. He can do so without giving away any secrets of tax avoidance by paying himself out of his one-person company in dividends rather than through a salary on earnings.

I was relieved and reassured to hear from the Front Bench opposite that they acknowledge that the Government have a legitimate right to take steps to remove that avoidance. The noble Lord, Lord Higgins, said:

    “We are entirely in favour of everyone paying their fair share. It would be wrong to suppose for one moment that we are in favour of unjustified tax avoidance".--[Official Report, 20/7/99; col. 912.]

The noble Lord, Lord Goodhart, said on the same day:

    “I do not think that the use of one-person companies for avoidance purposes is acceptable. It is an abuse of the NIC system and should be stopped".--[Official Report, 20/7/99; col. 918.]

Although noble Lords expressed their support for the need to act, a number of them had severe concerns about how the proposals would work in practice. I confirmed that the Government were considering the issues raised in consultation with business representatives, although I made it clear that there could not be any retreat from our intention of introducing legislation to remove that avoidance.

Consultations continued throughout the summer. The Government announced revised proposals in response to the consultations on 23rd September. The Paymaster General said in her announcement that while she was determined that no one should be able to avoid paying their fair share of taxes and national insurance contributions simply because of the way they structure their relationships with their clients, she recognised that any action must not do unnecessary damage to flexible labour markets where intermediaries are currently used. Our revised proposals will tackle the avoidance in a way which is more tightly targeted and does not prevent the use of intermediaries where they provide advantages other than the avoidance of tax and NICs.

There are three main changes to the revised approach. One thing we learned from the consultation was that both clients and workers saw benefits in the use of intermediaries--that is, these one-person companies--to hire skilled staff for short contracts, regardless of the tax and NIC advantages. The original proposals would effectively have given the client a choice between taking the worker onto his payroll for a short period, or running the risk of a PAYE and NIC liability on the contract payment which he had made to the consultant service company.

We were told that that threatened to take away the flexibility. We therefore decided to change the proposals so as to give the clients the option of continuing to hire workers through intermediaries on the basis of gross payment and without the risk or a new tax or NIC liability. The obligation to pay a fair share of tax and NICs will still be there, but it will be an obligation on the intermediary, not on the client.

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One welcome result of that approach is that there will be no need for the Inland Revenue to run a certification scheme. That was originally proposed to allow clients to identify those service companies which could continue to receive gross payments. Many were concerned about the administrative and bureaucratic demands which would result for both workers and clients.

The second major change concerns the method of identifying engagements or contracts which have the characteristics of employment and therefore fall within the scope of the new rules. As the House is aware, our original proposal would have relied on the degree of control that the client had over the worker as to the task and manner in which it was completed to decide whether he should be treated as an employee under the new rules. We thought that this “control test" would provide simplicity and certainty for both clients and workers. That was much criticised during the consultation. Now that we have decided to remove from the client any need to identify the contracts caught by the new rules, we have had the opportunity to look again at the way in which we identify those contracts.

We have decided to accept the arguments made in the consultation process and to retain the existing method of determining the boundary between employment and self-employment for tax and national insurance contributions purposes, as it is used for individuals without service companies. That method is based on the courts' interpretation of the concept of employment, without a detailed statutory definition.

I hope that this change will be welcome. As the noble Lord, Lord Goodhart, said in previous earlier debate, the change has the backing of the Institute of Chartered Accountants and the Tax Law Review Committee. When referring to the replacement of the “control tests" with the normal markers for determining a worker's employment status, he said,

    “If this amendment is accepted or passed, we shall support the Clause".

It has, however, been suggested that the definition of employment which is already used throughout the economy--including, for example, in the market research industry, which I know well--is in some way not appropriate for the information technology and engineering industries. I find that idea extraordinary. In fact, there are many people already working in the IT industry to whom those rules already apply.

Let us consider the case of two people sitting side by side in the computer department of a big company. One is an employee of the company, the other works for his own service company. They might have been there for the same length of time; they are both part of the same team and work under the same team leader, doing the same kind of work. It has been argued that because one worker has chosen to set up a service company, he is somehow an entrepreneur and deserves to pay less tax and NIC, and that because applying the normal rules to distinguish employees from the self-employed would result in taxing both in the same way, there must be something wrong with those rules. I do not think his colleague at the next desk would agree.

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There are freelance workers in all kinds of industries, not just IT: trainers, draftsmen, writers, cameramen--in fact, 90 per cent of the film production business is made up of self-employed people. Unless they have opted out by setting up service companies, the same definition of employment applies to all of them. I see no justification for arguing that it cannot be applied to the IT industry as it has already been for all the others.

The announcement on 23rd September also included clarification of the amounts which could be deducted from an intermediary's receipts from clients to arrive at the amount on which class 1 NICs and, in due course, PAYE tax would be due. These deductions are: first, any expense which would be allowed to an employee in the same circumstances; secondly, any employer's contributions paid by the intermediary to an approved pension scheme on behalf of the worker; thirdly, any class 1 NICs paid by the intermediary in respect of the worker, plus a flat-rate allowance of 5 per cent of the intermediary's receipts from relevant contracts. That deduction is to recognise the general and miscellaneous expenses associated with running a service company.

We believe that the deductions for expenses which we have listed are fair to workers who chose to set up a company to market their skills and those who are employed directly. The effect is to make a choice whether to operate through an intermediary or as a direct employee--a neutral one--in terms of tax and NICs. Therefore, I hope that it will be agreed that the changes which we have announced address the concerns of the House and reflect the genuine nature of the consultation.

I need not say much more about the IT industry. Our support for the UK IT industry is on record. Our IT specialists are world leaders. However, we do not believe that the payment of a fair level of tax and NICs will wipe out the IT industry or that IT workers will leave the UK en masse as a result of those changes. To preserve a tax avoidance device which is used by many who are not in the IT industry, and not used by many who are, would not be a good way to show support for IT.

Our proposal must not stop any worker continuing to supply his skills as he thinks best. It is the decision of an individual whether one is employed directly by a company or sells one's services to a service company. It is a decision for the worker to take. The Government have a duty only to ensure that, whatever decision is made, one should expect to pay a fair level of tax and NICs. If it is argued, as it has been argued by the IT industry, that that puts them at a disadvantage compared to the large and, in particular, the foreign companies which provide consultancy, I can only say that that is based on a misconception. Any company which is other than a one-person service company cannot use the loophole of paying its principal in dividends. That company must pay a payroll and therefore must pay NICs and tax on its earnings from its clients. Therefore, there is a level playing field in that respect.

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I shall now explain--and I shall do so as quickly as I can, but we are dealing with a large group of amendments--how our amendments work. Last week we had the advantage of a seminar in which some noble Lords were able to participate. At the seminar officials from the Inland Revenue were present to explain the amendments. We were able to provide the regulatory impact assessment, which sets out the cost--or a range of costs, because that is the best we can do--to industry of these proposals. We were also able to provide the text of Clauses 71 and 72 as they will be if these amendments are agreed.

Clearly, the revised clause must reflect the change to transfer to the intermediary the liability to pay any NICs due under the new rules. That is achieved by changing references from “client" to “intermediary". There are consequential changes which recognise whether it is payments made or deemed to be made to the worker by the intermediary rather than payments by the client on which NICs must be paid. That introduces the concept of attributable earnings; that is, the total earnings from the client less the four items I have already described.

Subsection (2) allows regulations to define an intermediary for the purposes of this provision. It is the service company which employs the worker or a partnership of which he is a partner. Subsection (3)(b) confirms that the intermediary is the secondary contributor. The new subsections on page 76 line 12 provide more detail of some of the deductions which regulations may allow in calculating attributable earnings. They provide the power to set in regulations a deduction for the general expenses in running a service company. The other main change is the amendment to remove subsection (5) which was the provision that provided for a certification scheme, which is no longer necessary.

I am speaking before any introduction of Opposition or Liberal Democrat amendments. Perhaps it would be for the convenience of the House if I allow noble Lords to do that. I shall then respond to them as appropriate at the end of the debate. I beg to move.

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