Consumer Rights Bill

First Reading

5.42 pm

The Bill was brought from the Commons, read a first time and ordered to be printed.

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Personal Service Companies (Select Committee Report)

Personal Service Companies Committee

Motion to Take Note

5.42 pm

Moved by Baroness Noakes

That this House takes note of the Report of the Personal Service Companies Committee (Session 2013-14, HL Paper 160).

Baroness Noakes (Con): My Lords, I am delighted to have this opportunity to move that this House takes note of the report of the committee on personal service companies.

The committee was part of last year’s experiment of setting up Select Committees for half a Session in order to tackle discrete topics. Our committee was set up in November 2013, and we finalised our report at the end of March 2014. I am delighted that seven other members of the Select Committee have put their names down to speak in this debate. We had an excellent committee, and I place on record my thanks to them for their hard work and for their insightful contributions to our report. I also record my thanks to our committee clerk, Patrick Milner, who coped magnificently with being thrown in at the deep end for his first assignment on joining the staff of your Lordships’ House. He was very ably supported by other committee staff, and I also record my thanks to the committee’s special adviser, Anita Monteith.

The Government produced their response last week. While I thank them for that response, I cannot say quite as much for its contents. I will quote just one outside view of the Government’s response:

“Lots of words, in fact saying very little … Looks to me as though it was written by a PR agency… what they do say is simply the same old trite clichés”.

I would not express it quite like that, but I know what they mean.

The subject of our report is personal service companies, but much of it is about how the modern flexible workforce interacts with the tax and national insurance system. No discussion of that can exist without delving into something called IR35, which is anti-avoidance legislation that first appeared in the Finance Act 2000. It is called IR35 for the very simple reason that the detail of the proposed legislation was first announced in a press release issued by the then Inland Revenue in its press release No. 35, which supported the March 1999 Budget. The name has stuck despite many changes, both before the legislation was first enacted and subsequently.

Of course, that took our committee into the territory of HMRC, which is responsible for administering the tax system, and HM Treasury, which sets policy. We held two evidence sessions with HMRC officials. As will become clear, we were not uncritical of HMRC, but had no issue with its co-operation with us. I wish that the same could be said of HM Treasury. My noble friend Lord Higgins will be picking up on this, but I will just say that the whole committee was

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“disappointed” that the Exchequer Secretary refused to give evidence. To rub salt into the wound, he also refused to allow Treasury officials to do so.

There are no precise estimates of scale of the use of personal service companies, but the general view was that there were around 200,000 and that their use continues to grow. Personal service companies are typically used by contractors or freelancers to offer their services, particularly in IT and in the oil and gas industries. However, they are found in all business sectors and, as I shall come to later, in the public sector. Companies using personal service companies told us in evidence that they generally use freelancers and contractors on things such as projects or time-limited activities, which gives them the opportunity to acquire those services without the encumbrance of employment rights.

On the contractor side, we were told that there were many reasons for individuals to use personal service companies. There is no doubt that the opportunity to pay lower amounts in national insurance and tax is among those reasons, but it is not the only one. The flip-side for those individuals is that they forgo employment rights. However, we received evidence that the individuals concerned did not want to be regarded as employees and had no desire for such rights.

Our tax system developed in an era when freelancers and contractors did not feature greatly. In this country we tax sources of income, and there is a sharp distinction between employment income, trading income and other sources of income. The world of work has many shades of grey in it, but they have to be fitted into our tax system. Successive legislation has taken many of those grey areas, which are not employment in a contractual or general law sense, and treated them as deemed employment. IR35 is part of that theme.

One of the things which surprised us is the extent to which a whole industry has grown up around IR35. That indirectly supports the evidence we received of the burdens of compliance. On that basis, we challenged whether that part of the tax code was cost effective. We received evidence from HMRC about the value of IR35. It told us that it amounted to £550 million, but that only £30 million of that was direct Exchequer yield. The remainder was based on calculations of how much tax would be at risk if the IR35 rules did not exist.

We were not convinced by some of these calculations and recommended that a detailed assessment be published, both of the Exchequer protection claimed for IR35—more than half a billion pounds—and of the costs of taxpayer compliance. The material provided in the Government's response provides hardly any more information than was given to the committee in evidence, and I remain sceptical about those figures. I do, however, welcome the commitment from the Government to give an updated administrative impact assessment this autumn, and I hope that HMRC will be open to proper debate on both the costs and benefits of IR35.

We also queried the resources allocated by HMRC to IR35 compliance, which appeared to us to be disproportionately small compared with the size of the personal service company population, and we

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asked for greater clarity on the costs and related yield. The Government's response does not really answer our points and certainly gives no comfort that HMRC has a firm grip. If I were in the Treasury, I would be distinctly concerned about the approach of HMRC, which can be summarised as, “We are doing a bit more than we used to but we don’t know how much we are spending on it or what we get for it”. We were, however, pleased to see that HMRC will look again at the confusing questions about service companies on the annual tax returns.

The Office of Tax Simplification had looked at IR35 in 2011. It recommended suspending IR35, but also offered an alternative of improving the administration of IR35, and that is what the Government chose to adopt. We spent some time looking at the various components of that—namely, an IR35 forum, some business entity tests, and a contract review service. We were not at all sure that any of these was working in an optimal way and there was particular criticism of the business entity tests which were supposed to help guide taxpayers in complying with the legislation but it was not clear that they did.

The Government’s response to our recommendations merely references an existing review by the IR35 forum. I shall take that review on trust, but I express personal reservations about whether anything much will change.

The freelancers and contractors I have been talking about are generally well paid, which is why there are attractions in corporate structures which offer opportunities to minimise tax and national insurance. The committee also turned its attention to the issues of the lower paid, who are also well represented in the flexible workforce of today, often through agencies. We heard that many lower-paid workers were in the past employed through managed service companies, whose advantages have already been neutralised by anti-avoidance legislation. Umbrella companies are now used instead to employ lower-paid workers who are undertaking temporary work. We heard that there was a very real problem of those workers not understanding the effect of those arrangements and what their rights and obligations were.

We had two basic recommendations. First, the Government should publish a short guide about the basic differences between employment and self-employment, and make that available on multiple platforms. The Government’s response simply stated that HMRC already had something online. The committee emphasised the proactive use of multiple platforms, including paper, for good reason—we were far from sure that the individuals who needed help would in fact be reached by a digital resource and nothing else.

Our second recommendation was that the Low Pay Commission should be asked to look at the use of intermediary companies for the low paid. The Government did not state whether they would do this. I hope that the Minister will clarify that today.

In addition, we heard in evidence that umbrella companies abuse expenses dispensations from HMRC, so we recommended that HMRC took more enforcement action and also ensured that dispensations were granted only where appropriate. I am encouraged to hear from the Government that the Office of Tax Simplification

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is to look at dispensations, but turning them into exemptions will not do away with the need for effective compliance, and the Government’s response here lacked real conviction.

Lastly, we looked at the use of personal service companies in the public sector. This is not new territory and there have been some causes celebres which had led to a Treasury review and to Cabinet Office guidelines which apply where there are appointments involving salaries of more than £58,200 per annum. We noted that large areas of the public sector—namely, much of the NHS and local government—were outside the scope of this review, as were all those on earnings levels lower than £58,200. We recommended that the Government look at these areas.

We also found that there was inconsistent application of the Cabinet Office guidelines and recommended that the Treasury should take the lead in ensuring compliance and in monitoring guidance.

I cannot pretend that the Government's response to any of our recommendations was encouraging. I do not think that the Treasury has shown any interest in finding out the full extent of the use of intermediaries or indeed in compliance with the Government’s own rules.

I hope that our report has shone a light on a difficult and complex area. The issues that arose during the course of our work have not been resolved by the Government’s reply, so this whole area of personal service companies must be regarded as unfinished business. I urge the Government to look again at their approach both to the higher-paid population and to the lower-paid population. I firmly recommend that the Government get their own public sector house in order.

5.56 pm

Lord Myners (Non-Afl): My Lords, I speak as a member of the Personal Service Companies Select Committee. It was a privilege to sit on the committee, not least because of the excellent leadership provided to the committee by the noble Baroness, Lady Noakes. The noble Baroness’s efficiency is already apparent in her summary today, which has left very little that is new for the rest of us to contribute. I therefore seek simply to underline one or two points made by her.

The work of the committee spoke powerfully of the contribution that your Lordships’ House can make in applying closer scrutiny to a complex and difficult area that is subject to the pressures of social and economic change, the way in which employers seek to employ and the ways in which those who seek employment offer themselves to the labour market.

There has been a substantial growth in the use of personal service companies and umbrella companies for employment. The committee, I believe, has done a first-class job in analysing areas where it was quite clear that from a public policy perspective neither HMT nor HMRC had a clear policy objective. There seemed to be a lack of consistency in the answers that we were given, masked behind a degree of contentment that was ill judged and hardly appropriate in the circumstances as they were revealed by the committee.

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The noble Baroness, Lady Noakes, said that she was disappointed that the Exchequer Secretary to the Treasury declined to be interviewed by the committee. I would go further than that. When I served as a Minister in the Treasury, I regarded it as absolutely beyond question that if I were invited to account to Parliament, I should do so. The reasons given by the Exchequer Secretary, Mr Gauke, for not doing so were, quite frankly, not acceptable. The issues that we are looking at were not ones of HMRC implementation; they were a much broader policy issue.

There are prima facie reasons to believe that there is substantial tax leakage at the upper end through personal service companies, while at the lower end of payment there may well be social harm as a result of people forgoing, unknowingly or under duress, some of their employment rights. It was quite frankly unacceptable for the Treasury Minister not to accept either of the invitations from the committee to give evidence—and, moreover, to say that his officials should not give evidence.

Perhaps in that context it is not altogether surprising that we have had a very flimsy response from the Treasury to the work of the Select Committee, one that quite frankly shows a disservice to the hard work that was put in by the members of the committee, our advisers and the clerks. I sincerely hope that when the Minister sums up at the end of this debate, he will be able to give us more substance in his reply than we have received from the Government to date.

It is quite clear to us that IR35 causes many problems. I want to say that it is not working, but it is not entirely clear what it is designed to do. The HMRC officials who gave evidence to us seemed far from clear about how it worked in practice, or were unable to substantiate the figures that they gave us, and they seemed excessively reliant on the IR35 Forum, which seems to be somewhat unbalanced in its constitution, comprising as it does many people who have an interest in the economic activity known as IR35.

I hope that the Minister will go back to the Treasury and say, “We should not be as dismissive as we have been about this report”. Some fundamental and important questions are raised in it about the operation of an area of the labour market that is increasing in its substance and significance. Yet the message that we have from the Treasury is that it really does not want to take this matter seriously at all. I, for one, find it very difficult to understand why the Treasury has adopted that position, so I urge the noble Lord, Lord Newby, to convey to his colleagues in the Treasury that this is a report of substance that raises a number of important questions that deserve close attention from government.

Finally, as a former chairman of the Low Pay Commission, I would like to emphasise the important role that it could play in reviewing the operation of personal service companies and umbrella companies in the employment of the lower paid. There is, again, very strong reason to believe that people are pressurised into accepting employment through one of these arrangements without fully knowing or understanding the implication of their loss of employment rights. Those rights constitute part of a package of reward

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for work, which is not limited to the hourly rate, although that may be the most important element. Therefore, it falls entirely legitimately within the framework of the Low Pay Commission’s role and within the competence of that commission and its officials.

I very much hope that the Minister in his summing up will give noble Lords a clearer message on whether the Government are going to put this matter in the hands of the Low Pay Commission or whether we have to conclude, regretfully, that HMT just cannot be bothered to get to grips with this issue, regardless of the cost in lost tax revenue or the potential damage to employment rights of the low paid.

6.04 pm

Lord Palmer of Childs Hill (LD): My Lords, I, too, was a member of the committee and I thank my noble friend Lady Noakes for her incredibly able chairmanship of it. We received a very complex set of reports, which were often conflicting and incomplete. I shall not repeat her comments on the Government’s response, which did not really address many of the problems that were raised.

My noble friend Lady Noakes dealt in great detail with the report and the response from the Treasury. Perhaps I may take a more generalised look at this issue. I came to the Select Committee with the experience of 28 years as a local government councillor. With some relief, I stepped down this May. I also have a lifetime behind me as a practising chartered accountant, so IR35s and the whole concept of tax reduction were not new to me. My view before the hearings was that personal service companies were essentially a means of reducing income tax and national insurance. That was my view when I went into the committee. People who were self-employed were able to claim greater expenses against their income and thus reduce their tax. There was a difference in tax law for those who were employed. Any expenses claimed had to be wholly, exclusively and necessarily in the course of one’s employment. If you were self-employed, any expenses claimed had to be only wholly and exclusively; the “necessarily” did not come in and you could claim more expenses, thus reducing your tax.

Being a personal service company is cost effective for what I will for simplicity call the employer—although it is not the employer—paying via such a company. The so-called employer does not have to pay holiday pay, redundancy pay, sick pay or employer’s national insurance, as well as a number of other things. So you might say that it is pretty useful. The employee is able to reduce his tax and national insurance liabilities by using a personal service company. It is good for the employee and employer, if I may call them that, but not so good for tax-gathering, because it essentially reduces the taxes that the state receives.

I was particularly worried by the move to use personal service companies in local government, the BBC, health authorities and the like. There is an acceptable use, as mentioned by my noble friend Lady Noakes, such as in employing IT contractors for a specific task—a contractor who may well have many other clients, be on a short-term contract, and so on. But a test of being self-employed in the old days, when

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I practised as a chartered accountant, was that you had recurring fees, not necessarily from one but from at least two clients. You could very well be treated as being an employee by the Inland Revenue if you had only one payer of your fees. But is it really acceptable to have people in designated positions of chief executive, director, assistant director or head of a department who are not employees under PAYE? To my mind, this is the big fault of what we have ended up with through personal service companies. However, in the private sector, it has always been sound business practice to trade through a company to take advantage of limited liability. This could apply whether you were the local grocer, running an IT company or whatever. After six months of hearing very complex and often conflicting evidence, I saw the problem as being that a whole industry has been built up on how to trade as a personal service company and avoid the pitfalls of IR35.

It appears that very few personal service companies are investigated by HMRC for non-completion of the IR35. It was shattering to hear what a small number it is. If there is any benefit it is purely that of deterrence. This was addressed by my noble friend Lady Noakes’s comment about the larger sum which the Inland Revenue theoretically maintains has been saved. I reckon that personal service companies simply chance their arm that they will not be caught by the IR35 legislation and do not actually bother too much with it. I will not repeat the comments made by the noble Lord, Lord Myners, and my noble friend Lady Noakes about the Treasury Minister or civil servants not coming to give evidence. I agree entirely with what they said.

After six months on the committee, having gone into the committee with a completely different preconceived view, I came to the conclusion that the report and government response should be noted, which is what we are asked to do, but I am not happy with it. To my mind, having thought about it even after the end of the committee proceedings, I believe that one of the fault-lines is that public bodies should not pay senior employees through personal service companies, or, indeed, umbrella companies. By some form of government directive, enforced by the payment of grant allocation, these bodies should be forced to employ people as proper employees under PAYE. If these are government-style bodies, however one looks at them, then the Government have control in terms of the money that those government bodies receive, and one of the requirements should be that they do not try to circumvent the PAYE system, which most people in this country are caught by.

Other than that—this is my final, rather bold statement—we should abolish IR35s and let all the accountants, lawyers, contractors, organisations and politicians go and get a life, without IR35s. There will be, in my view, no real, noticeable loss to the Exchequer and if there is no noticeable loss to the Exchequer, can other noble Lords and the Minister please tell me why we have entered in this farrago of IR35s? It is a deterrent to do something which is not really deterring. If there were no IR35s, the Exchequer would not lose more than the very modest sums that my noble friend Lady Noakes mentioned. The idea of IR35s is almost a jealousy that some part of our community—our

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business community—is getting a better deal than anybody else. That may well be the case, but it is not a case to my mind, having come at this from completely the other angle as a practising chartered accountant. There is no benefit in the IR35 and when HMRC and Treasury Ministers deign to come back to your Lordships’ House on this matter, I hope that they will take that point into account.

6.13 pm

Lord Hope of Craighead (CB): My Lords, it is a real pleasure to follow the noble Lord, Lord Palmer of Childs Hill, who did so much to enliven our discussions during the six months that he referred to. I very much welcome the opportunity to debate the report of this committee. It was a privilege for me, as a complete beginner who had never heard of personal service companies, or indeed an IR35 before, to sit on the committee and take part in its deliberations. I pay tribute to the skilled leadership of our chairman, the noble Baroness, Lady Noakes, and of course, as she did, to the clerks who supported us, Patrick Milner and Matthew Smith, and our specialist adviser, all of whom played an important part behind the scenes in guiding us through a very complicated situation. I found it an interesting exercise but at times a rather frustrating one, for reasons that have been hinted at already. It was not easy to get hold of the facts; indeed, the facts, when there were any, did not seem very firm or reliable. Some employer groups and, notably, the Treasury were reluctant to give us any firm information at all. That was highly regrettable.

As I understand it, the complex, perhaps outdated, nature of our system of income tax and national insurance contributions lies at the heart of the problem. On one hand there are those skilled, hard-working and well informed people who prefer to trade through the medium of a personal service company, rather than as individuals, for perfectly legitimate tax reasons, because that is the nature of the work they do and because the markets in which they deal prefer to employ companies rather than individuals. It is good for business, it is good for their business, and I see it as a sign of a vibrant and healthy economy. On the other hand, there is real cause for concern, because there are people on very low rates of pay, often with a very poor command of English, who are being forced into a system they simply do not understand. The problem is to identify the steps that can and should be taken to protect the disadvantaged without impeding or, at worst, penalising those who are making proper use of the facility. Across the board, there is the risk of exploitation of the system simply to avoid tax and insurance contributions that ought properly to have been gathered in by the Revenue.

As the noble Baroness said in her introduction, we are considering the effect of an anti-avoidance measure. The main purpose of IR35, as I now understand it, is to deter people from disguising employment income through the use of intermediary arrangements. A personal service company can, indeed, be used for that purpose, but as our evidence showed, in many cases that is not why the arrangement is being used at all. One has only to consult Google—a rather shocking exercise in this

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field—to see what a huge industry now offers advice, perhaps some of it very proper advice, perhaps some of it not so proper, on how the system can be made use of. Just as the number of people who are becoming self-employed is growing, as we hear daily, so, too, is the use of the personal service company.

I now realise, having been educated by the evidence, that I have come across such a person myself. He maintains the generator which provides electricity for my cottage in Scotland. It is situated in the hills of east Perthshire, north of Dundee, not far from Glen Clova, from which the noble and learned Lord, Lord Davidson, derives his title. It has no mains electricity, so if we want water, light or heat we must have a generator, and it is quite a big one which I cannot possibly look after myself. He is employed by me to look after it. He told me that he was once employed by a generator servicing company, but left to set up in business on his own. He works as a sole trader, providing his services right through Scotland, from the islands in the north to various places in the south and possibly even to Northumberland. He provides me with bills which, to my initial surprise, show that he trades as a company. I suspect that he finds that a useful protection, because these machines are complicated and he is able to limit his liability and not expose his personal assets should something go wrong. No doubt there are other benefits, too, but I would not dream of telling him what to do. His is a classic case of a personal service company being properly used. It is clear from the evidence that there are many others who adopt the same mechanism. I am glad to see in the response, in paragraph 2.16, that the tax system from which these people benefit is recognised by the Government, who recognise the risks that these people take in carrying on business in this way for themselves. It is a proper recognition of the proper use of the facility.

There is, however, a real problem in sorting out those who are in that category and those who are not; it lies at the centre of the inquiry. I have to say that it is not a new problem. It is one that tort lawyers have been grappling with for decades. The position is that it is crucial to a claim for damages for personal injury, if one claims against somebody one thinks of as an employer, to prove that the individual within the organisation whose act caused an accident was indeed an employee. There are various tests used to sort out who is and who is not in that category. Was the individual truly an employee or was he an independent contractor? Was his contract with the company one of service or was it a contract to provide services? If the latter is the case, the respondent is not liable.

The position lawyers adopt is that this will always be a question of fact and each case is different. I suspect that much the same problem confronts the Revenue when it is trying to police this huge and growing industry. As the response says in paragraph 2.11,

“differing engagements can result in differing tax consequences”.

We were urged to recommend that there should be a more precise definition, but I rather think that it is not possible to go much further than the Revenue has already gone subject to the following point, which I think has already been made, that better guidance could be given in language that is easy to understand

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so that people who are getting trapped in a situation really understand the difference between employment and self-employment and the exposure to the loss of the benefits that go with employment, which we have built up over so many years.

When one crosses the margin and moves into this grey area, the question arises of whether the Revenue is doing enough to help those who are genuinely not trying to use the intermediary to avoid tax. As the noble Baroness pointed out, the Government have responded positively to our question about the information given on the tax return and the guidance notes that accompany it. That positive response in paragraphs 2.24 and 2.28 is very much to be welcomed. That is the voluntary side of the coin, where people are prepared to come forward and provide the information, if they are told what to do. On the other side are those who are seeking to avoid their liabilities. I must confess that I was less impressed by the response to the question of whether sufficient resources are being allocated to policing non-compliance. The evidence that we heard was not convincing, as we said in our report. The response says a little more about this in paragraphs 2.32 to 2.37. The message seems to be that HMRC will continue to keep the situation under review. What we were looking for was a fresh, renewed effort, not just more of the same thing.

A commentator on our inquiry asked whether it would achieve anything. It is true that in paragraph 2.35 it is said that HMRC revised its approach in 2012. However, the point we were trying to put across is that even this is not good enough. The response to our concern about the contract review service, as to which the evidence told us there was a lack of confidence in its independence from HMRC, is also rather muted. It is not clear from the response that the problem of assuring users of its independence and impartiality has been fully appreciated. Solving that problem is crucial if the success of that service is to be achieved.

As the noble Baroness pointed out, we decided to dedicate a separate chapter of our report to the lower-paid and to the real concern we had that people in this category were being dragged into a system that they did not understand and whose consequences they did not appreciate until it was too late. This is evasion by those responsible for bringing them into the system not just of tax but of the whole structure of the employment law that we have built up for their protection. To some extent, the response is encouraging but one wonders whether reliance on the helpline mentioned in paragraph 2.58 is doing enough to address the problem. More attention needs to be given to publicising its existence, to the language problem and, indeed, to helping people who cannot afford the systems that give access to advice online in this way. It would surely be helpful if the Minister could assure the House that the Government support the committee’s recommendation that the Low Pay Commission, to which the noble Lord, Lord Myners, referred, should examine this whole issue. We set out our recommendation in some detail but paragraph 2.68 of the response does not make it clear that the Treasury has fully grasped the point.

Finally, as to whether this short inquiry in which we were engaged has achieved anything, I think it has

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served a useful purpose. We have drawn attention to the benefits and, even more, to the abuses and the deficiencies. It is now for the Government to support the benefits, as the response indicates that they intend to do, while at the same time curing the abuses and meeting the challenge of avoidance, as to which the response could have been more positive in endorsing our recommendations.

6.25 pm

Lord Higgins (Con): My Lords, I join those who expressed appreciation for the chairman of our committee, my noble friend Lady Noakes, who was an outstanding chairman and succeeded in producing a report in a very short timescale. That report deals with an extremely complex and difficult subject, as the committee discovered from its inquiry, but my noble friend put forward the problems very clearly in her speech this afternoon.

The response—indeed, the whole process—has been remarkably fast. As my noble friend pointed out, the committee was set up in November. We are only in June but we have already taken evidence, produced our report, received a reply and now had a debate. That is probably a record for any Select Committee report. However, as was made clear by previous speakers, the problem is that the Government’s response is very inadequate indeed and does not solve the problems to which we drew attention.

We are concerned about the Government’s attitude to this matter, as was said in previous speeches. I regret having to draw the following comments to the attention of the House and, I hope, to the Liaison Committee, which is ultimately responsible for these matters. Our report states:

“We were surprised by the lack of co-operation from the Government. The Exchequer Secretary to the Treasury, who has responsibility for tax matters within Her Majesty’s Treasury (HMT), refused to attend an oral evidence session citing that our enquiry was concerned with HMRC’s application of the legislation. He also refused to allow Treasury officials to appear on the same grounds”.

That is a quite absurd explanation of why he did not attend. We could not conceivably have looked into the way in which the tax collection system operated without also considering the legislation. Although the first of those matters is the responsibility of HMRC, the second is clearly the responsibility of the Treasury.

We investigated and raised a number of Treasury issues with other witnesses but were unable to get a reply from the Treasury itself until this evening. I hope that my noble friend Lord Newby will be able to give us a better explanation of why the Treasury was so unco-operative in this matter, because it is of concern to the House. Having been chairman of the Liaison Committee in the other place, I am more familiar with the problems that one has in getting witnesses there and am less clear what the situation is in this House. However, this example raises serious questions about the way in which the Government respond to Select Committees. Like the noble Lord, Lord Myners, I would have found it inconceivable not to respond to a request to appear in front of a committee, and even more inconceivable to refuse to allow Treasury officials to do so. This is a very unsatisfactory situation.

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There is no doubt at all that the IR35 issue, which we looked into in considerable depth, is extremely unpopular. Indeed, as has been pointed out, a whole industry has grown up to deal with the problems that it presents for those who are subject to it. While it is clear that people may incorporate a company for good reasons of limited liability and so on, there are also serious tax and national insurance implications. The Office of Tax Simplification suggested that perhaps IR35 should be abolished or at least put on hold. Contrary to what my noble friend on the Liberal Benches said, the committee did not take the view that it should be abolished and went along with the view that it should continue, but clearly a great deal has to be done to improve the present situation.

The Revenue is concerned that if it were abolished there would be mass migration from PAYE to personal service companies, and estimates a loss of revenue of £550 million. As my noble friend Lady Noakes pointed out, however, we have serious doubts about how valid that estimate is. While the Revenue has produced a slightly more sophisticated version in response to our report, it does not add anything significant to the earlier assurances that we were given on this subject.

The other matter that has been pointed out is that it seems clear that the Revenue is not pursuing individual IR35 cases with enormous enthusiasm. One of the other issues discussed was whether the merger of national insurance and income tax should take place. The response suggests, “We might do that eventually but not now”. I realise the complexities of such an operation; we should not hold our breath and suppose that that is suddenly going to take place.

More important is that implementation of the legislation by the Revenue has not been at all satisfactory. I was astonished to find that we have a self-assessment declaration form with a specific question on personal service companies that, it turns out, many people do not answer at all. Nothing seems to have happened as a result. We raised this question and received a response from the Government; it would seem that they are going to try to tighten this up. However, it is their attitude to the non-completion of the questionnaire that gives cause for concern.

The use of personal service companies is very widespread and produces, for those who operate them, considerable benefit to the economy of the country. That is not in dispute but there are, none the less, a number of issues here. Particular concern was expressed about the use of personal service companies in the BBC, for example, and in the public sector in particular. This needs to be dealt with seriously, and while the Government have taken some action, the committee was not satisfied that this problem had been solved—still less in parts of the public sector in which it appears that no action at all has been taken, even though it is the Government’s policy that personal service companies should not be used to mitigate tax and national insurance charges in the public sector. Something more needs to be done about that.

The area that perhaps gave us most cause for concern was the following: it is clear that many personal service companies are set up not at the instigation of the individuals concerned but at the instigation of their

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clients. This is particularly so for those on low pay, and it seemed to us that there was most appalling ignorance among those people about what they might be losing as a result of their use of personal service companies. Again, this issue is important. The Government’s response on it was somewhat better in terms of the Low Pay Unit and so on. However, again the matter brings out a real difficulty.

I believe that our report has been useful. It has been produced at very considerable speed and raises some difficult issues. In effect, we have turned over a stone and what is underneath is fairly unpleasant. The question that arises is this: we need some sort of comeback. It is fine having a debate; the Minister will reply and so on. If we are going to set up these ad hoc, high-speed committees, and they produce reports that result in unsatisfactory responses, the case for reconstituting the committee—which is familiar with the issues in the first place—in order for it to look at what has happened as a result of its recommendations, is worth while. I hope that the Liaison Committee will consider whether some form of post-report scrutiny can be carried out by the original body.

6.37 pm

Baroness Morgan of Huyton (Lab): My Lords, I, too, served as a member of this committee, and I confess that this was not an area about which I knew a great deal at the start. So I, too, pay tribute to the able chairmanship of the noble Baroness, Lady Noakes, who focused our attention for a short and concentrated period on the key issues and allowed us to understand the serious concerns that noble Lords have heard about and, I hope, to produce some practical recommendations. As other members of the committee have said, these recommendations have, sadly, not been taken seriously so far by the Government. I hope that we will hear more this evening. I also pay tribute to the team who worked with us.

It became clear during the course of our work that there has been a massive explosion in the number of personal service companies over the past 10 years or so, although there is no definitive number of them or an explanation of why this has happened. There is a somewhat fuzzy definition, because the personal service company is not defined in law: rather, its definition is understood and some of what we were trying to pin down was elusive.

There is a whole new industry, a sort of job creation in action, around servicing IR35 and personal service companies. There are companies and advisers on the details of tax: they produce publications, they do marketing, they run member bodies and campaign bodies seeking reform, and so on. There has been an absolute explosion. Beyond the fact that that presumably provides some jobs to some people, it only underlined our concern about the confusion in this area of taxation.

It was disappointing—in fact, incomprehensible—that evidence from HMRC was inconsistent and that HMT refused even to contribute at either ministerial or official level. Their explanations were unconvincing at best, and I hope that we hear a better reason from the Minister about the failure to appear and contribute. There appeared to be a general lack of rigour and focus by HMRC on the functioning and validity of

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personal service companies or on the overall functioning of IR35. There seemed to be insufficient resources focusing on compliance, and a lack of clarity about whether HMRC was really trying to enforce compliance or whether it was just trying to do a bit of deterrent work around the edges.

In fact, during the investigation we found a decreasing number of compliance investigations, which we felt sent a signal in itself. Bizarrely, as we have heard, HMRC asked questions, for example on the personal tax return SA100, that are not compulsory. We have been told that there is going to be a review of this in the Government’s response. I hope tonight that we feel it will be a worthwhile review that leads to change rather than just a review. Probably many of us have been part of reviews of that sort in the past.

It is clear that in some industries—we had strong evidence from the oil and gas industry in particular—the use of personal service companies is really extensive and is considered useful and understandable. Contracts in those areas were time-limited and specialist. It served those industries well to encourage the use of personal service companies. In other industries and sectors it is fair to say that it was less clear. We struggled to persuade some businesses to give evidence at all, particularly in the financial services and banking sectors, where I think it is fair to say that people wished to stay somewhat in the shadows and not appear before us. We received a lot of generic evidence, for example from the CBI and the LGA, but when we pursued details they immediately told us that they could not represent those details in detail. All they could do was talk in generalities. Their individual members on the whole chose not to appear before us.

What was apparent in the evidence we received was that highly skilled workers—often highly paid—were capable of seeking, paying for and receiving the necessary advice about the advantages and disadvantages of personal service companies. Whatever the shortage of information, lack of clarity and low-level obscurity of the issues surrounding IR35 and the use of personal service companies, it seemed clear through the evidence we received that those at the top end of the income scale were at least in control of their own destinies and made decisions accordingly. In many cases, it was the individuals rather than those hiring them who were insistent that they wanted to operate via personal service companies.

In very sharp contrast, it seemed to us, were those at the other end of the skill and income level. Collectively we were surprised and shocked by the evidence we received that showed the widespread use of personal service companies across a range of poorly paid jobs, including healthcare workers and cleaners but many others too. This was confirmed by HMRC, which said that personal service companies now exist across all income ranges and all key sectors. The warm words used to explain the widespread use of personal service companies, umbrella companies and agencies emphasised the importance to UK plc of the flexible workforce.

Obviously the specifics vary depending on the vehicle used. For individuals using a personal service company, the drawbacks include lack of holiday pay, sick pay, maternity pay and a package of rights. Workplace pensions would not be offered.

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Umbrella companies are obviously different, as there is a contract of employment. There are rights and entitlements, but these are usually less than for a conventional employment arrangement. There are also additional dangers for the individual. For example, they can be encouraged to make inflated tax-deductible expenses, for which they would be personally liable if investigated and found to be in error. Gaps in national insurance records and employers’ national insurance being deducted from gross were also cited, together with charging of fees that were automatically debited from the individual.

We also heard about the working of agencies that offered workers through various routes, including personal service companies. Often the agencies worked alongside umbrella companies as well to deliver flexible workers—or, perhaps more accurately, workers whom the employer wanted to be on flexible contracts. It is clear that workers in this low-paid flexible workforce generally had lower entitlements overall than those in permanent employment.

Crucially, we were concerned about the awareness by individuals of their rights and benefits or reduced packages. We also received evidence that the pressure to conform to the non-traditional form of employment was mainly from employment agencies. The Low Incomes Tax Reform Group talked about the specific targeting of migrant workers at the most exploitative end of the market. Workers were aware of what they had signed up to only when they tried to access benefits or exercise rights to which they thought they were entitled. Put simply, many low-paid workers think they are working for the company that runs their place of work. Why would they not?

There is much heralding of the UK’s flexible labour market, especially when compared to other countries in the EU. We know that much of that is true. There are workers at the lower end of the income scale who are perfectly happy to work in a flexible package because it suits them for a time, particularly when connected to family patterns. However, we should not be proud of people being pressured into flexible working and non-traditional employment contracts without realising what is happening to them. The Government must do more to inform and to expose. The abuse of flexible working damages the overall reputation of this broad policy approach.

The Government can decide to include issues in the annual remit of the Low Pay Commission. They might be reluctant to do so, but it seems essential that this whole issue is looked at calmly and comprehensively. Hotlines and publications will not suffice; I for one felt the Government’s response tended to err towards hotlines and publications. I hope tonight that we will hear a commitment to look seriously at taking this to the Low Pay Commission.

In summary, it seemed to us that there were two worlds. The higher paid tend to choose to use personal service companies, know what they are and why they are doing so, and seek the necessary advice and professional help. There are questions for HMRC and wider government and society about whether enough is done to ensure that there is necessarily tax compliance for these people. The other world tends to be low paid

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and often relatively poorly educated, not aware of the repercussions of their employment status and indeed may be not even aware of that status. They are pushed into non-traditional employment contracts rather than opting for them. Again, government action is needed but of a very different form. These are people who are working hard but, bluntly, not being treated fairly. They need better protection. I hope that we will hear tonight a more positive reply from the Government than we have heard so far.

6.46 pm

Baroness Bakewell of Hardington Mandeville (LD): My Lords, I welcome the Government’s response to the recommendations of the Select Committee and the opportunity to debate the issue. This was my first Select Committee; I found it a stimulating and interesting experience and one that I more or less understood. I thank my noble friend Lady Noakes for her chairmanship and for making me feel at ease. I welcomed the opportunity to participate and to learn from the more knowledgeable noble Lords on the committee. This has been a privilege. I do not therefore feel it necessary to comment on every aspect of our report and the government response to the recommendations, as there are those here today who are much better qualified to do so. I also thank and pay tribute to Patrick Milner and the others who worked so hard on serving the committee.

With regard to recommendation 2, the merging of income tax and national insurance, I welcome the Government’s acknowledgement that these could be more aligned and accept that employers already have to deal with significant amounts of change in legislation. However, I hope that the Government will return to this in the foreseeable future as a positive step forward.

Recommendations 3 to 6 set out a number of measures that are a mixture of clarification and enforcement surrounding tax returns and IR35. I note that HMRC is planning to undertake a full review of its questions and guidance on personal tax returns and RTI declarations. This move is to be welcomed and we wait eagerly for it to take place in the not too distant future—I hope that we do not have to wait too long. There are a number of recommendations where the Government have indicated that a review will take place, but, as other contributors to this debate have pointed out, the IR35 Forum appears to be either undertaking this review or playing a very significant part in it. As a councillor, I know that whenever a review of a service or an activity is undertaken, it is important that there is a level of independence in that review to maintain public confidence in the outcomes. Like others, I would welcome the Minister’s clarification on this matter, with particular regard to recommendations 8, 9 and 10, on the contract review service, the business entity tests and HMRC.

As others have indicated, the majority of the evidence that the Select Committee received was from those representing or dealing with people who had set up personal service companies and who were very well able to negotiate around the rules and regulations surrounding IR35. However, as has been said, we received evidence of how the legislation affected those on lower incomes. This is the whole thrust of

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recommendation 11. While the Government feel that HMRC has updated its guidance, and it is the Government’s aim to move us through their digital strategy towards becoming not just a paperless office but a paperless nation, this is not suitable for everyone.

Yesterday I was invited to the launch of the report from St Mungo’s Broadway, an organisation assisting the homeless. One stark fact struck us all: 51% of the homeless cannot read or write. While the subject of this debate is not the homeless, it is patently obvious that those working with the homeless are seeking not only to get them housed but also to get them into work in order for them to be in a financial position to maintain their housing. Many of the lower-paid workers, especially those using umbrella organisations, will have poor literacy and numeracy skills and have no access to the internet. While a digital strategy will suit the majority, it will definitely not suit all. I urge my noble friend the Minister to develop other strategies to reach the poorly paid to ensure that they are aware of the implications for them of a personal service company. I look forward to the publication of the remit of the Low Pay Commission this summer and sincerely hope that the use of personal service and umbrella companies is covered—it will be a wasted opportunity if it is not —and I encourage my noble friend the Minister to give a strong indication that this will be the case.

I was disappointed with the response to recommendation 15. While it is convenient for departments to do their own risk assessments, the response leans towards a certain complacency. Many in this House will have examples of where complacency can lead to poor outcomes. The committee was calling for a review; it is to be regretted that this was not accepted. In order for the outcomes from the committee’s work to be productive, it would be extremely beneficial for such a review to take place.

Finally, with regard to recommendation 16, I am encouraged that there is some movement. However, it is not clear whether this is as a result of the work of the committee or whether it would have taken place anyway. It would be helpful if my noble friend the Minister could clarify this.

While I fear that some of my comments have been negative, I nevertheless welcome the Government’s response to our recommendations. There is much to praise and I am hopeful of moving the issue of IR35 forward in a positive way. However, as with all things, the proof of the pudding will be in the eating.

6.53 pm

Lord Davidson of Glen Clova (Lab): My Lords, we on this side welcome the report as a real contribution to the debate about the UK’s tax system and how the objectives of fairness and encouragement of enterprise can be better achieved. I congratulate the noble Baroness, Lady Noakes—

Baroness Noakes: I thank the noble Lord for giving way. I think that my noble friend Lord Stewartby was hoping to speak before the Benches opposite.

Lord Davidson of Glen Clova: In that case, I will sit down and oblige. With her usual courtesy and brisk efficiency, the noble Baroness runs this House as well as she runs her committee.

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6.54 pm

Lord Stewartby (Con): My Lords, I do not know whether it was my timing that went wrong, but it enables me to take a slightly more detached view about proceedings over the past couple of hours. I have crossed out most of my speech anyway, so that is no problem.

What is left is a whole area of vagueness. There is very little in the way of action taken. You get the feeling that somehow people thought that, if they let things happen, that would be all right. However, a little while ago I checked through the nature of this issue and it raised a question in my mind as to what the people who are running the bodies think they are trying to do. A lady professor from Oxford remarked, “If you don’t know what you’re trying to do, you are not necessarily going to be very successful”. It is that sort of attitude that I felt had spread through a lot of our deliberations.

We all know that the arrangements for the way things work mean that it is quite difficult sometimes to get straightforward answers to straightforward questions, but we took that to some sort of an extreme. Whenever these issues came up, I asked myself what the authorities were trying to achieve. Did they want to have more of these companies or fewer, or did they not mind either way? This is a culture that spreads through a lot of the areas that we have been discussing this evening. I think that the whole show lacks not only direction but any sort of impetus. I do not think that it is possible just from observing what happened in the cases that we looked at to know whether the authorities actually have any objectives of their own. Do they stop and think whether they are doing what a reasonable person might do? I did not get very far ahead with my little investigations on that front, but I do not think that you will get a well organised and efficient body if its objectives are so vague. How would we know whether we had done a good job if we did not know what we were meant to be doing? It sounds rather asinine because it is such a simple issue.

If you take it in the round, covering all the areas that we have been looking at, you would find quite a lot of comments about what people did but not why they did it, or whether they were pleased with having done it, or however you would like to express it. I would ask that my late contribution to this discussion should not merely be filed away in a corner, because big changes are needed in the structure of management in a lot of the areas that we have been talking about. This is the wrong end of the debate to set off with a lot of new ideas—they are certainly not personal to me—but I hope that perhaps I have spent a bit of time trying to judge what would happen in an ideal world. It would not be quite like the world that we have in this area and there is a huge opportunity for improvement. It is necessary because a lot of what we were looking at is almost incomprehensible unless you are a specialist or expert in the field. I leave with the committee the thought that we could be a little less inert when we tackle these areas and I hope that that will come without too much delay.

6.58 pm

Lord Davidson of Glen Clova: My Lords, I will try again. I repeat my welcome for the report as a real contribution to the debate. For the second time this

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evening, I congratulate the noble Baroness, Lady Noakes, on her chairing of the committee, and I congratulate the committee on producing this timely and useful report. Immediately, I should say that on this side we support the committee’s recommendations. Our welcome for the report is tempered by much of the response from the Government. I join the noble Baroness, Lady Noakes, in restraining my enthusiasm for the Government’s response.

Most commentators accepted in 2000 that curtailing the use of personal service companies to disguise employment was a proper target and that IR35 was a reasonable first attempt to deal with the problem. It is plain that the legislation imposed on contractors, as the committee observes, the need to expend a great deal of time and effort, as well as the costs of accounting advice. In a business environment that is much changed since 2000, it is essential to understand the efficacy of IR35. I am glad I stopped and was able to hear the contribution of the noble Lord, Lord Stewartby, because he made it very clear that the question here is about what one is trying to achieve. In 2000, one knew what one was trying to achieve: to prevent disguised employment. But what is the position now? Is it simply about deterring something that is said to be bad but none the less seems to be expanding quite dramatically? It would be very interesting to hear the Minister in due course provide the clarity that the noble Lord, Lord Stewartby, requested.

The core justification for IR35 is recognised, correctly, by the committee as the Exchequer protection resulting from the deterrent effect of the legislation, and one might expect a reasonably articulate view from the Government after some 14 years of operation of this apparent deterrent effect. We are told that the calculated deterrent effect amounts to a figure of some £520 million. The committee’s concern about this issue, and the Government’s response, are instructive. Where the committee seeks “more robust work” on whether the justification for the deterrent is convincing, the response is that the Government are “confident” that their assessment is “robust”—their favourite word—while accepting at the same time that their methodology is based on uncertain assumptions. That is perhaps not reassuring. The government answer that this is “inherently difficult to estimate” is apparently based on “behavioural assumptions”. We are told that these assumptions are,

“consistent with intelligence from operational experts”.

I hear the words and of course understand them, but this is hardly a model of transparency from the Government.

One might also ask what the cost is of the current system to taxpayers—a figure not dependent on “behavioural assumptions”. Does the Minister have any estimate of taxpayer costs: the fees paid to accountants, tax consultants and so on? The size of the IR35 industry, as my noble friend Lady Morgan observes, must be fairly large—that is a cost imposed on taxpayers.

If the Exchequer protection guess is not as robust as asserted, what would the Government do? The Government’s confidence in the figure is not so impressive when one notes that they were not prepared to co-operate

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with the committee. The plea that “application of legislation” was in issue could not sensibly have prevented a detailed explanation of the core justification for IR35. As the noble Lord, Lord Higgins, observed, the explanation from the Exchequer Secretary is absurd. That answer could, in a sense, be applied by every Minister, who could say, “Oh well, it’s to do with the implications of how one operates legislation”. It would make answering to Parliament perhaps not a very powerful remedy in our democracy.

Presumably the Minister will take a bolder—possibly more robust—stance and explain the Exchequer protection figure with greater clarity than the government response offers. I imagine that the Minister, who is a sensible person, will take on board the observations of the noble Lord, Lord Myners, who describes the Exchequer Secretary’s conduct in this matter as “unacceptable” behaviour. The noble and learned Lord, Lord Hope of Craighead, identified the need for facts in this area. I trust that the Minister will agree. The noble Lord, Lord Higgins, described the Exchequer Secretary’s behaviour as “inconceivable” by his lights. These are quite strong observations. I will not extend the Minister’s pain any further—I am sure he listened to those observations.

When IR35 was introduced, the concern was about the use of personal service companies to disguise—to conceal—what was truly employment and to enable an individual to obtain advantageous, but presumably improper, tax benefits. The aim of IR35 was to produce fairness between employees and contractors. Now it has been seen that the use of personal service companies has expanded considerably, which, on one view, possibly contraindicates the effective deterrence by IR35, although it might be that more behavioural assumptions need to be considered.

More seriously, the committee identifies the use of umbrella companies to employ the lower paid—not through the choice of those workers. As the noble and learned Lord, Lord Hope of Craighead, observed, the potential for the exploitation of such individuals, who often are not fully aware of their rights, is clear. An environment where lower-paid workers are charged fees, confused over their employment rights and encouraged to charge expenses improperly, as my noble friend Lady Morgan pointed out, suggests a need for both strong enforcement and a high level of education. The noble Baroness, Lady Bakewell, draws attention, correctly, to the way in which communication needs to be dealt with sensibly when one seeks to bring information to the lower-paid. I assume the Government will agree with that as a generality, but could the Minister give greater clarity? For example, the government response states at paragraph 2.70 that,

“HMRC is aware that some”—

umbrella companies—“are non-compliant”. Might the House be told what steps have been taken to deal with these companies?

The committee notes the decrease in enforcement: the reduction in the number of investigations by about 70% over a decade. Is this decline a result of the success of the policy, a lack of resources or a change in HMRC priorities? The recent increase in staff, to which the Government allude, may suggest that the

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answer is not the success of the policy, but an answer would be helpful in understanding the Government’s view of the operation of the legislation.

Part of the thinking behind IR35 back in 2000 was that it might encourage direct employment. Do the Government have a view as to whether this has in fact been a consequence of the legislation? The move to outsourcing and a desire on the part of some employers to avoid the costs of employment legislation may suggest otherwise, but some information on this aspect would be welcome.

From another angle, IR35 was intended to catch the limited number of disguised-employment personal service companies but not to place obstacles in the way of genuine start-up companies. However, an emerging concern has been that start-up companies, perhaps with only one or two clients, without physical premises and without employees, can present as a disguised-employment company—whereas the reality is that it is a genuine start-up that may in fact develop into a business success. In due course, inevitably, some start-up companies will fail and some will succeed, but in the precarious initial stages of these companies, HMRC’s investigations into possible disguised employment can be immensely disruptive—a disruption that their larger, more established, competitors would not face. Is it possible for the Government to say whether there is evidence to bear out this concern and, if the concern is sound, whether any steps have been taken to reduce such a burden on these entrepreneurial enterprises?

Of course, greater and more visible legal clarity would reduce the confusion that sometimes exists on this subject. The risk criteria that HMRC uses in guiding its activities in this area could do with being made rather clearer so that taxpayers might understand where their activities need to be properly vouched. In the past, one understands that doctors, teachers and health professionals all appear to have featured as being within the risk sectors. In the interests of promoting greater clarity, is it possible for the Minister to inform the House of how these risk sectors are identified?

On what is perhaps a more parochial point, at a time when the prospect of different income tax regimes between Scotland and the rest of the United Kingdom is becoming a nearer reality thanks to the Scotland Act 2012, have the Government considered how personal service companies may be used to arbitrage tax rates within the UK? For example, have the current Scottish Government sought to discuss this potentially difficult area with Her Majesty’s Government?

Finally, I turn to the use of personal service companies in the public sector. We share the concerns expressed by the noble Lord, Lord Palmer of Childs Hill. The Government response to one view in this area raises more questions than it answers. As I read it, the Government are committed not only to tackling tax evasion, as all Governments must be, they also recognise the inappropriateness of public sector appointees using personal service companies. The Treasury review of these persons’ tax arrangements issued a recommendation that such persons should normally be on the payroll. Is it possible to state what the effect of the recommendation has been on such appointees’ tax arrangements? Broad-brush answers will do. Further, at paragraph 2.86 of

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the response, we note that so-called satisfactory assurances were received from 1,940 contractors within departments. Can the Minister indicate the broad nature of those assurances and why they were regarded as satisfactory?

This has been a useful debate in shining a spotlight on this area, which, as all speakers have said, is both difficult and important. The balance between encouraging enterprise and defending the Exchequer’s revenue should properly be kept under continuing review. As the noble Baroness, Lady Noakes, observed, this is unfinished business, and we agree.

7.12 pm

Lord Newby (LD): My Lords, I thank all noble Lords who have taken part in the debate. It is correct to say that, with the exception of the noble and learned Lord on the Opposition Front Bench, all noble Lords who have spoken served on the committee, and therefore I can doubly thank them for the work they undertook on a very short timescale. As the noble Lord, Lord Myners, pointed out, this is an extremely complicated area, while my noble friend Lord Higgins made observations on the procedure in terms of the pace of the committee’s work. The Government response, however inadequate some noble Lords feel it to be, and the speed with which we have been able to hold this debate are a good example of your Lordships’ House scrutinising how we attempt to implement public policy, and I hope that it will be followed more frequently in the future.

I hope that I am able to reassure the House that the Treasury and HMRC take this report and the issues it raises extremely seriously. There is one area where I am not going to be able to satisfy noble Lords, which is their understandable irritation at the non-attendance of a Treasury Minister. The experience of your Lordships’ House of Treasury involvement in the work of its Select Committees over a number of years has been variable. When I served on the Joint Committee on the draft Financial Services Bill, not only did the Chancellor of the Exchequer of the day refuse to turn up, he refused to allow his officials to turn up and he refused to allow them to send a written response to our questions on the administrative workings of tax on the basis that it would undermine the sovereignty of the Commons in that area. We thought that that was very unsatisfactory at the time. I can assure the House that I drew this committee’s views to the attention of colleagues in the Treasury before the debate and that I will do so again.

However, I think that both the Treasury and HMRC take the work of the committee very seriously and they are acting in response to that work. In some cases the committee has looked at and made recommendations in areas where work was already under way, but some of the recommendations made by the committee are being taken forward where work was not under way, specifically in relation to the questions around personal service companies’ self-assessment returns and employers’ returns. As a result of the work of the committee, these are now being reviewed with stakeholders with a view to making any necessary changes as soon as practicable. That is a concrete example of the influence of the committee in getting real change.

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The committee did not confine itself just to the use of personal service companies, but looked more widely into the engagement of workers in today’s labour market, and that was reflected in a number of speeches in the debate. The UK has one of the most flexible labour markets in the world and we recognise that that is one of the reasons why our economy has been more resilient and has recovered faster than many other western economies. We recognise that personal service companies are a key feature of this flexible and dynamic labour market and will continue to contribute to its growth. Regrettably, however, as noble Lords have made clear, there are those who see such arrangements as an opportunity to avoid paying their fair share and there is abuse of the system, not least among those on low pay who are often unaware of the situation in which they find themselves. Clearly, that is not right. The Government have provided a clear mandate to HMRC to ensure that everyone pays the right amount of tax. One of our biggest challenges is effectively to tackle avoidance while encouraging genuine enterprise. We have introduced a plethora of measures to encourage enterprise, but at the same time we have legislated to stop avoidance and help HMRC bring money in more quickly. Since 2010, we have introduced 42 changes to tax law in order to close loopholes and we have invested an extra £1 billion in the area of preventing and deterring tax avoidance, thus bringing in billions of pounds for the Exchequer.

IR35 is the central theme of the committee’s report. It is one of the best known, least popular and least well understood pieces of anti-avoidance legislation. HMRC has been working hard to change this, and I shall come on to it later. However, the real starting point of the debate is the analysis carried out by HMRC on the estimates, which showed that more than half a billion pounds of Exchequer receipts would be at risk were IR35 to be abolished. The noble Baroness, Lady Noakes, said that she was sceptical about the figure, as undoubtedly was the noble and learned Lord, Lord Davidson of Glen Clova. I am not sure whether my noble friend Lord Palmer dismisses the figure altogether, because he is not normally a man who likes to throw away 550 million quid. The assessment made by HMRC is robust—to use the word of the noble and learned Lord, Lord Davidson—but inevitably there are challenges around estimating the deterrent effects of anything. While we can quibble over whether it should be £550 million or slightly more or slightly less, the bald point is that I do not think anyone who looks at this would doubt the broad conclusion that hundreds of millions of pounds of revenue depends on keeping IR35 in place, and that is why we are going to do so. All our past experience has shown a number of UK incorporations to be very sensitive to available tax incentives. Therefore, we believe that there continues to be a compelling need for this legislation.

In 2011, the Office of Tax Simplification recommended that HMRC improve the administration of IR35. Since then, HMRC has been working with stakeholders, including the IR35 forum, to help people understand the legislation, to reduce the burden on compliant businesses and to address many of the concerns that were subsequently raised by the committee. The committee concluded that the guidance issued on how the system

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works was “far from satisfactory”. A comprehensive review of the guidance has been undertaken and new guidance was published one week ago following widespread consultation. We are confident that it will be an improvement.

One area in which HMRC has been making substantial changes is how it conducts IR35 inquiries. Many noble Lords touched on this area. I think there has been a certain amount of confusion about the numbers. When it was first introduced, the number of IR35 reviews was extremely high: more than 1,000 in 2002. It then fell dramatically so that in the final year of the previous Government there were 12. That number has now increased to 256, which shows a considerable increase in effort and commitment to ensure that this is not a voluntary area of activity. As we pointed out in our response to the committee, three new compliance teams were created in April 2012, and a fourth team has been put in place over the past year to further enhance HMRC’s ability to respond to IR35 risk.

Is this enough? How do you decide on the very many competing claims for the use of HMRC compliance staff? The answer is that HMRC has to do a risk assessment across the whole range of its activities, which attempts to work out how best to deploy the resources at its disposal. In this area HMRC has looked afresh at the way in which it assesses risk to enable it better to target those who deliberately flout the rules. The number of people involved and the number of cases that have been taken reflect the fact that it has decided to give a greater priority to this issue.

However, HMRC recognises that there is more to be done. In partnership with the forum, it is currently reviewing how it administers IR35 in the round, including the compliance strategy. HMRC and the forum will publish a joint report, with recommendations, in the autumn. A number of noble Lords referred to the forum. Its role has developed since its inception so that its external members now feel that they are driving forward its agenda. It is looking at the contract review service, about which there have been a number of complaints, and the business entity tests, which are being reviewed and changed, very much with the full participation of the forum.

As noble Lords have said, when it was introduced IR35 legislation was looking at people on relatively high salaries and in the professions. Clearly, there has been a big change over the past 15 years in that a very large number of low-paid workers have been brought within the net of personal service companies. Some of these low-paid workers are being forced or enticed into structures, including personal service companies or umbrella companies, and they are clearly in many cases unaware of the full implications of those arrangements.

In this year’s Finance Bill, we tackled a particular model that was being used to engage workers as self-employed when in reality they should have been employees. I hope that demonstrates that we take this area extremely seriously. As part of our concern about how low-paid workers are treated, we are also committed to increasing compliance with the national minimum wage. HMRC actively targets employers who flout their responsibilities and investigates complaints against them. Just last

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month, a number of those who failed to pay the national minimum wage were named by HMRC for their failure to comply. We have quadrupled the maximum penalty payable by employers who break the law in respect of the minimum wage to £20,000 and we will be legislating in this Session to increase the maximum penalty per underpaid worker to £20,000. So we are doing quite a lot in that area.

However, we recognise that there are a number of problems in ensuring that low-paid workers are aware of what is happening to them and of their rights. At one level, this is a question of joined-up government. Obviously, HMRC is not the only arm of government dealing with people in this situation. HMRC is working with the Gangmasters Licensing Authority, the Home Office and BIS to address the issue of low-paid workers’ rights, in particular in relation to their employment status, how they are engaged and how they are paid. HMRC has a pay and work rights helpline, which provides individuals with a confidential route to discuss these issues. We have updated the guidance on employment status and HMRC’s employment status indicator tool, both of which are accessible online, along with two explanatory factsheets. HMRC is now working more closely with BIS on how to improve the dissemination of the relevant guidance.

I was very taken by the comments of my noble friend Lady Bakewell about people who are really at the bottom end of the income and opportunity ladder, who are often illiterate. Clearly, how one reaches people in that situation is extremely complex and difficult—they are certainly not going to use the employment status indicator tool, whatever they do. We recognise the need to put further effort into dealing with that issue.

A number of noble Lords expressed concern that the Government were not taking enough action in respect of the public sector and off-payroll workers. I think that is rather unfair. The Chief Secretary made it clear to all departments that they needed to limit the length of time any off-payroll worker was employed to six months or less. There has been a review of how this has operated, which has led to action being taken against two departments, the Department for Transport and Defra, which failed to bring senior executives on to the payroll. Defra was fined £102,000 and the Department for Transport £398,000. Real action is being taken and I suspect that the Permanent Secretaries of those departments, as accounting officers, do not like the fact that they are being fined by the Treasury for not doing what they are supposed to be doing, and that this will prove to be a good corrective.

Questions were asked about local government and the devolved Administrations. With regard to local government, the Secretary of State for Communities and Local Government wrote to the LGA to highlight the issue and has published guidance on it while the Chief Secretary to the Treasury has written to the devolved Administrations in similar terms, so we are taking serious action to ensure that the public sector acts to stop some of the abuses at the top end. With regard to what happens further down the scale, should the public sector have a very strong presumption against using personal service companies for people who earn less than the current reviewable amount of £220 a day?

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Lord Higgins: Where is the money to pay the fine coming from? Is this simply a transfer from one part of the Government to another? Is it an appropriate sanction? Should someone not be fired?

Lord Newby: Well, it is a transfer of money from one part of the Government to another, but this is hardly surprising since it is one part of the Government that has transgressed a rule set by another part of the Government. As for firing senior civil servants for not having kept this properly under review, I am rather tempted by the suggestion—but if it were a principle, we would rapidly find that there was a depletion of civil servants, not specifically in this area but from a whole raft of other areas where there may have been the odd transgression that was not stamped down on quickly enough.

The noble Lord, Lord Davidson, asked an extremely interesting question about the Scottish situation and the relationship between the UK and Scotland, and asked whether there had been discussions with the Scottish Administration on this issue. I am not absolutely sure but I am almost sure; I suspect that there have not been.

This debate has confirmed that personal service companies play a vital role in the UK economy. However, there are those who seek to exploit such arrangements to gain a tax advantage. Because of this, in our view there is still a clear need for IR35. However, there is still more to be done in improving its administration, and HMRC, in partnership with the IR35 Forum, is working very hard on this. We welcome the committee’s recommendations, which will help with this very important work.

Lord Palmer of Childs Hill: Before the Minister sits down, I wish to take up the point about the £500 million saving, which the Minister said I had little regard for. My regard is that it is mythical—there is no proof of it. If HMRC has proof of this, will it bring it forward? The problem with a deterrent is that it is hard to tell what you have deterred and how much you have gained. If there are people who should have been in IR35 and were then brought into it, specific details would be available of the money that had been recovered. I say to my noble friend the Minister that I have no confidence in the figure of £500 million; if I had, I would not have raised the matter.

Lord Newby: My Lords, I think the point is: what would happen if the restraint were lifted? Would individuals pay more or less tax? HMRC has looked at the behaviour of individuals in a whole raft of other areas where it has a lot of experience, and has drawn what it believes to be reasonable conclusions—which I have looked at and which seem reasonable to me. By definition, though, you cannot absolutely pinpoint how much evasion of tax you have deterred; that is impossible to do with any degree of certainty.

7.34 pm

Baroness Noakes: My Lords, I thank all noble Lords who have taken part in this debate today, including the two noble Lords on the respective Front Benches

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who did not have the privilege of taking part in the committee. My committee members did not disappoint me today; I expected the debate to be of high quality, and indeed it was. I repeat my thanks to them for their work.

I would like to pick up two points in response to what has been said today. The first is in relation to the Treasury’s co-operation with the committee. If this practice were allowed to become more widespread, it would be a “get out of jail card” for all Ministers whenever they did not fancy appearing before a Select Committee because they did not much like the subject matter. The Minister referred to the Economic Affairs Sub-Committee on the Finance Bill in the era of Mr Gordon Brown. It is not the practice of Treasury officials to shun the committee now, and we would have been happy had Treasury officials come to us. This remains an egregious example of discourtesy to the House in general, and I feel it necessary to record that again.

My second point is about the lower paid. I had not expected the personal service committee to get into the area of the lower paid; I thought that this was about IT contractors and people who could look after themselves, and was just about tax avoidance. I think that we were all shocked by the evidence we heard about the way in which corporate vehicles were being used for lower-paid workers, many of whom did not have language skills, possibly had other kinds of learning problems, and did not understand what they were getting involved in. I do not think that the Government have really understood the nature of the concerns here. Their response is a very reactive one: “We’ll have it online”, or, “We’ll have a telephone helpline and you can come and get it”. That response does not address those needs and I do not think that they recognised them, although the Minister himself appeared to understand them more. I would like to think that this area would be examined again.

I also note that our recommendation was to get the Low Pay Commission to look at this area. We took the advice of the noble Lord, Lord Myners, who I am glad to see in his place again. He is a former chairman of that commission and he assured us that this was exactly the kind of work that could be done under its auspices. The Minister gave us no response to that today, so we just have the very unsatisfactory answer that lies in the Government’s official response.

Personal service companies seem to be here to stay. So, therefore, are many of the issues that were raised in our report, from the big questions raised by my noble friend Lord Stewartby such as, “What is it all for?”, to, “Does this calculation of £500 million or more really stack up today?”, and, “Is all that worth the burdens that we are putting on what are effectively small businesses in our society?”. These issues will not go away. I am not sure that the suggestion that we reconstitute the committee would find favour with all my fellow committee members, but I am sure that some mechanism will be found in future to return to these issues.

Motion agreed.

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EU: Youth Unemployment (EUC Report)

Youth unemployment in the EU: a scarred generation?

Motion to Take Note

7.37 pm

Moved by Baroness O'Cathain

To move that this House takes note of the Report of the European Union Committee on Youth Unemployment in the EU: AScarred Generation?(12th Report, Session 2013-14, HL Paper 164).

Baroness O'Cathain (Con): My Lords, I am truly delighted to have the opportunity to move the Motion for debate so promptly after the publication of our report on 10 April this year. The report, Youth Unemployment in the EU: A Scarred Generation?, is the product of an eight-month inquiry focused on the youth unemployment situation from an EU perspective. The members of the committee have been passionate about the subject throughout, and were very keen to bring our reflections to the attention of the House as soon as possible. In that vein, I should like to start by thanking them for all their self-imposed hard work. We had a very demanding timetable to meet the production date.

I thank the range of interesting witnesses who contributed through written and oral evidence. Our confidence in our conclusions was bolstered by the fact that we had heard from a truly wide range of witnesses including pan-European—or rather pan-EU—businesses such as McDonald’s and Marks & Spencer; a wide range of international think tanks; EU and UK trade unions; and charities that work directly with young people, such as the Prince’s Trust. Special thanks are due to the young people whose contribution was invaluable in witness sessions in the House, on visits to Birmingham and Liverpool, and indeed in Brussels.

Producing a report such as this would never have been possible without the sterling work of our clerk, Nicole Mason; our policy analyst, Paul Dowling; and the committee assistant, Deborah Bonfante. All of them are endlessly patient and so very helpful. It was an absolute joy to work with them. I am sure each member of the committee agrees with me on this. Our selection of John Bell, our specialist adviser, was inspired. We are immensely grateful to him for helping us navigate the wealth of evidence and other information at our disposal.

It is a shame now that I feel I have to introduce a sour note. The government response was due on Tuesday 10 June. It was received yesterday at 11.05 am, on Monday, after a weekend when members spent many hours crafting their speeches for this evening. This is unacceptable and was described as such, and worse, by members at our meeting yesterday afternoon. Worse than that, the response has all the appearance of being a very shoddy piece of work. The authors of the response could not even copy the title of the report. The heading reads HouseofLordsEuropeanUnionCommitteeReportonYouthEmploymentin—in where? Perhaps they were unaware that we were just addressing youth unemployment in the EU. The response does not address the conclusions in our report in many places. It is badly drafted. There is no covering letter.

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And, to cap it all, there are no page numbers. The layout is certainly user-unfriendly, and cut-and-paste was probably the order of the day.

I was very interested to come late into the previous debate and hear almost the same sort of comments about the Government’s response to that committee’s report. What has happened? Let us get a grip. I am not having a go at my noble friend the Minister, and we will of course formally consider the response and then write to my noble friend imminently.

Our reasons for deciding to conduct an inquiry on this topic are perhaps self-evident. We are all aware of the shocking situation of youth unemployment in the EU. The title Youth Unemployment in the EU: A Scarred Generation? might sound somewhat dramatic. However, the more we learnt about the situation and its effect on millions of young people, the more we realised that this is a question not just of jobs but of the potentially devastating impact on many, many young people, some of whom could easily be scarred for life. What damage does it do to the self-esteem, self-confidence and self-reliance of our own young people?

In March 2014, youth unemployment across the 28 EU member states stood at 22.8%, more than double the overall unemployment rate of 10.5%. This is a very slight improvement on the rate of 23.5% a year earlier. The rate of youth unemployment is also reducing in the UK. The figure in April 2014 was 18.5%, down 1.3 percentage points from the previous quarter and down two percentage points from the previous year. This level of unemployment, however, is still considerably higher than the level in the first quarter of 2008, of 14%.

It is true, and we should be very thankful for it, that the levels of youth employment are on the rise. We hope that the shock to the system that we have experienced, and indeed are experiencing, will not deflect our attention from the very serious situation that still exists. Complacency has no place in this subject, and we shall continue to look for solutions to the problem. Time and again we hear stories of the impact these levels of unemployment are having on young people.

I was particularly moved by the right reverend Prelate the Bishop of Durham’s observation of the impact of youth unemployment in his excellent maiden speech on 10 June. He spoke movingly about the young people in schools and colleges who are concerned that they will never find fulfilling work in an area in which they are interested. He thoughtfully acknowledged that some have lost all hope and aspiration long before the end of school, let alone college and university, having been told that their value is in work and economic contribution rather than being “great human beings”.

I agree wholeheartedly with the right reverend Prelate. To tackle the issue of unemployment, we need to think beyond just finding young people jobs. The conversations I had with the young people we visited in Liverpool and Birmingham brought this fact home to me. Many of these young people faced complex personal barriers to work—for example, insecure accommodation, caring commitments and criminal records. Through talking to them, I realised the importance of an approach that enables them to build stable and fulfilled lives before being able to find meaningful employment.

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Therefore, I wish to preface my further commentary on various other factors affecting unemployment and the solutions to it with my belief that youth unemployment cannot be properly addressed in the absence of a holistic approach. The aim of our report was to take this knowledge of the very real impact of unemployment right across the EU and consider what the role of the EU should be and how European funds should be used.

To be fair, the issue of youth unemployment has long been central to the EU strategy. It has been targeted through the European Social Fund, which was set up in 1957. In recent years, the European Commission has shown a renewed focus on addressing youth unemployment through various measures. It has increased funding so that, between 2007 and 2013, 68% of the European Social Fund went toward such projects. Additional funds have been allocated to deal with the problem. The Youth Employment Initiative comes to €6 billion in total, with a pledge from member states to add a further €2 billion. This money is intended to go to regions with more than 25% unemployment. In the UK there are five such regions: inner London, Merseyside, south-west Scotland, Tees Valley and Durham, and the West Midlands. Not all member states were eligible for such funds because not all member states have these areas of 25% youth unemployment. Another measure is the youth employment package, which was proposed in 2012, one of whose significant elements was the Youth Guarantee.

Despite the funds at EU level, the amount of money spent at national level by each member state dwarfs the amount of available EU funding. We concluded that it was right that the responsibility for dealing with youth unemployment should rest primarily with member states. There are, however, clear benefits from the EU co-ordinating the member states’ responses, sharing good practice and using EU funds for specific tasks that complement action at national level.

I turn now to the issue of the Youth Guarantee in more detail. It is an example of the EU spreading good practice. We must never forget that nobody—no Government, no institution, no international institution —has a monopoly on good ideas. All member states should and must learn from others and avoid a “not invented here” reaction. Surely it is part of the internal single market to have this relationship. The Youth Guarantee proposal, which the committee supports, is an example of the EU spreading good practice. In essence, it is an undertaking that all young people aged under 25 should receive a good-quality, concrete offer of employment, continued education, apprenticeship or training within four months of leaving education or becoming unemployed. It was pioneered in the Nordic countries. One witness said that the operation of a guarantee scheme was likely to be the reason for the very low rate of long-term unemployment in these countries.

The Youth Guarantee could, and probably would, look different in every country, but the key benefits are: immediate support, not waiting to offer help until young people have been lingering in unemployment for some time; personalised support, finding the outcome that is right for the young person, which could be an internship, employment, personal mentoring or something else; and support for all unemployed young people.

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The concept of the Youth Guarantee is different from the current system where the help is not immediate. The Minister said that because most young people on benefits come off them after six months, “It would be inappropriate to put support in earlier”. We found this rationale problematic as it does not account for those young people who have found unsuitable or temporary employment.

Implementing a Youth Guarantee scheme would be an opportunity for the UK to use EU funds to try something new which we know has worked in other member states. I repeat that we were disappointed by the Government’s lack of engagement with the EU’s recommendation that member states should implement a Youth Guarantee. Of the eligible member states, the UK was the last to submit a report outlining whether and how it would use a youth guarantee scheme. Our Government submitted it on 3 March, more than two months after the 21 December deadline. That does not show a lot of enthusiasm or interest.

In the report, the Government confirmed that they would not implement a Youth Guarantee scheme and used the report to describe how current initiatives served the same purpose as would a Youth Guarantee. We were disappointed by the Government’s decision, which we think would complement efforts to tackle youth unemployment at national level. We recommended that the Government reconsider this decision and use the funds to pilot a Youth Guarantee scheme in the five areas eligible for the extra funding. A Youth Guarantee scheme would tackle unemployment at an early stage before the feeling of being worthless and the loss of aspiration kick in.

A Youth Guarantee scheme is focused on the specific needs of the individual and therefore would complement UK measures, such as the Youth Contract with its focus on changing the labour market, making it easier for businesses to take on young people though providing wage incentives and support for those who are looking for work experience. We welcomed the September guarantee for 16 and 17 year-olds and the Youth Contract’s support for getting the most disadvantaged into a job or training or on to an apprenticeship scheme. Similar support needs to be offered to all young people struggling to find employment.

Throughout our evidence, we heard that one of the unusual aspects of this youth unemployment crisis is that it is affecting a wide range of young people, not just the most disadvantaged. Will the Minister say what the take-up of the Youth Contract has been? Has it improved? The initial figures show that between April 2012 and November 2013 only 10,030 wage incentives were paid to employers who had taken on an unemployed person, which is considerably less than the 160,000 available.

Inevitably, a great deal of the evidence we received was UK-specific, particularly the evidence we received from representatives of local bodies and from the noble Lord, Lord Heseltine, who worked with Birmingham City Council on its growth strategy in the aftermath of the publication of his government-commissioned report, No Stone Unturned: In Pursuit of Growth.We received much evidence that the best way of connecting with harder-to-reach young people is by using local specialised charities and other

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organisations. We were most impressed by organisations in Birmingham and Liverpool. It is easier for young people to connect with these grass-roots specialist organisations. Local authorities are in the best position to identify them. We welcomed the Government’s move toward greater decentralisation of funding and recommended that local enterprise partnerships, in partnership with local authorities, should be enabled to oversee the management and delivery of programmes. This would enable a move away from large-scale contracts towards the use of smaller service providers with knowledge of and, commitment to, the local area—in effect, localism.

In a Damascene moment, one that no committee member will forget, a member of the committee said, “We are investigating, discussing and taking evidence on youth unemployment, so we should take evidence from young people”. That was so true. We rapidly rearranged timetables, enabling the committee to schedule two visits, one to Birmingham and the other to Liverpool. Thanks to the great support of our committee staff and specialist adviser we set about remedying this problem. The young people were illuminating. There were open, no-holds-barred sessions. When the young people were asked about their attitudes towards various government initiatives, some of the language was unprintable and certainly unparliamentary. One youth witness commented that some of the policies in the area of youth unemployment would never have been put forward by a young person. The need to include young people in decision-making is another argument for localisation. It is easier for young people to be involved with local bodies, as they probably know some of the people involved. Young people prefer to stay in their own locality, where they have their friends as support groups.

There is certainly room for improvement in involving young people in decision-making. Local enterprise partnerships currently do not have to consult young people when making decisions about their youth unemployment strategy. We suggest that local enterprise partnerships should, as a matter of course, have to consult and involve youth groups about policies that affect them.

The final issue I want to touch on is skills mismatch. There are currently about 2 million unfilled vacancies in the EU. The digital skills area is a particular concern as nations in south-east Asia, India and many other areas appear to be far ahead. Skills mismatch is a particular problem in the UK. In its 2013 country-specific recommendations, the European Commission said that, despite progress in recent years, a significant number of young people did not have the necessary skills to compete successfully in the labour market. The Commission found that there was an oversupply of low-skilled workers in the UK and that the unemployment rate of low-skilled 15 to 25 year-olds in the UK was 37.2% in 2013, which was significantly above the EU average. We recommended that the European Social Fund be used to bolster skills training in this area and to ensure that young people get careers advice that matches their skills to the job market.

As an aside, I welcome the new House of Lords ad hoc Digital Skills Committee. I have to admit that I put it forward, and I am on the committee. We have

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our first meeting tomorrow, and I am truly looking forward to it. It will be chaired by the noble Baroness, Lady Morgan. If noble Lords were in their place during her contribution to the previous debate, they will know how fortunate we are. Digital skills is one area in which youth unemployment could be on the way to being solved.

I know I have stretched the House’s patience, but I thank noble Lords for being patient. I believe that there are four key changes which could ameliorate the current dreadful situation for the youth of the EU. There should be more of a focus on consulting and involving young people in developing youth unemployment policy. The Government should learn from best practice abroad and bring forward new ideas and initiatives, such as the Youth Guarantee. There should be a localised approach to devising and managing schemes that aim to address youth unemployment, which should involve local businesses, charities and specialist organisations. Finally, there should be better matching of skills to qualifications. I beg to move.

7.59 pm

Lord Haskel (Lab): First, I, too, express my thanks to our witnesses for giving us the benefit of their experience; to our special adviser, John Bell, for his understanding and knowledge; and to our clerks for their hard work and diligence. They all made this work possible. I also thank our chair, the noble Baroness, Lady O’Cathain, for her leadership, and, indeed, fellow members of the committee for their companionship.

I join the noble Baroness in saying that we received the Government’s response only 24 hours ago. It was impossible for all of us to study it and make a proper response, so as she said we shall have to reply by mail. It really is most unsatisfactory.

There was a time when we thought that young people who did not work were feckless: it was their own fault. That was a time of plentiful jobs and liveable wages. Now it is different. In the EU it is a time of austerity and of industrial and commercial change, which has eliminated many entry-level jobs, and technology and globalisation have eliminated or exported a lot of less-skilled work. Pay for the under-25s has actually fallen, in some areas to the same level as in 1997.

At the same time, young people live and breathe in an IT revolution, with its opportunities and challenges, to which the noble Baroness has just referred. These things are still not fully understood. Ways of doing business are changing. In some work, such as retail, IT skills replace the older technical and commercial skills. A LinkedIn profile can be as important as a CV. Your page on Facebook, or pictures on Instagram, or words on Twitter can strongly influence any potential employer. There is free movement throughout Europe, so that in some cases highly educated people go down the ladder in search of work and push less-educated workers further down, and those at the bottom get pushed off entirely.

This work of understanding and evaluating youth unemployment in Europe today revealed to me that young people have become the real victims in the aftermath of the financial crisis. Like the noble Baroness,

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Lady O’Cathain, I think we were all shocked. Evaluation proved difficult, partly because the system of transition from school to work varies in each member state. It also became clear that youth unemployment in the EU not only affects those who are poorly educated and without skills, it also affects young graduates. All this makes exact evaluation and comparison of the numbers not in work difficult. In our report, we use figures based on the ILO definitions; the noble Baroness gave us the numbers, so there is no need to repeat them.

What steps are being taken to reduce youth unemployment in the EU? The EU funds a youth guarantee scheme through the Social Fund, to be spent nationally and locally, subject to certain rules and standards. Where the unemployment rate is above 25%, the EU youth employment initiative provides further funds. Five such areas have been identified in the UK; the noble Baroness listed them. Ministers recently announced £170 million for a youth employment programme in five of our deprived areas. Can the Minister say whether these are the same five areas that the European Union youth employment initiative identified for extra funding? Is the source of the £170 million all or partly EU money?

Here in the UK we have the Youth Contract, which targets the neediest young people. There is also an employment allowance, which targets businesses by giving them a reduction in national insurance contributions. The Youth Contract is market-driven. Several witnesses told us that contractors had underperformed. We believe that there is a need for both the EU and the UK schemes. The government scheme uses payment by results to get young people into work, but is it enough? Market forces may deal with the skills mismatch, as long as it is addressed in a co-ordinated way. Market forces may produce worthwhile apprenticeships and traineeships as long as standards are high. Both of these we address in our report. However, will market forces deal with the need for young people to be work-ready? Will they provide the good face-to-face careers advice that we also seek in our report?

On the other hand, the EU schemes are part of a social contract, the kind of thing warmly welcomed by the Fairbridge programme run by the Prince’s Trust in Liverpool. We went there, and the noble Baroness spoke of this. Of the 207 young people it supported, nearly half had been affected by drugs and a quarter by alcohol. A quarter had poor mental health. Many were offenders or ex-offenders. Some were single parents or young carers. Market forces will not deal with these problems. Because EU funding is more of a social measure than an economic measure, we were impressed by the way other member states used the youth guarantee scheme to bring together employers, trade unions, charities and local and national government so that they all worked with each other.

The youth guarantee scheme has produced good results elsewhere in Europe, and we can and must learn from that experience. The lesson is surely that getting a job certainly changes a young person’s life, but many have to change their life before they can get a job. That is why we need both. It is because of these complex pressures and needs that we strongly recommend that EU and national funding should be spent locally—on

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the “grass roots”, as the noble Baroness put it—in consultation with young people, local employers, local charities and welfare organisations. They can deal with the human and social problems that often stand in the way of getting a foot on the employment ladder.

Elsewhere, the Government say that they strongly support the objectives of the youth guarantee but choose to deliver the objectives by other means. They justify this with the statement that 80% of 18 to 24 year-olds move off jobseeker’s allowance within six months. They move off to what? We received ample evidence that the schemes that take them off have,

“generated … a very confused marketplace”,

with a,

“plethora of support and … financial packages”.

Indeed, we were told that the CBI had counted 44 schemes coming from three government departments.

Other evidence that we took indicated that many of those young people coming off jobseeker’s allowance had stopped seeking employment; or had become so-called “self-employed”—the previous debate dealt with that; or were in short-time or part-time work without any opportunity for occupational development; or were living with multiple forms of insecurity; or were engaged in schemes that simply extended their adolescence; or were placed in some kind of community work without any motivation. Perhaps this is why, although we in the UK have more people in work than ever, we are less productive than we were in 2008, and 24% less productive than our key competitors in the European Union.

That indicates that something fundamental has changed in our labour market that will not be cured simply by a steady increase in the jobs count. The change will limit our economic growth potential unless we face up to this and work with the European Union on its schemes. Does the Minister agree that we need to be more ambitious and that the purpose is not to push people around to get the jobless numbers down? As the noble Baroness, Lady O’Cathain, reminded us, there are 2 million unfilled vacancies in the EU, despite the economic crisis and the free movement of labour around the Union: vacancies waiting to be filled by these young people. Surely the purpose is to empower them through the youth guarantee and the Youth Contract—as we say in our report, to empower them to contribute to our economy and to our society in the European Union; otherwise they will be left behind to become the scarred generation.

8.10 pm

Lord Shipley (LD): My Lords, I am glad to speak in this debate. I was not actually a member of the committee but I have a keen interest in issues around youth unemployment and have spoken previously in your Lordships’ House on the subject. As someone who was not involved in the deliberations of the committee, I find the report a very impressive piece of work. It is very detailed and contains a very helpful discussion of all the issues around youth unemployment.

I will mention two things in particular that I like about it. The first is the title—Youth Unemployment in the EU: a Scarred Generation? I think the question mark at the end is important. I think there is a very

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real danger that we are going to have a scarred generation, but it does not necessarily follow that we will if the right policies are adopted in what appears to be a period of continuing growth from now into the future. The actions suggested in the report that could alleviate the impact of youth unemployment, together with the actions the Government are already taking, mean that we can get more young people into productive employment.

The second thing that I am particularly pleased about is the report’s clarity on the varying definitions around youth unemployment and the associated definitions around NEETs—as we know, those not in employment, education or training—and inactivity, which is not quite the same thing as NEET, because it relates to anyone who is not working at all and is not available or looking for work.

There are many statistics across the EU and within the United Kingdom, but the truth is that whatever statistics you use—for example, whether you categorise students in full-time education—youth unemployment is too high both in the UK and across the EU. We simply have to get more young people into work. The report is right when it states that more control over EU funds should lie locally, and is also right when it acknowledges that the EU’s main role besides funding is to advise on successful innovation and good practice. I support the committee’s view that ESF funding should be assessed on real outcomes rather than just the cost and numbers of participants in schemes.

I hope that we may now be seeing the start of a downward trend in youth unemployment in the UK. It may be too early to say but there seem to be some signs of it. The number of young unemployed people who are not full-time students has now fallen by just under 100,000 since 2010. The number of NEETs is lower than at any time since 2005. One thing we have to do is to continue work closely with small firms because they are responsible for four of every five jobs created between 2010 and 2013. It is important to understand this because this performance by the SME sector in recent months has been impressive—as has the performance of the Government in encouraging apprenticeships.

Since 2010 1.6 million apprenticeships have been created and I welcome the plan to build this up to 2 million apprenticeships by 2015. Many of these apprenticeships are in the private sector. The previous Government created short-term placements predominantly in the public sector, and half the people on them returned to benefits. What this Government are doing is much more sustainable and we need that sustainability because youth unemployment has structural causes. It is not just a recent problem, although without doubt the financial crisis in 2008 and the consequent recession made it worse.

The youth unemployment rate across the EU in 1994—20 years ago—was 20%, very close to the current level. Thirty years ago, in 1984, youth unemployment in the UK was very similar to what it is now. Spain today has very high youth unemployment but in 1987 it actually stood at 45%. Even in 2006 in the UK, following a four-year period of growth, there was still very significant youth unemployment.

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I think there is a structural issue, because Germany—which I will come on to in a moment—does not have that same structural problem. There is a cost to the Exchequer in this because youth unemployment costs several billion pounds. Some estimate it as more than the entire budget for further education for 16 to 19 year-olds in England. We would agree that it is better for young people and our economy to spend that money on training and apprenticeships and getting young people into jobs.

The committee has clearly had a debate about the Youth Contract and the Youth Guarantee. Its view on the Youth Guarantee differs from that of the Government. Clearly there is going to be a further discussion around that and I hope it might be possible for everyone to get round a table to have it. The Youth Guarantee is a guarantee for young people leaving school that they will have an immediate opportunity of employment.

My view is that the Government and all their partners must be focused on outcomes, which means that young people need to be suitably prepared to enter apprenticeships, employment or training. That means that they need a pathway at a personal level to enable them to move seamlessly from school to an apprenticeship, to vocational training or to college or university without waiting, and that they are “work-ready” when they enter the world of work rather than being expected to learn on the job.

The Government’s reply is that the Youth Guarantee model would not fit the UK. However, I think it could. What matters in this is the individual—that every individual has a personal plan and that they feel wanted and engaged. The statistics around NEETs and those who are inactive suggest that not everybody feels wanted and engaged. Therefore the principles behind the Youth Guarantee seem very important.

I will mention the role of Newcastle Gateshead, my home city, which is a Youth Contract pathfinder, in helping 16 and 17 year-olds into employment, education or training. It is interesting to note that almost half of 16 to 17 year-olds who have taken part have moved into employment or training; others are in education. That seems to be a sign that the policy is working. If so, that is an example of good practice that can be spread.

There is a very interesting statistic about the north-east in the Library briefing for this debate. It has the highest level of youth unemployment in the UK at 25%, but has a lower rate of youth inactivity than many regions, seven of which—including London—have higher rates of inactivity. I have puzzled over what the cause of that might be and have drawn the tentative conclusion that the Youth Contract is now helping. Over the past two months, 1,124 apprentices were taken on in the north-east. The National Apprenticeship Service has just announced this figure two months into its 100 Days Apprenticeship Challenge. Some 650 regional companies have taken on those apprentices, backed by the North East Chamber of Commerce and training providers, and impressively supported by the region’s press. That is partnership working at its best.

I will say something further about Germany’s youth unemployment. It is under 8%. Germany has high levels of youth employment and almost no unemployment

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among those in education. It has apprenticeships and vocational training in secondary education. That leads me to the role of our schools. Schools have a statutory duty to provide a careers service, yet a few months ago Ofsted reported that three-quarters of secondary schools were not executing their statutory duties satisfactorily.

Advice and guidance is broader than just careers advice. Students need to understand better the qualifications and skills required to enter an apprenticeship, particularly in science, maths and IT. They need programmes of visits to local employers to experience what the possibilities might be. Schools are central to the development of relationships with local employers through programmes or visits, exchanges and other opportunities.

In conclusion, the UK is doing better than many eurozone countries. Youth unemployment is far too high; we must learn from Germany. However, we have to use every lever within our power and remember that this is everybody’s problem to solve, not just the Government’s.

8.20 pm

Lord Wilson of Tillyorn (CB): My Lords, it was a very great pleasure to take part in Sub-Committee B, which drafted this report under the chairmanship of the noble Baroness, Lady O’Cathain. As other noble Lords have said, we were enormously well served by the staff and by the witnesses who came to give evidence.

I will deal with a couple of general points first and then deal in slightly more detail with the section of the report that deals with the job market for youth in the EU and with the question of migration. On my first general point, there is some evidence of improvement in the unemployment situation, including for youth recently, and for the overall situation for unemployment. That is obviously a good thing, and it is a good thing, too, that we in the United Kingdom have not been among those who were hit worst by the unemployment problem during the recession. Equally, however, we have not been among the best at dealing with the issue. We have been beaten by a long way by Germany, Austria, the Netherlands, Denmark and, somewhat to my surprise, Malta. We are not at the bottom but we are not at the top or nearer the top, where it would be nice to be. Despite this improved situation, what struck many of us and came out so strongly in the recent maiden speech of the right reverend Prelate the Bishop of Durham was the sense of despair among many young people—the feeling that they would not be able to get a job in their lifetime, that there was a tangle of ways to make progress, but that they were not capable of finding out what to do or how to do it. That is a very real psychological problem.

Another general point is that it was clear from the evidence we received that it is far better to deal with most of the issues of unemployment on a national basis. The differences between countries of the European Union are so great in that area—the disparity between the methods of employment and the structures are so great—that to try to deal with them on a one-size-fits-all basis for the European Union will not work. Therefore I am sure that the majority of the work on unemployment should be dealt with on a nation-state basis. But,

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equally, if funds are available from the European Union, we should make every effort we possibly can to access those funds.

I shall make one or two points about the jobs market within the EU. It was very interesting that there appeared to be a growing realisation that vocational training is just as important as purely academic training. One interesting bit of evidence was from Barclays Bank. It stated that it now had a new point of entry and it was for people who were not graduates. It explained that when it had only a graduate point of entry, many of those graduates found that what they were expecting to happen in terms of the job they were going to be given did not occur and therefore they left early. Therefore, it recruited people, appropriately trained and educated, for the jobs they were going to do. For many years we have downgraded the value of vocational training. It is rather good to see the circle turning and we are now valuing it again. That is a good thing. The noble Lord, Lord Shipley, referred to the number of apprenticeships and apprenticeship schemes. They are now being reintroduced and valued, but from the evidence we received there was a problem area here. Perhaps it is just a dumbing down of language. What is an apprenticeship? Some of the apprenticeships we heard about were a very long way from the traditional schemes of training people in skills for long-term employment. Some of the schemes, indeed, produced some pretty caustic comments from members of the committee because they did not seem like apprenticeship schemes at all—it was just a good headline to use. Apprenticeships, good; dumbed-down apprenticeships, not so good.

We need to be careful about wording that we use for all these different schemes: apprenticeships, traineeships and internships. It became clear—it became clear also in the Government’s reply to our report—that there are differences in different parts of Europe about what these schemes mean. Nevertheless it is a pity that the Government seem to be opting out of what is called the quality framework for traineeship schemes which the European Commission has put forward on the grounds that the criteria for these traineeships are not the same in other parts of Europe as they are for us. It seems worth trying to find common ground with other countries within the European Union which would help to promote traineeships and apprenticeships and also help to access EU funding for that.

It may be instructive if I quote from an interesting exchange which comes from the sayings of Confucius. I thought it might be rather nice to have sayings from Confucius when the Chinese Prime Minister is here. One of Confucius’s disciples said to him:

“I hear that the King of Wei wants your help in running his Government. What are you going to do first?”.

Confucius replied:

“What is necessary is to rectify names. If names are not correct, language is not in accordance with the truth of things. If language is not in accordance with the truth of things, then the affairs of state cannot be carried on to success”.

I think it was a good point, considering how long ago it was said. He went on to say that if things are not done properly, then the consequence is that punishment cannot be meted out correctly and, as he put it,

“the people will not know how to move hand or foot”.

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We do not necessarily need punishment, but we need people to move hand and foot. Correct use of language may be helpful in this and may be helpful in accessing funding from the European Union as well. We need to know what we are talking about when we put forward schemes for apprenticeships, traineeships and internships. On a slightly different point, we also need to avoid schemes such as internships in particular becoming some form of low-cost exploitation—just a cheap way of recruiting labour. All these schemes surely should be designed for long-term high-quality jobs and training for that.

Another area which perhaps presents a similar problem to this is zero-hours contracts—much discussed and by many people much criticised, including by some of our witnesses. The committee concluded and indeed the evidence very clearly supported the fact that zero-hours contracts are helpful in present conditions. They allow young people to get experience and they reduce the amount of youth unemployment. Again we need to ensure that they do not become some form of exploitation. There are rules to protect workers and workers’ rights, and things such as minimum wages. Those rules need to be known and they need to be used.

Another area that is somewhat controversial but should not be shied away from is the issue of job migration. Understandably, the Government want to ensure that free movement is free movement to seek work and not to seek welfare, but we surely should not forget how much we in the UK have benefited from the migration of workers—nor should we forget how much our own young people can benefit from taking jobs elsewhere in Europe. It is marvellous experience and very good for what they do later in life. Migration of youth seeking and getting work is invaluable. It seemed from the evidence given to us that more could be done to publicise those sorts of schemes and opportunities. There is a scheme called Youth on the Move, which has a website that gives details of job vacancies all over the European Union. It was very clear in talking to people that most of them had never heard of it and that even fewer had actually accessed it. There is a job there for schools, colleges and any employment agencies, such as the Jobcentre Plus system. There are opportunities, and it would be very nice to see them used.

I raise one final small point on youth entrepreneurship. There seems to be a growing interest among young people in entrepreneurship—in other words, in creating jobs rather than just going out to find work. The report recommended that the European Commission should make it more explicit that two of the funds, the European regional development fund and the European Social Fund, should be used to back these schemes. Somewhat surprisingly and oddly, the Government in their response demurred; they said that, although nothing explicit appeared in the regulations on this, the funds can be used, and they saw no reason to alter the regulations. This is one of the issues that the wit of man should easily be able to resolve. The funds can and have been used, greater encouragement could come from the Commission so that they are used to a greater extent, and there is no need to change regulations, which is always a tremendous problem—so QED. As

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we went through all the evidence, there seemed to be a number of cases where we have got terribly tied up on questions of definition and small bureaucratic points, when with a bit of free-thinking it would be possible to solve those problems. Would that all problems of youth unemployment were as easy to resolve as questions like that.

As others have said, the unemployment situation is clearly getting better, and that is very encouraging. However, it remains the case that unemployment for anybody is a tragedy and debilitating, and for young people to go into adult life believing that they will never get a job is highly destructive. We need to do everything possible to avoid that happening and to avoid having a scarred generation. One hopes that this report in some small way will help to achieve that.

8.33 pm

Lord Freeman (Con): My Lords, it is a great pleasure to follow the noble Lord, Lord Wilson. I agree with virtually everything that he said and pay tribute to his experience and his contribution to the Select Committee. The noble Baroness, Lady O’Cathain, paid tribute to our clerk and the staff, which I very much endorse, but on behalf of my colleagues on both sides of the House I pay tribute to her as our Lord chairman for her patience for almost 12 months in dealing with many witnesses but also in bringing together an excellent report, for which the House should be very grateful.

As other noble Lords have said, we are dealing with a scarred generation, but there are some hopeful signs. In the past three months, youth unemployment in the United Kingdom has fallen by 60,000. That is a very small part of the total problem we face, but at least things are going in the right direction.

In my brief contribution tonight, I shall simply share with your Lordships two lessons that I have learnt. The first is one that I learned from my former colleague, my noble friend Lord Heseltine, in the Cabinet Office when he—and I, trying to assist in some ways—was trying to deal with issues such as unemployment, particularly youth unemployment. I think that his contribution to the debate, if he were here tonight, would be that we have to place the emphasis locally. We have seen that in Birmingham, on our visit, and certainly in Liverpool. National initiatives are fine, but very often the documents are read and discarded, or not implemented at a local level. If you focus locally, particularly where there are pockets of youth unemployment, which we saw in Birmingham and also in Liverpool, one can target effort, initiative and money, with the co-operation, obviously, of the local politicians. So, local emphasis is very important for me. That is the first lesson that I have learnt during the course of this inquiry.

The second lesson, which is probably counterintuitive for many colleagues, is the importance of looking at those 14 to 16 year-olds who will, when they leave school, in some cases join the NEETs—not in employment, education or training. It was an initiative of Gordon Brown, the then Prime Minister, to fund an organisation through the Ministry of Defence called SkillForce, which I have had the honour of chairing for the past 10 years. We have taken 50,000 schoolchildren who have been disruptive in schools through regular

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courses, where they are taught life skills and encouraged by former service men and women. Over the past 10 years, 85% of them have got into employment—in other words, they are not categorised as NEETs. I think that that emphasis is quite important. I am trying to encourage my colleagues in the Department for Education, and, indeed, in the Cabinet Office, to look not just at the 16 year-olds who are leaving school, but also at the category I have just referred to, who perhaps only have a single parent, are causing disruption in school and, if nothing is done to encourage them and provide some life skills, will end up unemployed and adding to our great problem.

Those are the two lessons. I promised to be brief and I am going to offer concrete action to my noble friend Lady O’Cathain. I am going to the Vote Office, I am going to buy 12 copies of the report and I am going to send them to 12 chairmen of the largest companies in this country with my encouragement that they should take action where necessary, where they have employment, factories or workforces, to help us reduce even further the level of youth unemployment.

8.38 pm

Lord Brooke of Alverthorpe (Lab): My Lords, I am a member of Sub-Committee B and was, happily, very much involved in the production of the report. Like others, I express my gratitude and pay tribute to the noble Baroness, Lady O’Cathain, for her brave leadership and determination to get the facts and to stick to making recommendations, even though they may not be too popular, necessarily, with her own Government. She has certainly ploughed an individual line there, well supported by her committee. My grateful thanks go, too, to our clerk Nicole Mason, to our policy analyst Paul Downing and to Deborah, as well as to our specialist adviser John Bell, who is up in the Gallery, for all the guidance and assistance which he gave to us.

Since we started this inquiry, as many others have mentioned, unemployment has declined, happily, which is welcome. Youth unemployment in the UK has also gone down, as indicated in the letter sent to us yesterday, although it has not gone down by quite so much as the general reduction in unemployment. None the less, that is a move in the right direction. However, we are still concerned about the underlying trend of 16 to 24 year-old NEETs. That is still a significant problem and a hard one to crack, as the Minister will know given that he tried to assist in the efforts of a previous Government to resolve this long-standing issue. This problem first reared its head in 2003-04, when the underlying figure for NEETs rose notwithstanding the growth in the economy and the general expansion of GDP.

As others have mentioned, there is also a very serious youth unemployment problem in many EU member states—hence the intervention of the Commission and the Council to try to help. We were not surprised to find that many EU countries were in a much worse position than the UK. However, as other speakers have identified, some are doing better, notably Germany, which is well ahead of the rest. Austria has also done well in this regard, as has Holland, and the situation in

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Scandinavia has improved. It was interesting to note that a significant change has taken place not just in Malta but in Finland. Those countries put that down to embracing the Youth Guarantee.

We considered what the winners in this situation were doing and whether we could emulate that. It is interesting to note that each of them has a more highly developed social partnership economy than we do. We tend to have a more flexible and laissez-faire approach than is the case in Germany and Holland. We also noted that all those countries had embraced the Youth Guarantee. Indeed, all the European countries have embraced it with the exception of the UK. That is an important difference and I shall devote most of my speech to addressing that issue. I appeal to the Minister not to stick too strictly to his brief when responding to the debate.

As we have heard, the committee took a lot of evidence and visited different parts of the country as well as Brussels. We found that the majority of people who submitted evidence to the committee, particularly people in this country, were in favour of adopting the Youth Guarantee. We produced a report in which we set out what we thought were cogent arguments for instituting a number of changes. We particularly wanted to persuade the Government that they should adopt the Youth Guarantee. We have been fairly modest in not asserting that it should be applied across the whole country and to all those who come off JSA after six months. We have suggested that the Youth Guarantee should be introduced only in limited areas, and that the Government should address those areas with 25%-plus youth unemployment.

Regrettably, the Government have resolutely tried to persuade us that what they were doing was more effective than the Youth Guarantee and praised the UK’s Youth Contract. However, many of our witnesses did not share that view of the Youth Contract, although it was interesting to hear what the noble Lord, Lord Shipley, said about how he sees it working in the north-east. We are grateful to the Government for sending us a 36-page document seeking to persuade us to drop our line that there was something special about the Youth Guarantee that ought to be explored. However, we have stuck to our guns. Indeed, we note that the written response still seeks to make us change our minds in that regard. I hope that the noble Lord might be prepared to reflect a little again on what we have put before him. Incidentally, I share the view of the noble Baroness, Lady O’Cathain, that when we get these long letters it would be a great help if the paragraphs were numbered in the way in which we have numbered our report. It would then be much easier to pick up individual points and refer the noble Lord to them.

I read that letter carefully overnight. I do not have a speech that responds to all the points, but I felt that the letter makes an underlying case for a trial of the Youth Guarantee. The more I read it, the more I thought, “They are making the case for us”. What comes through clearly is that there are areas in which—the noble Lord’s officials were open and straightforward with us on this when they gave evidence—they do not track everyone. In particular, I should like to ask a question about 16 and 17 year-olds. The noble Lord

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says that the number of NEETs has reduced significantly. We were unable to find the figures that related to these people. His department’s officials could not tell us how many were in that category. How many people just disappeared? When they left school, the officials did not know where they had gone. I should be grateful if the noble Lord could tell us the numbers and how he has managed to find them. When his people came before us in the autumn, they were unable to tell us.

This involves the worrying group that disappears into the ether. In our opinion, people in that group should be picked up because they are, effectively, trainee NEETs. If they disappear in this way, many of them will end up being permanently unemployed. We thought that if the Minister was prepared to look at the Youth Guarantee, he would find that they would be required to come into the system within four months of having left school or college. There would be a requirement to put them in the system and follow them through it.

I say to our friend the Minister, whom I refer to as a friend because he has worked on this issue for both sides, that it is difficult to see among the arguments he has advanced—given that we have European money and particular locations with special problems, and we are not asking him to run this across the whole country but only in limited areas—why he is so steadfastly opposed to the Youth Guarantee, when it has seemed to work elsewhere, has been effective and could be effective in the UK. Even if he is not prepared to look at the five areas—although I know that devolution means that Scotland has responsibility for what happens in Glasgow—and even if he went to just one of the four other areas, I am sure that our committee would be happy if we saw the noble Lord trialling the Youth Guarantee in one area.

Ultimately, while we share the direction in which the Government are travelling, to devolve down the line, we find that there are so many different interests with a finger in the pie that it is difficult to identify who, at the end of the day, has full responsibility for each individual who gets lost and ends up being permanently unemployed or workless. We have colleges and schools with a finger in the pie, as well as the careers service, the LEPs and the local authorities, which pick up people who fall into difficulties—but only where they have a responsibility to ensure that such people are cared for. We need to start looking at providing a worker who can help each person, take them into employment, training or education, and keep them out of this ever-growing category—a cohort that stays workless for many generations. It comes through clearly in the noble Lord’s letter that there are too many fingers in the pie. We need to focus on individuals who can actually deliver.

The Minister could use the money from Europe to trial the Youth Guarantee to see whether it works. It is perfectly in line with the compelling evidence that we received from the noble Lord, Lord Heseltine. This is not a party-political issue at all. We all have a serious issue and are trying to resolve those underlying problems. Ultimately, it should not be just at the four-months point when intervention should take place to try to get the numbers down; in due course, such intervention

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will have to be when they leave college or schools. That is not in our report and it is not going to happen. Perhaps in the mean time, however, the Minister could at least reflect on whether to carry out a trial, implementing it at the four-month point in one of the areas of the country where we have 25%-plus unemployed.

8.49 pm

The Earl of Liverpool (Con): My Lords, as a member of EU Sub-Committee B, I should very much like to associate myself with the remarks of my noble friend Lady O’Cathain and other noble Lords in expressing sincere thanks and gratitude to our clerk Nicole Mason, to our policy adviser Paul Dowling, to Deborah Bonfante for the secretarial help she provided, and lastly, but by no means least, to our specialist adviser John Bell. The committee had 20 oral evidence sessions and 54 written submissions. The period from the first call for evidence to the printing of our report, as my noble friend Lady O’Cathain said, was eight months.

During that time I travelled with others to Liverpool, where we met young unemployed people on the Prince’s Trust Fairbridge project. I then went to Lithuania, where I and our clerk attended a two-day chairpersons conference, which our chairman was unable to attend, on the youth unemployment problems in the EU. It has been quite a journey—one which it would have been impossible to undertake without the advice, guidance and support we received from our staff.

The first and perhaps obvious thing I will say is that there is no one-size-fits-all solution to youth unemployment problems, which all countries in the EU face. As paragraph 3 of the summary on page 5 of our report says:

“We consider that the responsibility for dealing with youth unemployment rests primarily with Member States”.

However, much can be achieved by learning from good practice across Europe. We heard from the Centre for European Studies, which attributed Germany’s economic success to reforms enacted by the Schroeder Government back in 2003-04, which involved working with social partners to enact corporate downsizing and restructuring, and wage reticence on the part of the unions.

The TUC, UNISON and the British Chambers of Commerce said that social partnership was less well developed in the UK, but all expressed a willingness to work together on such issues as career advice in schools and improving representation of the young in their organisations. We welcome this increased co-operation and encourage social partners to work even more closely with the Government and with each other.

There is an urgent need for that to happen, because we heard from a number of people, particularly the young, that careers advice in schools was generally poor. A recent report by McKinsey & Company confirmed there was a problem across Europe. The report found that less than one-third of the 5,300 young people surveyed in eight member states felt that they were getting good careers advice at secondary school level. That means that nearly 70% thought they were not receiving good advice. I find that truly shocking. My noble friend Lord Shipley referred to that problem.

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By a happy quirk of fate, I have a young student of 17 doing some research work for me this week. Seeking his views on the committee’s report seemed like too good an opportunity to miss. I asked him what stood out as the issue most relevant to him. His immediate reply was the poor quality of careers advice he had received to date. I believe that there needs to be better dialogue between local businesses, schools and career advisers. We recommend in the report that careers advice should be better co-ordinated and that the National Careers Service should be extended beyond the 12 centres currently in the UK and act as a one-stop shop to refer young people to the different sources of careers advice.

We also received evidence about the skills mismatch, which is more of a problem in the UK than the rest of Europe. This is one of the main causes of particularly high unemployment rates among low-skilled young people. We therefore recommended that the Government integrate the EU Skills Panorama into careers services provided at national level through schools, job centres and online resources.

I was surprised to learn from the evidence given to the committee by Go ON UK that digital literacy—that is, IT skills—was worse in the UK than in some other member states, with 6% of young people in the UK lacking the basic online skills required to send an e-mail. The recommendation made in paragraph 103 that we could use,

“the European Social Fund and European Regional Development Fund to support enhanced provision of both basic and higher level ICT training and skills training in general”,

therefore seems particularly relevant, and I hope that this will be adopted by the Government.

During the education process, not enough emphasis is placed on the need to teach and encourage soft skills and social skills. Indeed, another organisation called WORKing for YOUth said that,

“employers tell us in no uncertain terms that it is the soft skills—the communicative skills, the social skills—that they find most lacking by the time people leave school to come to them”.

Surely this is something that schools should be teaching as a matter of course and I hope that message will be received loud and clear.

We were told by the Prince’s Trust how beneficial mentoring can be in building confidence and achieving positive outcomes. It also said that, for certain young people, becoming entrepreneurs and setting up their own businesses was a good option. We need more entrepreneurs, as other noble Lords have said, and I believe that my noble friend Lord Young of Graffham, with the support of our Prime Minister, is proposing that it should be included in the school curriculum and fostered and encouraged as a skill set.

Going forward, local enterprise partnerships—LEPs—can play a pivotal role in identifying the next generation of entrepreneurs. With the funds that they will have at their disposal, is it too much of a quantum leap to imagine that they could set up local quasi-venture capital funds, where good ideas are supported by funding on favourable terms over a reasonable timescale? Perhaps these could be run in tandem with the Government's excellent start-up loans scheme, which includes mentoring support. In the two years since its formation by BIS in 2012, I understand that the scheme

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has loaned over £91 million to more than 18,000 new businesses. This bodes well for the future creation of many SMEs and, it is hoped, as time passes, large public companies.

Statistics show that countries with a strong balance of payments surplus have low youth unemployment. This means that we have to invent and make things that people want, and this is where the entrepreneurs of tomorrow can make such a tremendous contribution. Last Tuesday in this Chamber, my noble friend Lord Bamford made his maiden speech. It was an excellent contribution, and I hope that noble Lords will bear with me if I quote just one passage from it, as I think it is very relevant to our debate today. The noble Lord said that,

“we have a duty to identify and nurture young talent. That is why, in 2010, we opened the JCB Academy in Staffordshire. The academy is now giving 500 14 to 19 year-olds a hands-on technical education … not just for the benefit of JCB but for British industry as a whole”.

He went on to say:

“We are creating real opportunities in industry for our young people. In recent years there has been much progress in the field of technical education. We need, however, to do more—much, much more”.—[Official Report, 10/6/14; cols. 267-68.]

University technical colleges can play a major part in producing the entrepreneurs of tomorrow, which in turn will make us rediscover our manufacturing skills, promote exports, reduce our balance of payments deficit and, most important of all, play a major part in bringing down unemployment. It is rare indeed to find an initiative with the potential to offer a quadruple win, and I hope that the 17 or so UTCs which we currently have in the UK will prosper and multiply. Indeed, I believe there are plans for another 30 to be opened by the end of 2016, which is really excellent news.

I was also struck by an idea proposed by the noble Lord, Lord Macdonald of Tradeston, in the same debate last Tuesday. He said:

“Finally, it is surely regrettable that half the UK’s large companies do not offer apprenticeships. We can no doubt change that if we sustain the cross-party consensus and support for vocational training. We should also look again at the proposal that the Government use the leverage of their billions of pounds spent in public procurement of goods and services to boost apprenticeship opportunities by requiring companies bidding for larger contracts to offer apprenticeships”.—[Official Report, 10/6/14; col. 270.]

I do not believe that the Minister who is responding to the debate this evening was able to indicate whether he favoured the noble Lord’s proposal, and so I end by asking him whether he might be able to give the House his views on this when he rises to his feet later this evening. I fear that I have gone slightly off piste on this last one and I hope that my noble friend on the Front Bench will forgive me.

9.01 pm

Lord Clinton-Davis (Lab): My Lords, one of the tasks that we set ourselves was to dispel, as far as we could, some of the hopelessness which affects young people today. We cannot possibly succeed in doing that entirely, but we can make a contribution, which is what we tried to do.

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I wish that I could have gone along with my colleagues to Birmingham, Liverpool and so on, but unfortunately my health did not permit it. However, I think that we have done a worthwhile job and I pay a compliment to our staff, who were superb throughout. I also pay a compliment to our chair, who enabled all of us to make a contribution. She deserves the compliments of the whole committee as far as that is concerned. The sub-committee has been remarkably well led. She has shown a determination to involve all the members and, without exception, they have responded in full—sometimes, like me, rather too fully.

I also share our chairman’s view that it is outrageous that the Government should have responded to this lengthy report in the way that they have. We have a joint effort to make in tackling this important issue. Why have the Government been so late? Why have they chosen to come forward with their response so close to this debate? It is absolutely outrageous.

The sub-committee concentrated, of course, on the question of youth unemployment and, in particular, on the threat that it poses to young people and to society at large, here and in the European Union. How can the European Union assist member states on the question of long-term unemployment? Long ago I was a member of the European Commission, but I cannot recall a debate about this issue. Perhaps we were rather slow to tackle it or perhaps it was not of such concern at the time. All I would say is that this report sheds a certain light upon an issue that all too often is shrouded in darkness.

Of course, the foremost task lies with the member states—a point underlined by the sub-committee and repeated in this debate—but the EU can and should play a vital role in supplementing those efforts. I do not think that prejudice against the EU has any part to play in this. It is important to collaborate in order to find solutions for this important issue, if we can. Naturally, the EU cannot do everything and it does not try to do so, but it can indicate how member states might most usefully work together. The process of learning and working together can be hugely beneficial. The report rightly emphasises that we can also learn from the experience of others who are not members of the EU. They are suffering too, and they may have useful ideas to share. It is indeed in our mutual interest to do this. Moreover, as the report indicates, the EU’s Europe 2020 strategy has a prominent role to play in tackling youth unemployment in Europe.

As the report illustrates, although UK youth unemployment is lower than the EU average, we should not rest on our laurels. In fact, youth unemployment in the UK does not compare well with some other similar economies in the Union—a point that is highlighted in the report. In my view, the Government’s response is far too complacent about this issue. We contend in our findings that there is much to learn, and we have strongly suggested that EU funding should be far less centralised. The correct course for enabling Union funds is that they should be spread more sensibly among the people and organisations that are most affected so that they can be full partners in this enterprise.

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The concept of the Youth Guarantee which has been advanced by the Commission is broadly supported by the sub-committee as an important initiative in the drive to confront youth unemployment. We have set out our support for the steps that are outlined for those parts of the EU which are most affected by youth unemployment. We have recommended that this youth employment initiative should be set up in five areas of the United Kingdom, which would receive that funding. This point has been made time and again in this debate, and we deserve a reply from the Government about what their intentions really are.

We also indicated the importance of young people working and gaining experience in other member states, but we must insist, as a vital ingredient, on the proper protection of workers’ rights, thus averting the exploitation of young workers.

My earnest hope is that the report of the sub-committee will help to advance the significant issues that are at stake. All in all, I close where I began by saying that the members of the committee, led skilfully by our chairman, have contributed largely to the findings that we seek to insist upon.

9.10 pm

Baroness Uddin (Non-Afl): My Lords, it is a great pleasure to follow the noble Lord, Lord Clinton-Davis, who has a long-standing record of contributing to these very valuable discussions. I thank the noble Baroness, Lady O’Cathain, for her leadership of this critical examination of this important matter. I was not a member of the group but, having spent three decades trying to connect neglected generations to potential employers, I took a great deal of interest in the report.