Schedule 3
Finance Bill
12:00 pm
Theresa Villiers (Shadow Chief Secretary To the Treasury, Treasury; Chipping Barnet, Conservative)
Thank you, Mr. Illsley. I welcome you to the Chair.
I had just started to address the position of staffing and recruitment companies and employment agencies in the schedule. The purpose of the Opposition’s amendments to the definition of a managed service company provider is to focus on those people
“whose sole or main business relates to the provision and facilitation of”
use of service companies. If the amendments were agreed to, they would remove the threat of liability from staffing and recruitment and employment companies, because they would be only incidentally involved with managed service companies. Their main business would be related to placing individuals, which would be different.
Proposed new section 61B(4) of the Income Tax (Earnings and Pensions) Act 2003 provides some protection for staffing companies, but its ambit is unclear, and I hope that Government amendment No. 97 will provide further assurance to the recruitment sector. It is vital that we clarify the position of recruitment companies in the schedule, because damaging the recruitment industry could have a negative impact on the flexibility of the UK labour market.
The key concern is that if a recruitment company has any influence over the choice of service company or the professional adviser through the workers with whom it is involved, the company could be liable for “promoting or influencing” within the meaning of new section 61B. That is a particularly strong concern when staffing companies have contractual control over the freelance worker, as many do. Furthermore, many staffing and recruitment companies influence the way in which payments are made to the worker, and again, such influence might trigger the MSC provider status that we were discussing before the Committee adjourned.
I make it clear that the Government’s response to the recruitment industry’s concerns is welcome; many of its representatives are pleased by their movement on that issue. However, we still need more clarity and we need to asses what risk mitigation steps the recruitment industry can take to avoid inadvertently falling within the scope of proposed new section 61B. The feedback that I have had is that the recruitment industry wants to be compliant, but it does not know what compliance looks like.
It would be useful, for example, if the Chief Secretary could confirm whether holding a list of approved company suppliers and advisers is sufficient to amount to “promoting and influencing” within the meaning of paragraph (d). It would be unfortunate if the changes that we are considering under schedule 3 were to encourage staffing and recruitment companies to take no interest in the contracting arrangements of their contractors and workers, as that would remove an important quality control that is currently exercised. The absence of a tax status review by staffing or recruitment companies could increase the likelihood that less reputable operators—the kind of people about whom Her Majesty’s Revenue and Customs is concerned—have more, not less, scope to supply their services.
Amendments Nos. 42 to 44 concern the problem of tainting, about which I have received a number of representations. The anxiety is that if an adviser has a sufficiently close relationship with a client to be deemed to be “promoting or facilitating” under paragraph (d), it will become an MSC provider in relation to any client and any company with which it is involved. The Bill does not specify that the promotion or facilitation must relate to one particular company. Provision of services within the meaning of paragraph (d) could taint all the companies with which the adviser deals. The upshot will be that a freelancer will be faced with the hassle not only of ensuring that the relationship between her company and her professional advisers is compliant and does fall not within paragraph (d), but that her adviser does not provide any non-compliant services to other clients. Frankly, that will be difficult in practice.
It will also be difficult for end clients and staffing companies that are anxious to comply with the legislation to ensure that they are not brought within third-party debt rules, via an indirect connection to a company that has a non-compliant relationship with another adviser or client. There is a real danger of litigation if someone finds their tax bill suddenly increasing because their adviser entered into a non-compliant relationship with other clients.
The amendments are intended to deal with such tainting. Amendment No. 42 proposes a new subsection (1A) to make it clear that one should consider only the relationship between the scheme provider and the company whose tax affairs are under consideration. It is important to bear in mind that this is a serious problem, which could have a significant impact on how the proposals are enforced. If HMRC believes that a particular company falls within the MSC provider definition, for example, it will presumably inform not only that company, but all its clients. They will immediately leave, because they will be worried about being tainted by the activities of that particular scheme provider. That could trigger an instant cash-flow crisis and, quite possibly, put the provider out of business instantaneously. We therefore need to deal with the issue of tainting. The Bill might not be intended to have that effect, but I fear that that is the effect that it might have. It could cause significant inconvenience for freelance workers.
Amendments Nos. 38 and 39 are essentially tidying-up points that were suggested by the Law Society in its useful briefing on the Bill for the Committee. They would amend proposed new section 61B(c), which specifies one of the triggering factors for a situation to be categorised as one involving a managed service company. A situation would be considered as such if the way in which payments are made to the worker would result in her receiving payments that exceed those amounts that she would receive, even if every payment made in respect of the services provided were employment income.
Committee members will see from the briefing that the Law Society welcomes paragraph (c) as helpful, because it prevents the mere provision of services of individuals from giving rise to MSC status even when employee tax is paid. It makes the sensible point that the Bill does not specify the period for which test is to be applied, however. The amendments would makeit clear that the relevant period is the year of assessment.
Amendment No. 47 was also a useful suggestion by the Law Society. It is designed to remove a possible loophole in the framework. The provisions seem to be somewhat unclear as to how they impact on partnerships. The amendment is intended to go with the grain of the Government’s proposals and ensure that they operate effectively in relation to partnerships and also to ensure that a partnership structure cannot be used as a loophole. So the amendment would extend the reach of the proposals to make them bite in a situation where the scheme provider is a partner in a partnership, which amounts to the MSC. The Government’s drafting seems to be largely based on a corporate model and it does not seem to work exactly in relation to partnerships. The amendment might help to achieve greater clarity and ensure that the measure operates more clearly in relation to partnerships.
Amendment No. 48 is another tidying-up amendment. It is essentially a technical point to ensure that any payment taken into account for the extra MSC taxes does not include payments that have already been taxed as earnings elsewhere. The consequence of the application of the MSC legislation is that various payments are treated as if they were the earnings of an employeefor tax purposes, and therefore they are subject to PAYE and national insurance. Where the Bill applies, these payments become part of what is referred to as the deemed employment payment. That is calculated using a series of steps set out in the proposed new section 61E(1). Step 1 defines
“the amount of the payment or benefit mentioned in 61D(1)(b).”
However, new section 61D(1)(b) covers all payments received by the worker, including those that have already been taxed as employment earnings. Therefore, if that measure is left unamended, there is a danger that extra taxes would be applied to earnings thathave already been taxed as employment earnings. By adding, as this amendment would, a reference to new section 61D(1)(c), payments already taxed as earnings are excluded from the scope of the deemed employment payment.
I would like to turn to amendment No. 49, which focuses on a concern raised by the Private Contractors Group.