Personal Service Companies

Oral Answers to Questions — Treasury – in the House of Commons at 12:00 am on 25th January 2001.

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Photo of Mr Nick St Aubyn Mr Nick St Aubyn Conservative, Guildford 12:00 am, 25th January 2001

What his estimate is of the number of IT consultants who will move overseas as a result of proposed changes to the tax and national insurance treatment of personal service companies. [145794]

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

There is no evidence that a significant number of IT consultants are moving overseas as a result of this legislation.

Photo of Mr Nick St Aubyn Mr Nick St Aubyn Conservative, Guildford

In answer to a previous question, the Paymaster General wrote to me on the subject of this stealth tax, which falls principally on IT consultants. She said that this burden on them was allowing us to target support on the real entrepreneurs. Does she accept that IT consultants are disgusted that she does not recognise that they are real entrepreneurs? Why is an IT consultant who keeps money in the business to invest in equipment and take on more workers not a real entrepreneur?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

The hon. Gentleman has pursued this subject for some considerable time. He needs to appreciate three main points. The proposal to which he refers, commonly known as IR35, does not attack entrepreneurs or those who run their companies. Nor is it targeted at the IT industry. Its purpose is to deal with a specific issue. The use of service companies meant that people who, in any other circumstances, would have been employees, were able to reduce their liability to tax. To give an example, a service company worker earning £50,000 a year had been previously paying about 21 per cent. tax and national insurance compared to an employee doing exactly the same work paying 35 per cent. The encouragement provided to entrepreneurs in this country is well known, given the reforms undertaken by the Government—and, indeed, that is recognised, even by the press, in the surveys published today.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I take that point and will rephrase those words, given the sensitive nature of our comments at present. It is recognised in the press.

So the hon. Member for Guildford (Mr. St. Aubyn) point first, that IR35 hits IT workers, is not true; and secondly, that it discourages entrepreneurs, is not true because the Government's policy has encouraged them. It ensures that those people working in the same conditions are subject to the same tax. It is not a stealth tax; it ensures that people pay the tax that they should have been paying all along.

Photo of Mr Robert Sheldon Mr Robert Sheldon Chair, Liaison Committee (Commons), Chair, Standards and Privileges Committee, Chair, Liaison Committee (Commons), Chair, Standards and Privileges Committee

Is my hon. Friend aware that anyone moving overseas as a result of our tax treatment would be very ill-advised? Has she seen the account in yesterday's Financial Times about the European Parliament commissioning a report from seven international financial people involved in such matters? The report shows that the Government's tax treatment and labour market policies were the ones that the eurozone should copy. Is not my right hon. Friend the Chancellor to be applauded for achieving the respect and admiration of the eurozone countries for the work that he has done?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

My right hon. Friend is entirely correct about the plaudits that my right hon. Friend the Chancellor has received for the innovations that he has introduced to encourage entrepreneurial activity in the United Kingdom. Indeed, on the specific question about IT consultants, in the Electronic Telegraph of 3 April 2000, a commentator said that she was sceptical at repeated threats that specialists will just move offshore to avoid IR35. She went on to say: The tax on most parts of the Continent is even worse than it would be here for those consultants and that "they would be poorer" if they left here. For example, in Norway, Belgium, Germany and the Netherlands, the tax rates are higher for those workers.

Photo of Richard Ottaway Richard Ottaway Shadow Spokesperson (Treasury)

Can we now have a straight answer to the question asked by my hon. Friend the Member for Guildford (Mr. St. Aubyn)? Will the Paymaster General admit that IR35 represents everything that is damaging about the Government? It adds to the regulatory burden; it is a stealth tax and an attack on innovation and enterprise; it is an attack on the genuine wealth creators of this country; and it is driving our finest people overseas. In short, it is the politics of envy.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

No, I do not agree with the hon. Gentleman's proposition. IR35 is not driving IT workers overseas and there is no evidence to support that allegation. The tax system encourages entrepreneurial activity in the United Kingdom. The hon. Gentleman needs to tell us whether he would continue to allow that mechanism to exist in the tax system so that some people could pay less tax than others when they are in exactly the same position.