Clause 135 — Provision of Services Through Intermediary

Finance Bill – in the House of Commons at 1:30 pm on 14th May 2003.

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Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General 1:30 pm, 14th May 2003

I beg to move amendment No. 8.

I welcome you to the Chair, Mr. Gale, on what is the first occasion on which I have served under your chairmanship on the Floor of the House.

Clause 135 extends the scope of the much reviled and criticised IR35 legislation, which continues to cause distress. It applies to people who provide personal services through an intermediary to those who are engaged in a domestic capacity. The proposals are to take effect retrospectively, from 10 April this year.

The clause means that affected people will have to submit two self-assessment tax returns. The amendment is very simple and offers an easy solution. I am surprised that the Government did not adopt a similar approach in the first place. I hope that, for once, they will accept the amendment with the result that we get a better Bill. The amendment would simply delay the effective date for the income tax change, so that changes to national insurance and income tax happen on the same date.

The Government's anti-avoidance legislation is drafted in such a way that the people concerned, to reflect their tax affairs properly, must make two self-assessment tax returns this year. Those individuals were encouraged to incorporate by the Government, but they will be left with the increased burden of corporate regulation, no tax incentives, and considerable complexity when it comes to self-assessing their tax affairs.

It would be sensible to remind the House that the IR35 rules were originally written specifically to exclude domestic staff, presumably because the amounts at stake in tax and national insurance charges were not high. Has that changed dramatically over the past year? Is that why the Government are so monumentally concerned about the matter that they have to capture the domestic staff involved? Given that the clause is expected to raise only £15 million a year, that would be very surprising.

Furthermore, although a huge—for them—additional regulatory burden is being placed on the people concerned, no regulatory impact assessment is available. Has one been undertaken? The Government claimed always to be able to put in place such an assessment. When the matter has been raised in various Committee discussions, the Government have responded by saying that they would sort out such an assessment—they never volunteer to provide one. Frankly, it is not good enough for the Government not to provide such an assessment, given that some people are patently being given an additional regulatory burden. The people involved are those least in a position to be able to bear such a burden. I call on the Government to issue a regulatory impact assessment in relation to this provision. I think that they would find it pretty poor reading, and that it would be sensible for them to accept the amendment.

To make matters worse, the Government last year encouraged sole traders to incorporate, with the introduction of lower corporation taxes for smaller companies. A number of people acted on that, and incorporated—well done them—but now, only a year later, this Bill proposes to tax certain of those individuals as though they had not incorporated at all.

The provision is not targeted at wealthy tax planners. It will affect workers on relatively low incomes, who pay tax at the basic rate. They relied on last year's legislation in good faith. The Chancellor's proposed IR35 changes will be a major headache for tens of thousands of people who provide domestic services, such as gardeners, cleaners and cooks. They will be dragged into the Government's bureaucratic tax trap. The people affected will lose money, and be forced to submit extra tax returns.

The Chancellor is taking almost £50 million over the next three years out of the pockets of nannies, gardeners and cooks, and transferring it to the Government's coffers. The Federation of Small Businesses has noted that the provision will affect some of the lowest earners in Britain.

Only last year, many of the people involved were encouraged by the Government to incorporate. Twelve months on, they are to be hit by this regulation. None of the expected tax incentives can continue to apply and, for the people involved, assessing their tax position will be a considerably complex task. The problem has arisen solely because of the Government's incompetence, and their inability to draft effective legislation. Many people who thought that they were doing the right thing by following the Government's advice last year will now be seriously inconvenienced and financially penalised for their diligence.

No doubt, the Government will try to justify this clause only 12 months after they incorporated the very encouragement that has led to what they regard as the mischief of anti-avoidance. The Government say that they must stop anti-avoidance, and the Opposition have said repeatedly—as we must, to prevent the Government from falling into the temptation of mounting a false argument—that we support that. I have demonstrated the scale of the matter, but the theme of this Finance Bill, as was shown yesterday, is that the Government are determined to wrestle as many of the measures as possible through the House under the cloak of anti-avoidance. That is a blatant attempt to stifle scrutiny and criticism.

The Government and the Treasury have adopted an arrogant approach. They are not aiming to target anti-avoidance so much as making a futile attempt to be anti-accountability. Britain's honest and hard-working citizens will not be fooled.

I have read the official record of last year's Finance Bill Committee debates. The Government were fully aware that the interaction of lower corporation tax rates and dividend planning would provide tax advantages for an incorporated business. Even so, they implemented the measures without amendment.

It is proper and right to remind the Committee and the Paymaster General—I also hope that the Chancellor may deign occasionally to listen to arguments that do not accord entirely with his own—about a Federation of Small Businesses report published on 3 February this year. The report said that, at the time that the Government proposed the measures last year, a self-employed person with profits of £15,000 could pay up to 32 times more in tax than an incorporated counterpart.

The report, entitled "The Self Employed versus Incorporated Businesses", is well worth a read. It quotes figures from the Institute of Fiscal Studies, so it is not merely self-serving special pleading on the part of small businesses, although there is no more worthy cause in the business arena. The report states that, on profits of £15,000, the self-employed person would pay a combined income tax and national insurance bill of £2,884, which is 32 times more than the £91 paid in corporation tax by a limited company. On profits of £30,000, a self-employed person pays a combined income tax and NIC bill of £7,234, compared to £3,654 in corporation tax for a limited company. Is that not an obvious disparity between self-employment and incorporation?

As a background to the amendment and to the Government's purpose in extending the measure to low-income earners, such disparity in tax treatment shows that, even after all the strong encouragement and the legislative power devoted to persuading those on low incomes to incorporate, the minute that, in good faith, they do so, they are slapped with a further regulatory burden. Their affairs become complex and they may suffer financial penalties.

The remarks of Neil Hamper, the head of the Federation of Small Businesses taxation unit, are striking. He said:

"Clause 135 is evidence of the hole which the Chancellor has dug for himself. It comes as little surprise that many self-employed people, some of the lowest-paid people in the UK, will choose to incorporate when the tax system so obviously discriminates against them."

It is right that our scrutiny of the measure should be carried out by a Committee of the whole House. Our amendment would at least ensure synchronisation so that the regulatory burden was eliminated. The Treasury could easily accept our proposals, but one fears that, due to the Government's characteristic arrogance and their resistance to admit that they might have got something even slightly wrong, they are so stubborn that they will even resist something as sensible as our amendment, although I hope that the opposite will be the case.

Through the Government's mistakes, the original legislation was not drafted properly, so they have a responsibility to those who relied on it. The least that they can do is to implement the measure in such a way that individuals can unwind their affairs or carry out self-assessment with the least complication.

If the Government are characteristically blind to our arguments, I and my party, on behalf of the relatively low-earning nannies, gardeners, cooks and all the others who are affected by the measure will wish to press the amendment to a vote.

Several hon. Members:

rose—

Photo of Roger Gale Roger Gale Vice-Chair, Conservative Party

Order. Mr. O'Brien took a fairly wide-ranging approach in introducing his amendment. It may be helpful if I indicate now that I shall be unlikely to accept a stand part debate as well.

Photo of Norman Lamb Norman Lamb Shadow Spokesperson (Treasury), Liberal Democrat Spokesperson (Treasury)

We very much support the amendment. We, too, share concern about the absence of a regulatory impact assessment. Often, such assessments do not comply with the Government's guidelines as to what they should include, but the fact that there is to be no assessment at all is of serious concern. The measure will add to the regulatory burden of people who are trying to operate small businesses, so there should be an assessment and I should be grateful if the Paymaster General would respond to that concern.

I also share the concerns expressed by the Conservative spokesman, Mr. O'Brien, about the disparity in the tax treatment of sole traders and of limited companies. I shall not go into that in detail, in acknowledgement of your comments, Mr. Gale, but serious concerns have been raised with me and many others by the Federation of Small Businesses. People have been encouraged to incorporate and now this change has happened.

Last year, when IR35 came in, the Liberal Democrats opposed the measure. We fully accepted the importance of tackling abuse and tax avoidance, but we thought that the Government were taking a sledgehammer to crack a nut and that the implications of the measure could be extremely serious. We are now discussing an extension of IR35, and I have some questions for the Paymaster General.

What evidence can the Government show that the scale of abuse makes the measure necessary, given the relatively small amount of extra revenue that it will bring in? Why was it thought necessary to extend IR35? Why was the matter not dealt with last year when the first measure was introduced? I was going to ask what assessment had been made of the amount of extra income that would result, but a figure was mentioned by the Conservative spokesman. What is the overall purpose of the reform?

Photo of John Redwood John Redwood Conservative, Wokingham

The clause is disappointing. I welcomed the Government's proposals last year to favour incorporated businesses and to introduce a better tax regime for the smallest companies. It was a sensible measure in favour of enterprise, so it is particularly disappointing that, after only a year, when, as one could have forecast, the policy has enjoyed modest success, the Government want to clobber those who took advantage of it and to reverse the position. I urge the Paymaster General to think again. Her thoughts last year were rather better than her thoughts this year.

In support of my case, the Paymaster General has evidence that IR35 is not only a widely hated tax but also that it is extremely damaging to the United Kingdom. It pushed people out of self-employment. It sent some of them abroad, where they had successful, high-earning businesses; but others simply left that employment altogether, because the tax was an imposition too far. It did considerable damage at a time when the high-tech industries, which were especially targeted by the measure, were extremely fragile.

My hon. Friend Mr. O'Brien, in moving his amendment, pointed out the big imbalance between the taxation on earnings for a self-employed person and the taxation on profits for a small, incorporated business. He is right about that. However, a fair comparison for the Paymaster General to make, when she assesses the potential damage, as she sees it, to the Revenue, would be not between profits held within an incorporated business and the earnings of a self-employed person but between distributed profits in a small business and earnings. In such a case, the comparison is not as stark as my hon. Friend said, because there would be taxation on the money being drawn out as wages by the person concerned, or even as share dividend. If the person was the shareholder and decided to take money out, there would be a tax payment, which would narrow the gap, so the threat to the Revenue would not be as great as the Paymaster General will undoubtedly want us to believe when she replies to the debate. In normal circumstances, the gap for low-earning, self-employed people would not be nearly as great in terms of tax, as they would want to take all or most of the money out of the incorporated business in one form or another because they would want it to live on. As my hon. Friend pointed out, those people often do not earn much.

Having listened carefully to my hon. Friend, I think that he was very gentle towards the Government, given the magnitude of their U-turn, in their decision to bash the very people whom they encouraged a year ago. His suggested remedy is mild. If he wishes to push the amendment to a vote, I shall have no worries about supporting it because it is better than the current provision.

However, it would be better still if the Government dropped the clause altogether. The clause is nasty and brutish; it is part of rip-off, insensitive government. It will not bring in much revenue—the Treasury figures probably exaggerate the amount—but it will do damage and put many small entrepreneurs, people who are trying to provide a service, under a lot of pressure that they do not deserve. Such people are not experts on the tax system; they do not want to go through these enormously expensive and difficult changes. The measure will worry them, when they want only to provide a livelihood for their families and a service for someone else. I hope that the Paymaster General will realise that, in the main, they are decent people, trying to make a modest living while paying sensible amounts of tax. Her decision to target them will not be welcome in any constituency.

Photo of John Baron John Baron Conservative, Billericay

May I welcome you to the Chair, Mr. Gale?

I support the amendment. There is little doubt that clause 135 creates a gross injustice, a point that has been raised by several of my constituents. Last year, the Government encouraged sole traders and the self-employed to incorporate by introducing lower corporation tax rates for small companies. Subsequently, a large number of people did just that. Only a year later, on the grounds of reducing tax avoidance, the Government propose legislation that will tax individuals as though they had not been incorporated at all. Those measures are not targeted at wealthy tax planners; they affect many low-paid workers, who were fooled by the Government into incorporating and, having done so, they are now being ambushed by the Government under the Bill. The victims are normal taxpayers who rely on the Government's legislation in good faith, and they have been badly let down.

In addition, the anti-avoidance legislation has been drafted so that the individuals concerned will now have to submit two self-assessment returns for this tax year properly to reflect their tax affairs. So those individuals whom the Government encouraged to incorporate now face not only an increased burden of corporate regulation, but no tax incentive whatsoever and considerable complexity in self-assessing their tax affairs.

I can only add to the request made in support of my hon. Friend Mr. O'Brien by asking the Government to undertake a regulatory impact assessment to ensure that the measure has been properly thought through. As has been mentioned previously, IR35 rules were originally written specifically to exclude domestic staff, presumably because the amount of tax and national insurance contributions at stake was not very high—the figure of £15 million has been suggested. I should like to understand better whether that has changed dramatically, which would be surprising given the figures suggested.

The Government are obsessed by tax avoidance, and that is obviously not necessarily a bad obsession, but their approach in this case has hit legitimate businesses that have set up companies to help the organisations that they serve. They are not avoiding tax and, moreover, they provide the very flexibility in the labour market that the Government say that they are trying to encourage and that is an asset to this country.

The Government criticise other EU countries for their lack of labour market flexibility, but they appear to be piling on more and more regulation domestically and introducing more taxes and tax measures that undermine the asset about which they boast. That cannot continue.

I support amendment No. 8, as the Government's proposed changes to the law will put an unnecessary burden on individuals who do not deserve to be persecuted in this way. I ask the Government to recognise that they should have listened to the warnings from my Front-Bench colleagues during consideration of last year's Finance Bill. They should seriously consider accepting the amendment, which will at least attempt to salvage something from this shameful sequence of events.

Photo of Mr John Burnett Mr John Burnett Liberal Democrat, Torridge and West Devon 2:00 pm, 14th May 2003

May I too welcome you, Mr. Gale, to the chairmanship of our proceedings this afternoon?

Opposition Members are absolutely right to say that the Government have actively encouraged people to incorporate. However, in this case, the commissioning contractor—for want of a better expression—often insists on dealing with an incorporated person and they do so for reasons of saving tax themselves. We debated that at length when IR35 was introduced, and I consider the changes made then and these changes to be outrageously unfair. Obviously, when the changes are made, additional national insurance contributions will be payable by the subcontractor; nevertheless, no additional employee benefits will accrue or be available to those subcontractors. In other words, they will pay and they will get nothing, and they will also be subjected to an additional burden of bureaucracy.

Finally, I should like to ask the Paymaster General whether she could let the Committee know whether the Government yet have any proposal to make the fiscal penalties for disincorporation more fair and less punitive.

Photo of Jonathan Djanogly Jonathan Djanogly Conservative, Huntingdon

My hon. Friend Mr. O'Brien described in detail and extremely well how the provision could affect some of the poorest workers in our country. While totally concurring with him, I should like to examine the other side of the coin and explain how the clause will attack middle-class, middle-earning, aspirational and hard-working parents, particularly women. I shall do so in relation to the implications of applying IR35 and how it will affect nannies. That will cost parents who take advantage of the existing regime hundreds of pounds a year. We are talking about extra charges of at least £6 a week and probably £10 or more in London.

Outside London, the average nanny's wage is about £235 a week net of tax, and it is likely that parents will lose about £312 a year. I note that that is some £60 more than the new child trust fund that is being introduced. One tax partner at Grant Thornton said:

"If you employ a nanny or housekeeper, the chances are you will pay around 25 per cent. more for the service now this tax break has been removed."

Parents will therefore have to start paying a triple whammy—their own national insurance, presuming that they work; the employer's national insurance contribution for their nanny and, of course, any other domestic staff; and their nanny's own national insurance bill, because parents traditionally take care of their nanny's tax and insurance liabilities.

For example, a working mother would have to earn a gross salary of £30,345 simply to pay her nanny a gross salary of £20,400, netting some £300 a week. That shows how middle-class parents are being hammered at the moment. The mother's own annual net pay after tax and national insurance deductions would be about £22,350, while the cost of employing her nanny—including employers' national insurance contributions, which are additional to the nanny's gross wage—would be £22,360. Of course as nanny's wage grows, the triple-whammy effect gets worse.

The Government provide help with child care through the working tax credit, but although that payment is worth up to £200 a week for people with approved child minders, it is important to note that, despite ongoing lobbying on that point, the Government refuse to apply registration to nannies. Child minders are mostly registered through Ofsted and regulated by national standards for day care and child minding, but nannies are not approved in that way. In addition, parents with a joint income of £58,000 or more will not be eligible for child tax credits.

We have increasingly seen a move towards nannies and parents going underground in relation to employment, and that will increase under the clause. One of the worst-kept secrets in the capital is that probably as many nannies work outside the tax system as inside it. People do not want to do things that way; they are being forced to do so by a system that does not take notice of the needs of middle-class parents in this country.

Of course this tax affects women in particular because their salary normally pays for the nanny. Most women will have a very difficult decision to take when they have children: should they stay at home, or should they go back to work? They will want to go back to work to keep their minds ticking over and to keep their trade experience up to date, but in effect they will do so to pay for the nanny, as the figures that I have given show, rather than to provide themselves with any additional salary, so we are talking about an additional tax on women. I thought that the Government were in favour of getting women back to work, but they are clearly in favour of getting people whom they see as being lazy and sitting at home back to work but not doing so for aspirational, hard-working middle-class women who want to get out and do something for this country, and we desperately need to get more women back into the labour force.

Photo of John Redwood John Redwood Conservative, Wokingham

Although I see my hon. Friend's point that some might be tempted down the path of illegality into the black economy, does he not agree that many of the professional women about whom he is talking, who wish to return to work and have every right to do so, would never dream of going down that path, as it would be against their principles and would prejudice their important employments, in which they are expected to be decent, honest and upright? Will not this therefore be a tax that stops women having the freedom of choice that they should have? It will be very bad news for them and will put them off returning to the labour market, which may result in their losing their confidence in future years.

Photo of Jonathan Djanogly Jonathan Djanogly Conservative, Huntingdon

I agree absolutely. This Government are not considering aspirational women who want to get out there and improve themselves. My constituency currently has virtually no unemployment, and is one of the fastest-growing areas of the country—a fact of which I am very proud. When I visit local businesses, I am told consistently that there are serious problems with recruitment: they cannot find the people to fill the jobs, and they cannot find people with the necessary skills. Thousands of women in this country are highly skilled and want to work, but they cannot do so because of the current tax system. I hope that that provides some spur, while going in the opposite direction, for the Government to rethink this issue.

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

It may help if I explain to the Committee how the mechanism works in relation to service companies, why domestic employees were exempt last year, and why the Government acted this year. That will lead me directly on to some of the hon. Gentleman's points.

Although I appreciate and understand the important points that Opposition Members have been making about a company being incorporated or unincorporated, they are sorely mistaken on the focus of this specific measure. I want to explain to them why that is. In relation to the decision last year to exempt domestic employees, what has happened subsequently confirms the point that the Government repeatedly make: if a loophole is left, unfortunately, somebody will try to exploit it.

The existing service company legislation ensures that workers who would have been taxed as an employee if they had been working under a contract with the client cannot avoid paying tax and national insurance on the same basis as any other employees by using a limited company or other intermediaries to sell their services. As I have said, the current legislation does not, however, apply to engagement in a domestic capacity. Regrettably—again, this point has been made repeatedly since 1997—the Government have to have mind to how taxpayers will behave towards the tax system. Our duty is to ensure that the right amount of tax is collected and that it is collected fairly: by that, we mean that those who should be paying tax do not find artificial ways of not paying it, as that is patently not fair to all other taxpayers. In advocating a higher rate of tax, Norman Lamb fails consistently to understand that it is important to ensure that people pay the tax that they are supposed to be paying.

Generally, schemes operate by setting up the domestic worker as a director and shareholder of a personal service company. The individual employee therefore starts off as an employee of the client. Subsequently—not because it improves the employer-employee relationship or because the employer is interested in helping self-employment grow—the positioning of an intermediary is used simply to reduce tax. I shall explain how that works.

The domestic company is set up for the domestic worker so that the domestic worker is a director and shareholder of the personal service company. The service company offers the services of the director to the former employer. The domestic worker takes a salary from the company at around the personal threshold of £4,615, and the remainder in dividends. Therefore, if the company net profits are below the threshold for the starting rate of £10,000, the domestic worker can extract up to £14,615 free of tax and national insurance contributions.

Let me remind the Committee: somebody who was an employee is then encouraged to use an intermediary to reduce the cost to their previous employer or to increase the payment to them by setting up the service company.

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

The hon. Gentlemen should let me finish, as they need to know what was being marketed. I will then challenge them to say what they would have done were they in government. We did not act out of some fickle desire: there was proof of what was going on, and I shall give that proof to the Committee.

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

I will not. If the hon. Gentleman will let me explain this complex point, there will no doubt be plenty of time for interventions.

The scheme providers usually charge a monthly fee for operating the scheme. Effectively, the domestic worker still receives a weekly or monthly payment, albeit that it might be a larger amount because of the savings that the scheme produces through avoidance—the savings might be split between the former employer and the domestic worker, or the former employer might take all the benefit.

It was right to ask the question—we did not think that leaving domestic workers outside the system would not raise issues, and as with all points of the tax system, we give careful consideration and follow developments. We had been approached by several parties, however, of which I will give one example, about the number of schemes that were about to be marketed to exploit the loophole. The schemes were able to offer significant savings in tax and national insurance contributions to any domestic employee with net weekly earnings above £111 a week. In terms of the attitude to the Government action, let met quote Leonie Kerswill of PricewaterhouseCoopers:

"IR35 previously exempted domestic staff, but the cost savings of the arrangement for parents employing nannies has led to an explosion in the use of service companies".

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

No. I will finish making this point and then I will give way to the hon. Gentleman. I am trying to explain this complex point, giving the proof for why the Government acted in this way. I will give way at the relevant point.

Bearing in mind the tax and national insurance savings, the Government were faced with a significant problem. For example, a letter was circulated to every client of a particular agency that runs the arrangements for nannies. The letter states:

"As you will see, we do not believe that the use of a personal service company represents best practice in nanny employment because they involve the use of a tax-saving vehicle which obscures the real employer/employee nature of the relationship between parents and their nannies, with some attendant loss of employment rights for the nannies", most of whom are women. Mr. Djanogly was concerned about women's rights.

When the measure was announced and comments were made about the Budget, on Saturday 12 April The Daily Telegraph reported the managing director of Nannytax as saying:

"We cover all types of domestic workers—housekeepers, gardeners, butlers, as well as nannies. The decision to close the tax-break loophole was appropriate. We think the relationship between, for example a family and a nanny, should be one of employer and employee. Nannies who were employed as a private company were losing employment benefits such as maternity leave and some pension rights."

The fact that the exemption was about to be exploited on a massive scale was flagged up to the Government in the run-up to the Budget, along with the attendant loss of income to the Government and the difficulties that would be created for employees.

Nursery World is concerned with issues that relate to child care and nannies. In a poll, it asked:

"Is it a good idea for nannies to become limited companies?"

Some 36 per cent. said yes and 62 per cent. said no. The clause is not about self-employment. It relates to employees and the problems created by a mechanism that is driving them into a relationship that leads to a diminution of their rights and a loss of tax revenue. The Government have acted now to avoid extensive use of the mechanism before it creates the many problems that the hon. Member for Huntingdon flagged up about families making those arrangements only to find the loophole closed.

Photo of John Baron John Baron Conservative, Billericay

Does the Paymaster General accept that there is a gross injustice? Those problems should have been thought through before the mechanism was introduced last year. The Government have in effect encouraged many self-employed unincorporated people to incorporate, and in the following year have ambushed them with the tax measures in the Bill. That appears to many outside the Chamber as grossly unfair. Will the Paymaster General address that central issue?

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

The hon. Gentleman is entirely wrong. The Government have done no such thing. We made our position on IR35 clear when we debated last year's legislation. The clause is not about the rights of people to be self-employed or employed; nor is it about the right of people to have their own companies; it is about the use of a mechanism that is designed only to reduce the amount of tax paid.

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

No, I shall not give way.

I am describing a tax distortion that has been driven by a particular arrangement in the tax system by which people choose to be employees and are in danger of being required not to be.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

When we debated the new zero rate of corporation tax for small companies in the last Finance Bill, we welcomed the general principle but stressed that to introduce it without a parallel or averaged rate for sole traders made it an obvious tax incentive for people to incorporate and exploit. Indeed, I made the same point when I wrote to the Paymaster General some eight months ago. I said that it was wrong in principle to have rules in our tax system that act as a massive incentive to incorporation and to the exploitation of the advantages that it brings. The Federation of Small Businesses made the same point. The issue is specific, but it is part of the wider territory. If there is such a big distortion in our fiscal arrangements, it is inevitable that people will try to exploit it at all levels.

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

The clause is not about individuals who choose to be self-employed or to incorporate. It deals with a specific aspect of the tax system. The exploitation of a loophole was driving people into a particular tax position simply to save tax for their previous employer or themselves, or to share it equally. The hon. Gentleman will know that from our discussions on IR35.

The wider debate, which the hon. Gentleman verges on, relates to changes to incorporated and unincorporated companies, and whether that balance is correctly struck. I believe that it is, but that should not be debated in the context of this clause. I accept that many hon. Members, and people and companies outside the House, want the issue to be explored further. We must always find a basis on which to strike a balance, but that is not what we are dealing with now.

Hon. Members asked why we are making the change now, and I have set out our reasons. They asked how the mechanism was being exploited and why, and I have made that clear. The debate is not about incorporation or unincorporation; it is about whether we should leave a mechanism in the tax system that leads not only to a loss of tax revenue but to a diminution of employment rights, and all because of a loophole.

Photo of Mr John Burnett Mr John Burnett Liberal Democrat, Torridge and West Devon

The Paymaster General is invariably fair, and I think she would agree that it is right to put it on the record that there are tax consequences in making distributions out of companies to individuals. However, I sincerely hope that she will deal with the point that I raised. If incorporated sub-contractors pay full employee national insurance contributions, surely they should qualify for full employee benefits.

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

The hon. Gentleman teases me back to the debate that is at the heart of the changes known as IR35: does the individual operate as a shareholder or an employee of his or her own company? If they operate as an employee of their own service company, they get all the rights that all employees get.

As for opinions within the relevant employment sector, it is interesting to note what is said in an article in Professional Nanny. The article asks whether nannies are being urged to become directors of their own companies and says that

"if all nannies saw themselves as young Richard Bransons, eager to make their first million, then maybe running their own service company might be an irresistible prospect. But in reality, many nannies are in their first or second job, dedicated to the children they are responsible for, and looking to the parents to protect their interests both as an employee and as a new member of the family."

It is incumbent on the Government to protect nannies' best interests. The temptation provided by the loophole has been removed precisely to protect those nannies.

Photo of George Osborne George Osborne Opposition Whip (Commons) 2:30 pm, 14th May 2003

The right hon. Lady would accept that the driving force behind the provision is the high cost of child care. I received a copy of the letter that she read out, but resisted the temptation to take up the offer, because a friend of mine who is a tax barrister told me that the Treasury would close that particular avenue. However, does she accept that dealing with what she calls tax avoidance is likely to cause an increase in tax evasion? Has the Treasury analysed whether there will be an increase in the already large number of working nannies who will be outwith the tax system altogether?

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

I am glad, but not surprised, that the hon. Gentleman decided to resist that temptation on the sound advice of his friend—that clearly supports the case that I have put to the Committee this afternoon. The position of nannies as people who are employed by a family or supplied by agencies remains unchanged, but we have removed any driver that might change that relationship. He will remember that, in the letter to which he referred, the company made it clear that it expected the Government to close the loophole because it was neither reasonable nor fair. For those reasons, it is inappropriate, to put it mildly, to accept an amendment that leaves in place, even for a specific period, the arrangements that gave rise to that loophole. I urge the Committee to reject it and support the clause.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

Much of the Paymaster General's riposte concerned nannies, but let us not lose sight of the fact that the provision will affect cooks, gardeners and many others in domestic service, not all of whom are subject to the arrangements that she sought to pray in aid. As we predicted, she sought to defend the provision as an anti-avoidance measure. The Treasury, having found out from its scouts in the City that somebody, somewhere had come up with a clever wheeze and was beginning to market a new product, decided to put a stop to it.

The Paymaster General has missed the point. We oppose the provision not because it is an anti-avoidance measure but because it lets down people on relatively low incomes who, encouraged by last year's Budget, acted in good faith. They are now being slapped down and face a regulatory burden of two self-assessed tax returns in the current tax year. The amendment would reduce that regulatory burden. Furthermore, the Paymaster General never bothered to answer my serious question about why there is no requirement for a regulatory impact assessment because, I dare say, she would not like the answer that she would have to give.

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

I apologise to the hon. Gentleman. I did not mean to avoid his question, I just forgot to answer it. A regulatory impact assessment is not included because, as he knows, the Government are not required to carry out such assessments of anti-avoidance measures, although he is challenging that. The costs are in the Red Book, but it is impossible to say how much the problem would continue to grow. The experience of the last Conservative Government of profit-related pay shows that initially payments are small but they end up being very large.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

The Paymaster General is quite right—there is no obligation to produce a regulatory impact assessment. We have had many discussions about that when debating secondary legislation. Even though it is not required, in some cases it is offered, and we receive letters about that. The provision under consideration would have been a worthy candidate for such an assessment.

Photo of John Gummer John Gummer Conservative, Suffolk Coastal

Has my hon. Friend noticed that if the Government decide that any measure is an anti-avoidance measure, they are able to tell the Committee, "We do not need to give you the information that we ought to have"? We should point out to the Committee that that is a dangerous argument that leads to self-assessment and self-regulation.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

I thank my right hon. Friend, not least because he speaks with experience of government. I am grateful for the opportunity to point out to the Committee, particularly to those who were detained elsewhere at the outset of our debate, the fact that I said that a theme of the Bill is to arm-wrestle as much of its content as possible into the cloak of anti-avoidance in a blatant attempt to stifle scrutiny and criticism. That arrogant approach, I said, was less about anti-avoidance than about a futile attempt by the Government and the Treasury at anti-accountability, which will not fool the hard-working citizens of this country. That answers precisely the point made by my right hon. Friend, with whom I could not agree more: anti-accountability is the inherent culture of this Government. There could have been recognition of unintended consequences in the clause, and the Government could have used it to close a loophole. However, they have blatantly disregarded our arguments, and the clause is now a slap in the face for domestic workers who have incorporated.

Photo of John Bercow John Bercow Conservative, Buckingham

Given that the Government have consistently spun the policy as a response to abuse by fat cat entrepreneurs, and given that my hon. Friend made the seminal point that its main victims will be some of the most vulnerable people in our society, would it not be helpful to know how many cooks, cleaners and gardeners may be affected by the provision? The Opposition have a responsibility to communicate to those people the scale of the damage that the Government are inflicting on them.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

It is impossible to give those numbers without a census, but it certainly is our duty to speak up for those people. It is interesting that Mr. Neil Hamper from the Federation of Small Businesses said that people running their own businesses should be able to choose which business model suits them best. They should not have to contend with the hoops and hurdles of incorporation to secure generous tax breaks. That is the problem: people incorporated to take advantage of a tax break touted by the Government. My right hon. Friend Mr. Redwood properly pointed out that the extent of that incentive depends on the way in which the differential is measured, but there is a differential none the less, so the incentive remains. Seeking to end an abuse that has not been proven is, in fact, an abuse by the Government.

Photo of George Osborne George Osborne Opposition Whip (Commons)

My hon. Friend has spoken about consultation and its impact. Has he had the opportunity to discuss the matter with Mr. Woodward, an expert on these matters, who may have been able to help him draft amendments?

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

I am grateful to my hon. Friend for that colourful example. I gave a speech in St. Helens only the other day, but did not spot the hon. Gentleman or his alleged butler.

We have a duty to point out the unintended consequences of the clause. However, the Government have made plain that its intended consequence is a slap in the face for certain people. They have slammed the door shut on people who took advantage of a tax break in good faith. We should speak up for the people whom my hon. Friend Mr. Bercow mentioned, and I urge my right hon. and hon. Friends and everyone else who accepts the power of these arguments to join me in the Lobby.

Question put, That the amendment be made:—

The Committee divided: Ayes 172, Noes 283.

Division number 196 Finance Bill — Clause 135 — Provision of Services Through Intermediary

Aye: 172 MPs

No: 283 MPs

Ayes: A-Z by last name

Tellers

Nos: A-Z by last name

Tellers

Question accordingly negatived.

Clause 135 ordered to stand part of the Bill.