Clause 25 — Managed service companies

Orders of the Day – in the House of Commons at 7:45 pm on 30th April 2007.

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Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury 7:45 pm, 30th April 2007

I beg to move amendment No. 1, in page 17, line 15, leave out from 'Schedule' to end and insert

'shall come into force on a date which the Treasury shall by Order made by statutory instrument appoint.

(3) No Order shall be made under subsection (2) unless the Treasury has compiled and laid before the House of Commons a report on the likely consequences of bringing into force the provisions contained in Schedule 3.

(4) A report under subsection (3) shall in particular include the Treasury's assessment of the implications for—

(a) the overall level of tax revenues accruing to the Exchequer;

(b) the cost impact and regulatory burden of the measure;

(c) the United Kingdom labour market;

(d) the competitiveness of the United Kingdom economy and the encouragement of enterprise.'.

Photo of Roger Gale Roger Gale Conservative, North Thanet

With this it will be convenient to discuss amendment No. 14, in page 17, line 15, leave out from 'Schedule' to end and insert

'shall come into force on 31st October 2007'.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

Amendment No. 1, which is in my name and the name of my hon. Friends, would postpone the application of schedule 3 and the measures in it until there has been time for a thorough consideration of the effects of the legislation, and time for the Government to report formally to Parliament on the impact of the provisions proposed on tax revenues, the labour market, the competitiveness of the UK economy, and the cost burdens that the provisions will impose. In particular, I would like the report to dwell on the impact on freelance workers, contractors and small companies.

According to the Professional Contractors Group, there are just under 1 million freelance workers and contractors in the UK, and they make a significant contribution to gross domestic product, particularly in the information technology industry, where they play a pivotal role in keeping the country competitive. Paragraph 2.1 of the Government's consultation document on the proposals acknowledges the importance of varied working patterns in giving

"businesses the flexibility to respond swiftly to new opportunities as they arise."

The Opposition's view is that imposing unreasonable new administrative burdens on the freelance and contractor community, as the Bill threatens to do, could significantly damage the ability of British business to compete in the globalised world economy. The Opposition believe that the proposals implemented in schedule 3 by clause 25 are flawed, and that they need to be significantly revised if they are to achieve the Government's stated goal of cracking down on abusive schemes without penalising legitimate freelance and self-employed workers.

It goes without saying that the Opposition support moves to crack down on illegal tax evasion with respect to freelance and self-employed workers, and as I acknowledged on Second Reading, we also support attempts to stop abusive tax schemes. Indeed, we, like a number of people who have commented on schedule 3, have a degree of sympathy with some of the Government's goals in the schedule. If, in reality, a worker is an employee, and a service company is being used simply to reduce the amount of tax payable, there is a case for measures to tax the substance of the relationship, rather than the label that the parties choose to give it for tax-motivated reasons. We would certainly be happy to work with the Government on reforming IR35 and on amending schedule 3 to try to target such situations and ensure that the workers in question pay their fair share of tax. However, as I shall explain, schedule 3 as currently drafted has a much wider impact.

The schedule will place significant limits on the administrative functions that a genuine freelancer, in business on his or her own account, can outsource to advisers. It will force them to deal directly themselves with much more of the red tape that comes with incorporation, rather than delegating it to others.

Photo of Stephen Hesford Stephen Hesford PPS (Rt Hon Baroness Amos, President of the Council), Privy Council Office

Does the shadow Chief Secretary to the Treasury not accept that her amendment is inconsistent with protecting revenue, despite what she says?

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

As I shall come on to say, I think that a pause for reflection, thought and analysis of how we can get the legislation right could have a positive impact on tax revenue. The first thing to note about schedule 3 is that the proposals are a clear acknowledgement that IR35 has failed. If the Government had got IR35 right, they would not need to bring further complex legislation before the House to attempt to police the borderline between the employed and the self-employed.

Many hon. Members will remember that in 1999 the Government caused significant controversy in the freelance and contracted-out community with their proposals on IR35—so-called because they were not announced in the Chancellor's Budget speech, but in Inland Revenue press notice 35. The Government said at the time that that would raise £300 million for the Exchequer, and cost it just £55,000 a year ongoing to implement. However, of the IR35 investigations known to the Professional Contractors Group, 1,405 concluded that the taxpayer in question was outside IR35, and only three concluded that the taxpayer was within its provisions.

The Government have repeatedly refused to publish any figures on the amount of revenue collected under IR35 or on its ongoing cost impact for contracts. The truth is that IR35 has been a hugely expensive failure. It has left thousands of freelancers in an uncertain tax position and created serious difficulty in planning ahead. It has cost untold millions in compliance checking, and whole galaxies of the blog universe have been devoted to the intricacies of IR35 compliance. We appeal to the Government to postpone the implementation of schedule 3 to assess the reasons why its predecessor—IR35—failed; to consider the steps needed to ensure that schedule 3 is not a costly failure in the same way as its predecessor; and to establish whether the Treasury will undertake to measure the revenue raised by schedule 3, despite its refusal to do so in relation to IR35.

That investigation would provide an opportunity, too, to see whether IR35 is still necessary. If schedule 3 is adopted, there will be an even more complex tax framework for the taxation of freelance workers who have incorporated than there was before. Companies outside IR35 will be on one regime; companies inside IR35 will be on a second regime; and there will be a third regime for companies covered by schedule 3. Yet again, the Government have introduced highly complex and controversial legislation that is not properly thought through. They have found that it does not work properly, and to try to fix some of the problems that they created in their first round of tax law they are introducing more complex legislation that is not properly thought through either.

I should like to take the opportunity to explode a myth peddled in relation to both IR35 and schedule 3. The proposals are not about employment protection. The impact of schedule 3 will be to change the tax status of individuals working through companies that fall within the definition of a managed service company. It will not change their employment status. Of course, it is wrong for people to be forced to give up their employment rights by being pushed unwillingly into managed service companies, but the proposals will not have any impact whatever on that problem. If the Government wish to deal with it, that is not the way to do it.

A fundamental problem with schedule 3 is the collateral damage that it will cause. As drafted, the provision could hit many genuine freelancers who operate entirely legitimately and are genuinely self-employed—they are not employees. The consultation document asserts that the "underlying nature" of the relationships established by workers in MSCs is "almost invariably" one of employment. No evidence is given to support that assertion in the consultation document, and the Professional Contractors Group has challenged it:

"This ignores the possibilities that MSCs can be used for commercial relationships, and often are.

PCG has relatively few members who work via MSCs but those that do are generally conscious of IR35, have no wish to be employees and make a point of using IR35-compliant MSCs.

Several have contacted us following the announcement of the proposed changes to make it clear that they operate commercial relationships and are in no sense employees."

The Chartered Institute of Taxation has looked at the problem, too, and it says:

"Our main concern is distinguishing between Managed Service Companies and Personal Service Companies...There are workers that operate through a PSC without failing IR35, but who do not have time to manage a company and will therefore outsource its functions to a professional...It is important that the legislation clearly distinguishes between these PSCs and MSCs."

Freelancers who outsource part of the financial and administrative functions relating to their company to advisers are in danger of being caught by the provisions of schedule 3—that is a key point. Outsourcing routine administrative work to allow the worker in question to concentrate on what he or she does best, whether it is IT, engineering and so on, could walk them straight into the clutches of schedule 3. The nature of their working practices and their relationship with their end client is wholly irrelevant to their tax status under schedule 3.

The key question is posed by proposed new section 61B (1) (d) of the Income Tax (Earnings and Pensions) Act 2003—ITEPA—which is part of schedule 3. We must ask whether

"a person who carries on a business of promoting or facilitating the use of companies to provide the services of involved with the company."

That is the issue that determines tax status, and it is the relationship with specialist advisers that is critical to the whole framework. Any company involved with an MSC provider is caught by schedule 3, whether someone is genuinely self-employed and in business on their own account or not. Their factual relationship with their end client is wholly irrelevant under schedule 3.

The Law Society expressed concern that the test of involvement is "enormously wide". The question that every freelancer up and down the country must ask is whether her professional advisers could fall within the category of an MSC provider under the meaning of paragraph (d), and it is not an easy question to answer. It is highly likely that, under the provision as drafted, it would take at least a couple of cases going through the courts to determine the answer, and the uncertainty surrounding the meaning of paragraph (d) is a critical reason for supporting amendment No. 1 and postponing the implementation of those proposals until they have been fully thought through.

Without qualification, paragraph (d) would hit any freelancer who uses an accountant to draw up her company tax returns, so its scope is narrowed by proposed new section 61B(3), which states:

"A person does not fall within subsection (1)(d) merely by virtue of providing legal or accountancy services in a professional capacity."

The meaning attributed to that carve-out will be critical in determining the reach of the legislation. There are at least three possible approaches to the carve-out and the type of services that are relevant in the context. First, under a narrow approach, the carve-out would provide safe harbour only for basic, traditional accounting services such as book-keeping. Secondly, the widest definition could cover any services ordinarily provided by accountants. The third approach would apply to accounting services ordinarily provided in the course of an accountancy business.

We need much greater clarification—that is why we need a delay and a report—about the range of services that are currently outsourced and whether they would trigger the operation of schedule 3. Those are services such as setting up and registering companies; invoicing; company secretarial services; IR35 compliance checking; routine tax advice such as guidance on the different rules governing companies and sole traders; and other assistance on regulatory compliance. Almost all those services are frequently performed by accountants, so it would not cause a problem if the second, wide interpretation is the correct one. However, if the third, middle way—the more restrictive option—is correct, the setting-up of companies and company secretarial services may fall outside the carve-out for an accountant. They are services provided by accountants, but they are more closely associated with lawyers than accountants, so they could be treated as MSC-type services if provided by an accountant, but not if provided by a lawyer.

The Institute of Chartered Accountants has expressed concern about the issue, and it says:

"The legislation is ambiguous about whether firms of chartered accountants and tax and business advisers who as part of their other services advise clients about the best structure through which to trade and provide the necessary company secretarial services to enable them to do so, are within the definition of 'an MSC provider'."

Her Majesty's Revenue and Customs has indicated informally that such activities should not turn accountants into MSC providers. However, as the Institute of Chartered Accountants points out, there is no substitute for a legal definition, and we propose to table amendments in the Public Bill Committee to clarify the operation of the safe harbour in proposed new section 61B(3).

The Opposition believe it is unfair and unwise to impose the new regime on freelancers while such uncertainty attaches to the scope of proposed new section 61B. The Chartered Institute of Taxation points out that there is a real danger that

"uncertainty could render the legislation unworkable or difficult to enforce".

The IR35 precedent is not a happy one. Susie Hughes, founder and editor of the specialist contractor website Shout99, said:

"It is clear that contacting is a very complex business, and the new legislation has caused a headache for many contractors, who are still unsure about how to comply with the new rules.

The majority of freelancers who visit Shout99 are very knowledgeable, but the last-minute changes in the Budget knocked many sideways."

Members should be aware that the Government maintain that these rules are in force as we speak. Despite the fact that they are unclear, they were due to come into force on 6 April.

There is another twist in the tail. A freelancer might have an entirely compliant relationship with her professional adviser that does not go beyond the provision of accountancy services within the meaning of proposed new subsection (3). However, she could still end up with MSC status if her accountant was providing non-compliant services to other companies. Her accountant's work for other companies would taint all their clients, and in assessing whether she is at any risk of falling within the scope of schedule 3, a freelancer therefore has to look not only to her own relationship with her professional advisers, but at the services that they might be offering to other people.

This uncertainty is made even more problematic when one turns to the new section 688A of ITEPA, which is also introduced by schedule 3. That gives the Treasury the power to introduce secondary legislation to impose liability for the tax debts of an MSC and levy them on third parties. The Law Society described this section as "extremely wide" and stated that it

"could cover a wide number of people who do not actually benefit from the provision of the MSC services."

The Chartered Institute of Taxation has also expressed the concern that the proposals are "unnecessarily wide".

The third parties potentially caught by the provisions are set out in proposed new section 688A(2). They include any person

"who (directly or indirectly) has encouraged, facilitated or otherwise been actively involved in the provision by the MSC of the services of an individual".

The phrase

"encouraged, facilitated or otherwise been actively involved" indicates the potential for a much wider application of the provisions than the consultation document suggests is the Government's intention. The provisions pierce the corporate veil, leaving directors, employees and payroll clerks in the firing line. The Chartered Institute of Taxation expressed the concern that although the HMRC says it wants to target the controlling minds of a scheme provider, ordinary employees of those providers might well be hit with tax debts, as they could be seen as encouraging and facilitating the provision of services through an MSC.

There is also no firm guarantee that I can see in proposed new section 688A that someone who works as a contractor through a managed service company will not end up becoming liable under this section. Furthermore, there is every chance that the end-client might be viewed as having encouraged the provision of services of the worker via an MSC. According to the Law Society,

"It is quite possible that a client might be caught if it encourages involvement . . . the word 'encouragement' introduces an extremely wide concept . . . We think this goes too far and could cover something that was entirely informal where the party encouraging received no benefit and no involvement . . . it leaves too much discretion with HMRC."

The Law Society goes on to point out that leaving end-clients on risk for the tax debts of the freelancers and contractors that they take on could have a highly disruptive effect on outsourcing in Britain.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree 8:00 pm, 30th April 2007

I strongly agree with all my hon. Friend's comments. Is it not the case, as with other legislation with which the Government try to tackle specific problems, that they end up using a sledgehammer to crack a nut? It would be much better if the legislation were far more focused than schedule 3.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

My hon. Friend hits the nail on the head. Far too many people who are legitimately in business on their own account as genuine freelancers will be hit by the legislation, which is designed to target abusive schemes.

It is critical that we do not produce legislation that makes it difficult for companies to take on freelancers and contractors. That could significantly damage our competitiveness as an economy and the flexibility of the UK labour market. As on the third-party debt provisions that I outlined, and in the same way as for section 61B, there is a carve-out aimed at removing professional advisers and recruitment firms from the scope of the provisions. However, the carve-out suffers from a number of the same uncertainties that I outlined earlier in relation to the definition of a managed service company provider. There is a real risk that recruitment firms and professional advisers might still fall foul of the encouragement or active involvement tests set out.

Ann Swain, chief executive of the Association of Technology Staffing Companies, stated:

"It seems completely contrary to all common principles of justice to make companies that have no legal control over individuals liable for their tax. The Government tried to make the recruitment industry liable for contractors' tax affairs when it introduced IR35, but eventually backed down. Here we are six years later facing the same tax grab on the recruitment industry. The attitude seems to be that if Revenue and Customs cannot ensure contractors comply with tax law, because it is too difficult to apply, other parties need to be made to pay".

The Opposition believe that the recruitment industry is a vital part of ensuring a flexible and efficient labour market, and that much more time, reflection and thought are needed to ensure that the industry is not damaged by the proposals in schedule 3. We hope to table amendments in Committee to bring that about. I have received representations pointing out that the potential liabilities under the third party debt provisions are uninsurable, and that public companies involved in working with freelancers and small service companies are being advised that they would have to set so much aside as a contingency as to have a significant impact on their share price. The debt transfer provisions could also involve considerable litigation risk, as companies might end up blaming one another for being dragged within the scope of schedule 3.

Photo of David Taylor David Taylor Labour, North West Leicestershire

I declare an interest as a member of the Chartered Institute of Public Finance and Accountancy. The hon. Lady complains about the possible impact on recruitment companies of a liability to ensure that taxation falls where it should, but surely that is a prosperous, profitable and reputable section of industry on quite a grand scale. What on earth is wrong with expecting those companies to live up to the professional responsibilities that they should have in the role that they are performing? People watching the debate will be astonished by those comments.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

I agree that one should expect recruitment companies to exercise high standards in the way that they conduct their business, but that does not mean that they should necessarily be liable for the significant tax debts of the people with whom they do business. I do not see how the hon. Gentleman can make that connection. It is one thing to require companies to behave well and in a reputable manner, but why should they be liable for other people's tax bills?

The third party debt provisions are draconian. They seem substantially harsher than the rules that govern the limited context where directors are held personally liable for the debts of their companies. Those connected with or giving advice to contractors operating through service companies will be on risk for potentially huge liabilities, and liable to the last penny of their personal wealth, yet the final version of the legislation is not even in the Bill for us to consider today. Key parts of the legislation that will put the third-party debt rules into effect are to come in via secondary legislation, and we do not have the final version of that.

It is unacceptable that such significant risks should be imposed on reputable firms without the certainty of the final version of the legislation. We are supposed to take on trust the promise by the Government that they will take a proportionate approach. Some are not prepared to do so. The risks surrounding the debt transfer rules are a key reason why some people are already winding up their businesses and handing out P45s to their staff. Further detailed consideration is needed of the impact of schedule 3 on tax revenues—the point raised earlier. As I have explained, one of the obvious effects of the provisions is to limit the extent to which freelance workers can outsource the management of their tax affairs. Moving those workers out of companies that are managed by specialist providers and into companies that they run directly themselves could make it more difficult, rather than easier, for HMRC to collect the tax that is due.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree

Again, my hon. Friend is making a lot of excellent points, but I do not think that she has hammered home the point about the extra bureaucracy that will be imposed on a lot of these small businesses. The Government talk a lot about stimulating the IT sector—we are a leading force in that—but the bureaucracy that the clause will impose on small businesses will be a great dampener on trying to stimulate that sector.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

My hon. Friend is right to pull me up on that point. It is unacceptable that, given the significant increase in red tape that we have seen under the Government, including a huge increase in the complexity of the tax system, the Government want to hammer small business people who want to outsource the hassle that comes with that extra burden of red tape. It is unfair and it is not justified by the proposals.

To return to the point about tax collection, instead of having to monitor and deal with 150 specialist providers, HMRC will have to deal with thousands more individual personal service companies as the provisions that prevent outsourcing bite. Those individual contractors may, I am afraid, prove far less efficient at paying HMRC the tax that they owe than the specialist advisers were.

We need further consideration of the impact of the loss of VAT income where the rules result in freelancers being taxed as employed people rather than self-employed people. It would be wise, too, to assess the impact of schedule 3 on departmental budgets. I am informed that the national health service and HMRC make substantial use of workers operating through personal service companies and managed service companies. Concerns have been expressed by organisations such as the Recruitment and Employment Confederation that the proposals could have a big impact on projects such as the NHS IT programme and the Olympics. We do not believe that the Government have properly thought through those issues, and that is why we have tabled amendment No. 1.

A delay in implementing schedule 3 could also give a chance for other options to be considered. A possible alternative would be some sort of licensing system for managed service company providers. HMRC is clearly concerned about that part of the service sector. Instead of drafting wide tax provisions, why not just tell the companies that they cannot operate unless they are licensed and that if they are caught using MSCs to disguise employment-based relationships they will be fined or shut down? In that way, we can get to the problem on which the Government are focusing—the small number of companies that operate abusive MSC schemes—but will not burden the entire freelancing and contractor communities with unintended extra costs, extra hassle and legal uncertainty, not to mention the thousands of lawyers and accountants who provide advice to those freelancers and small companies.

The last point in favour of amendment No. 1 is the most obvious. More time should be given for consultation with those affected by the provisions. There was a short window between the end of the consultation on 2 March and the publication of the Finance Bill and the start of the new rules on 6 April. The statutory element of the third-party debt provisions went into the Bill even before the consultation period was finished. Surely that suggests that the Treasury proposes to take only limited notice of the representations that have been made. IR35 had many problems, as I have outlined, but at least the Government took a lengthy period to finalise and implement that measure. During that time, the Revenue carried out in-depth discussions with many people who were affected by the legislation. People had time to understand the rules and to make preparations to ensure that they and their companies were compliant.

In contrast, the Government have decided to implement the proposals with effect from only four months after their first announcement. The Professional Contractors Group has stated that

"on reflection we feel the timing of the measure's introduction to be so swift as to be certain of causing a damaging and shambolic period of uncertainty".

It went on to say:

"It is proposed to introduce the new tax treatment with breathtaking rapidity: the final form of the proposed legislation will only be known about a fortnight before it comes into force, and the Finance Act itself will not be passed until some time later...The timescales involved seem extraordinarily short when one considers the burden this will place on workers who operate commercial relationships via a MSC".

Ann Swain of ATSCo described the deadline for implementation as unworkable and way beyond anything she had ever seen before.

In conclusion, this evening we call on the Government to think again about schedule 3. I know that the Financial Secretary is a reasonable person, and I appeal to him to listen to what we have had to say. There is a risk of collateral damage, with many legitimate, genuine freelancers and contractors and their professional advisers hit by the fallout caused by the Government's attempt to shut down abusive schemes. We think that the Government should take time for further reflection, consultation and analysis on how the proposals should be amended to prevent that unfortunate consequence. People from firms that advise small service companies are already winding up their businesses and handing out P45s as a result of the Bill.

Given the risks involved, we call on the Government to take time to get this right, to consider the alternatives, to work out and clarify what these complex provisions mean, to try to avoid the mistakes of IR35 and to ensure that the provisions do not end up clobbering genuine, hard-working freelance workers who are merely trying to make an honest living and are already struggling with rising inflation, falling living standards and rising mortgage rates.

Photo of Roger Gale Roger Gale Conservative, North Thanet 8:15 pm, 30th April 2007

Before we proceed, I have been acutely aware listening to the debate that Mrs. Villiers is to some extent a prisoner of the drafting of the Bill. The amendment relates, of course, to clause 25 but its basis is schedule 3, which, for various reasons, has not been committed to the Committee of the whole House. I have no desire to inhibit the debate on the Floor of the House, but I propose that I and my co-Chairman on the Bill should take cognisance of the debate here when considering the depth of debate in Public Bill Committee later. Right hon. and hon. Members might wish to consider that when bearing in mind what they talk about this evening and for how long they talk.

Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer, Liberal Democrat Spokesperson (Treasury)

I want to introduce amendment No. 14, which stands in my name and that of my hon. Friend Julia Goldsworthy, and to support amendment No. 1, which tries to achieve the same thing in a somewhat different way.

Mrs. Villiers has talked in some detail about the technical and legal issues, and I do not want to duplicate that. The value that I can add relates primarily to being a gnarled veteran of the IR35 debate in the 1997 to 2001 Parliament, when we went through these arguments in Committee and on the Floor of the House. Clause 25 is in many ways a successor to that. In her introduction, the hon. Lady raised many fundamentally important questions, including whether IR35 has failed, whether clause 25 is a substitute for it or a complement to it, and how the two things interact.

Having been involved in the IR35 debate, it was clear to me that we are in inherently difficult territory. We are dealing with an economy with a great deal of ambiguity; with the fuzzy borderline between employment and self-employment. That presents fundamental problems for any Government when it comes to avoidance, because there is quite a big margin of difference between the marginal tax rates paid by the employed and the self-employed through national insurance. A lot is at stake.

At the same time, we have an economy where some people are not easily pigeonholed as in employment and in self-employment. The hon. Lady mentioned one of the most important groups—the IT industry. That industry, which will be primarily affected by the clause, is important not only for the economy in general but for Government finance and contracts, and for delivering IT contracts on time. The clause seriously affects the oil industry; large numbers of people in the offshore oil industry work with such a contractual relationship. It also affects the national health service. The biggest group of contractors who will be affected by the clause are temporary workers within the NHS. The ability to maintain the supply of those services when there is a shortage of NHS staff hinges critically on a sensitive tax treatment.

So I revert to the question that the hon. Lady posed of whether IR35 has failed. She asked whether the Government could tell us how many people were brought within the standard tax-paying employment bracket through IR35, how much revenue it generated and how many people fell outside it as a result of the growth of management service companies. I do not have much of a feel for the quantitative background to the provision—perhaps the Financial Secretary can provide it for us.

Clause 25 introduces a fundamentally new concept, which I want to understand a little better. When IR35 was introduced, the key distinction between the employed and the self-employed was provided through a control test—an attempt to ascertain whether the management of the company that hired the contractor had effective control or whether the self-employed were in control of their work. Control is a difficult concept in taxation, but at least everyone was working with it.

We now have a new idea of "being involved with" as opposed to "control". An MSC provider is involved with a company if it

"benefits financially on an ongoing basis from the provision of the services of the individual...influences or controls the provision of those services...influences or controls the way in which payments to the individual (or associates of the individual) are made...influences or controls the company's finances or any of its activities, or promotes an undertaking to make good any tax loss."

The clause and schedule 3 therefore introduce the idea of "influence" as opposed to "control".

What is the distinction between those two important words? If somebody is regarded as self-employed under the IR35 definition but employed under the MSC definition, what happens? What happens if the definitions clash? How will the ambiguity be resolved?

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree

The hon. Gentleman is making an excellent case about definitions. The distinction between "control" and "being involved with" is important—indeed, it is the nub of the problem. Does not he believe that we are considering yet another mechanism whereby the Government are trying to reach even further to draw people into providing more and more stealth taxes to the Chancellor, who is desperate to find money through any possible means? The wide definition gives him another opportunity to try to pick the pockets of hard-working IT professionals and others.

Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer, Liberal Democrat Spokesperson (Treasury)

I was not going to go that far. I assume that the Government are acting in good faith and at least trying to deal with tax avoidance. I am concerned about the practical difficulties that might result from the two different definitions. I am not here to speculate on the ultimate motives—I did that in the Budget debate.

One can place a charitable interpretation on what the Government are trying to do. In the evidence that was given to the Treasury Committee, John Whiting, a PricewaterhouseCoopers adviser, whose name has been mentioned several times in the discussions, said of clause 25:

"Whilst the announcement of proposals to tackle Management Service Companies was seen as controversial at the time of the pre-Budget report, the Treasury and HMRC are undoubtedly right to tackle this area. Consultations on the proposals have been constructive and the refined proposals, focusing on MSC providers, are a good way forward, though more discussion is needed to ensure the targeting is precise with no collateral damage."

It is therefore possible to make the case that the hon. Lady and I are making more sympathetically than the hon. Gentleman suggested.

The key point is how we distinguish in practice between MSCs and companies that fall outside the definition. The distinction is crucial because, as the hon. Member for Chipping Barnet said, companies that fall within the new definition are liable for tax debts, which can be astronomical. As I understand it, some progress has been made in narrowing the definition of the professional groups who are likely to be involved. Accountants are now excluded, but as the hon. Lady asked, what is an accountant? Are company secretarial services included? There is a spread of possible professions.

The hon. Lady cited another definition, which she did not complete. It raised the possibility that the spread of responsibility could become wide. For example, a spouse's clause could be involved and extend to cover more distant relationships, perhaps even business partners. The limits of the liabilities are far from clear despite the moderate success of the consultation process, at least in narrowing the definition to some extent.

It is worth citing some of the professional bodies. The hon. Lady has done that and I shall not simply repeat all her cases. The Institute of Chartered Accountants in England and Wales is a reputable organisation that has no obvious axe to grind. It stated:

"Many of our members provide a variety of services for MSCs but are acting properly and within our ethical code and professional conduct rules. They are concerned that if the exclusion is not clarified, they could become liable for debts incurred by their clients when they have been acting entirely within the law and the professional conduct rules that govern their services."

That professional body is trying to get on the right side of the law and not push the boundaries. It simply wants to be crystal clear about who falls within the definition of the schedule.

I therefore believe that the sensible way forward is to provide for limited delay. I appreciate that prolonged delay can simply open the way to evasion and people finding a new way around the provisions, so I do not suggest that. However, the method that the hon. Lady proposed of a specific targeted study is one way of achieving the objective. We suggest a six-month delay to give the relevant organisations an opportunity to assimilate the secondary legislation, which we have not seen.

The Professional Contractors Group said that it would welcome a six-month delay because the proposals had caused much confusion among legitimate small businesses, especially the question whether accountants could be deemed to be scheme providers under the Bill. The PCG is an important voice in the debate.

Photo of Stewart Hosie Stewart Hosie Shadow Spokesperson (Women), Shadow Spokesperson (Home Affairs), Shadow Spokesperson (Treasury)

I am comfortable with a delay or a specific study. However, should not we consider more than exemptions and definitions? Should not we also include provision for a cost benefit analysis? If we are right and a tax liability may fall on a third party, which, as Mrs. Villiers said, is uninsurable, the costs would be put on to the final user—largely Departments and local authority departments. Should not such consideration be made in the study during the suggested delay?

Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer, Liberal Democrat Spokesperson (Treasury)

That is eminently sensible and amendment No. 1 is designed to provide such a cost benefit study. I emphasise the six-month delay because the six-month contract is the standard period for many contractor-type relationships. If we are to avoid a position whereby MSCs have to redesign all their payroll arrangements in mid-contract, they need a period in which to phase them in. That was the origin of the proposal for six months, but amendment No. 1 also appears entirely sensible.

I hope that the Government will reconsider the matter. I reiterate that we appreciate that there is a genuine problem of tax avoidance. We understand that the Government are responsible for dealing with that and that avoidance—and, indeed, serious criminal evasion in some cases—is happening with the rapid growth of MSCs. Something must be done, but we want to provide a limited opportunity for phasing in and conducting a study and analysis. That is the sensible way in which to deal with the sensitivities of the companies involved.

Photo of Stephen Hesford Stephen Hesford PPS (Rt Hon Baroness Amos, President of the Council), Privy Council Office 8:30 pm, 30th April 2007

You really hit the nail on the head for this debate, Mr. Gale. Of the two amendments, amendment No. 14 is slightly better than amendment No. 1, in the sense that it is less disingenuous. If what Mrs. Villiers said is to be taken at face value, the debate that we should be having—but which we cannot have, because schedule 3 is not before us, as you quite correctly pointed out, Mr. Gale—is on a group of amendments to schedule 3, not this one.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

The amendment concerns the implementation date of schedule 3, which is dealt with in clause 25. It is entirely in order to talk about clause 25, because it implements schedule 3.

Photo of Stephen Hesford Stephen Hesford PPS (Rt Hon Baroness Amos, President of the Council), Privy Council Office

I am not addressing technical reasons why one could not move the amendment. I am talking about having a proper debate on a matter of substance, and I am questioning whether this is a genuine debate to have at this point.

Although I do not agree that there should be any pause or delay, the reason I say that amendment No. 14 is slightly better than amendment No. 1 is that it at least has the merit of being time-specific, in proposing a six-month delay. As well as not grasping the details of schedule 3—we have had a discussion about that—amendment No. 1 is designed to make implementation almost impossible. Proposed new subsections (4)(a) to (4)(d) in amendment No. 1 list the things that the report should deal with, but it is wholly unrealistic that the House would want to see those matters dealt with in such a report. The amendment is set out in such a way as to make the report so complex and compiling it take so long that the delay in getting to schedule 3 would almost last for ever.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

The hon. Gentleman does not have a lot of confidence in his own Government if he thinks that they cannot produce a report on the fairly simple matters that I detailed in the amendment.

Photo of Stephen Hesford Stephen Hesford PPS (Rt Hon Baroness Amos, President of the Council), Privy Council Office

The hon. Lady says that they are fairly simple matters. I shall not read out the list, but if the amendment were passed at face value and a report was produced, I suspect that she would then say that proposed new paragraph (a), (b), (c) or (d) had not been looked into properly. She would then again want to set in motion a debate about whether those issues had been looked into sufficiently, before the matters that my hon. Friend the Minister will want to talk about in due course could be dealt with. The amendment is really an exercise in kicking the process into the long grass.

Why are the Opposition trying to kick the whole process into the long grass? I probably have far less experience of Finance Bills than most hon. Members here, but in my limited experience, the words that are guaranteed to set off Opposition Members are "anti-avoidance". That is the one matter that consistently gets them exercised. Every time we have such debates they trot out the same arguments, no matter what anti-avoidance scheme is proposed. Their argument is that they are of course in favour of anti-avoidance and protecting the Revenue; but they then disparage, blow-for-blow, the anti-avoidance schemes that my hon. Friends on the Front Bench have put forward, and this debate is no different.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree

I understand the spirit in which the hon. Gentleman is making his point, but our point is that every time the Government come forward with legislation, their tax remit becomes wider and wider and they end up hurting people whom they do not mean to hurt. Our party is trying to deal with those unintended consequences, not stopping people who should be paying tax from paying their fair share.

Photo of Stephen Hesford Stephen Hesford PPS (Rt Hon Baroness Amos, President of the Council), Privy Council Office

I am grateful to the hon. Gentleman for that intervention, because it enables me to reiterate the point that I made earlier. If he is going to make a contribution in this debate—

Photo of Stephen Hesford Stephen Hesford PPS (Rt Hon Baroness Amos, President of the Council), Privy Council Office

The hon. Gentleman nods, and I look forward to hearing what he says. He therefore may wish to reflect on this point. If the amendment is a genuine attempt to take issue with the substance of schedule 3, the debate should be about the contents of schedule 3, not about its start date, as I have indicated. What I am saying is that this is a peculiar and artificial debate. The debate that we need to have is on the detail of schedule 3, which I am sure we will come to in due course.

The hon. Member for Chipping Barnet also said that there need to be further discussions. In my limited experience of reviewing such matters—I shall of course be corrected from the Front Bench if I am wrong—HMRC does just that, always keeping them under review and always being prepared to seek further discussions as events unfold. Her point is therefore not really an argument for delay.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

It is my understanding that HMRC has refused to give anyone any advice at all on how the provisions will operate until the Finance Bill has completed its passage through Parliament. I shall be interested if the Minister contradicts me, but the reality is that people are not receiving the advice that the hon. Gentleman says they are.

Photo of Stephen Hesford Stephen Hesford PPS (Rt Hon Baroness Amos, President of the Council), Privy Council Office

The hon. Lady misunderstands what I was saying, although I do not think purposely. I was not talking about advice so far, but about ongoing discussions as to how the legislation will affect people. If as a result of experience the legislation needs to be reviewed in due course, I have no doubt that my hon. Friends on the Front Bench will do just that.

Photo of Stewart Hosie Stewart Hosie Shadow Spokesperson (Women), Shadow Spokesperson (Home Affairs), Shadow Spokesperson (Treasury)

If the consequences are increased costs to users, particularly the Government, a tightening of the labour supply, inflexibility in the labour market and chaos for possibly tens of thousands of contractors in many sectors, does the hon. Gentleman not think that we should conduct the review in advance, rather than doing so down the line, after the damage has been done?

Photo of Stephen Hesford Stephen Hesford PPS (Rt Hon Baroness Amos, President of the Council), Privy Council Office

I am grateful for that intervention, because I shall come to that very point in my concluding remarks. In a sense, the hon. Gentleman has hit another nail on the head—there are lots of nails.

Photo of Stephen Hesford Stephen Hesford PPS (Rt Hon Baroness Amos, President of the Council), Privy Council Office

Yes, absolutely—cracking the nut with a sledgehammer. However, I shall address that point in my concluding remarks.

The other matter that worried me when I listened to the hon. Member for Chipping Barnet was that of the three institutions that she chose to quote in support of her argument—I am not talking about schedule 3, and she will tell me if I have miscounted—two were not related to the industry. One was the Chartered Institute of Taxation and the other was the Law Society. They are removed from the issue, because they are just practitioners.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

They are not removed. Accountants will be directly affected by this legislation. They are potentially at risk, as huge sums could be involved in relation to the tax debts of their clients. These are reputable organisations with an extensive knowledge of tax and legal matters.

Photo of Stephen Hesford Stephen Hesford PPS (Rt Hon Baroness Amos, President of the Council), Privy Council Office

I accept that those organisations have an indirect, ultimate connection to these matters in a professional sense. The odd thing is, however, that the people that the hon. Lady prays in aid are not the ones that she says that she is trying to protect.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

If the hon. Gentleman wants to hear what the contractor community thinks about these proposals, he should just go and visit Shout99 or one of the IR35 websites. He would experience a lively discussion and hear some trenchant views on this Government's performance on tax matters.

Photo of Stephen Hesford Stephen Hesford PPS (Rt Hon Baroness Amos, President of the Council), Privy Council Office

I thank the hon. Lady for that intervention, because it brings me to my next point. Von Clausewitz said that war was the continuation of diplomacy by other means. The hon. Lady seems to be seeking to have the whole argument about IR35 over again, having lost that battle [ Interruption. ] She is nodding. If she wants to intervene on me, she may do so.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

Schedule 3 is an admission that IR35 has not worked. If it had worked in the way that the Government had intended, we would not need schedule 3.

Photo of Roger Gale Roger Gale Conservative, North Thanet

Order. This is not about schedule 3 at all. We are becoming slightly detached from the amendment before the Committee.

Photo of Stephen Hesford Stephen Hesford PPS (Rt Hon Baroness Amos, President of the Council), Privy Council Office

Of course I shall adhere absolutely to what you have said, Mr. Gale.

I did not count the number of times the hon. Lady said "IR35", but it must have run into double figures. She seems to be replaying all those arguments, which I did not accept at the time. The reason why I did not accept them is that a number of self-employed constituents came to see me when the IR35 debate was going on, and they were worried about the effect that it would have on them, in advance of its introduction. A furore had been whipped up, no doubt to some extent by the arguments adopted by Conservative Members. Of all those constituents who expressed concern about what the effects of IR35 might be, however, none came back to tell me that their fears had been borne out and that we were now doing this, that or the other to them. I would argue that the fears about IR35 were to a great extent oversold, and I put it to the hon. Lady that the fears that she is now expressing are being oversold in exactly the same way, and for exactly the same reasons. This all goes back to a lack of willingness to support my hon. Friends on the Front Bench in their efforts to sort out tax avoidance.

From my short experience of Finance Bills, I have observed that one of the documents that is often referred to in great detail—because it rescues many of us—is the explanatory notes. Neither of the two Front-Bench spokespersons who have spoken in this debate have mentioned them. I find that extremely interesting. Stewart Hosie raised a point earlier about consultation and asked whether there should be a delay. The explanatory notes state that in 2006—by my calculation, that is a year ago—the pre-Budget report announced that the Government would take

"action to tackle managed service company...schemes which enable workers to provide their services through companies and avoid paying employed levels of tax and national insurance".

We have therefore had one year's notice—

Photo of Stephen Hesford Stephen Hesford PPS (Rt Hon Baroness Amos, President of the Council), Privy Council Office

Forgive me. We have had six months' notice.

The explanatory notes go on:

"The consultation document "Tackling Managed Service Companies", set out the growing problem of the use of managed service companies and their failure in the vast majority of cases to apply the Intermediaries legislation".

It seems strange that that consultation document was never referred to by either Front-Bench spokesperson.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

I referred to the consultation document at least twice, possibly three times.

Photo of Stephen Hesford Stephen Hesford PPS (Rt Hon Baroness Amos, President of the Council), Privy Council Office

They must have been the very briefest of references, because I missed every one of them.

This is an apparent row, rather than a real one, and we are having it for a time-honoured reason in Finance Bill debates: Conservative Members do not like the anti-avoidance schemes. The Government are putting forward legislation to protect the Revenue. That is what my hon. Friends on the Front Bench are doing tonight and I support clause 25.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree

Thank you for calling me to speak, Mr. Gale. I am delighted to see you in the Chair.

I have three points to make. First, there is agreement over the broad principle that managed service contracts should not be allowed to exist as a cynical tax dodge—as I believe Stephen Hesford might describe it—but there seems to be some question over the real scope of the existing problem. I was uneasy when I heard John Whiting of PricewaterhouseCoopers give evidence to the Treasury Committee on this subject. He said:

"I have seen various estimates, certainly estimates of 100,000 or more employees or individuals under this regime. It is very difficult to get an exact figure because very often these populations by nature are transient and rapidly changing."

That alone should be sufficient justification for my hon. Friends' cautious amendment proposing deferral while further study takes place.

Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

Is not there another reason for the Minister to be cautious? The number of people registering as personal service companies in recent months gives some indication of the number who might previously have been working in managed service companies. Given that tax offices are being reviewed and the scaling back of staff is being considered, should not the Government examine the ability to manage at local level the burden of the tens of thousands of individuals now registering as personal service companies? It would be for their own benefit.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree

The hon. Lady makes an excellent point. I do not want to detract from it, but the Treasury Committee also considered the issue of the Government closing down tax offices and letting go experienced tax officers who could track down the very avoidance that they are seeking to deal with by centralising everything. That, in itself, creates problems.

If the Minister believes that he already has the answers to the questions posed by the amendment, he has an opportunity to set them out for the Committee now. I look forward to hearing his comments.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I understand that the hon. Gentleman has asked the Minister to set out further evidence. Has he read the consultation document, "Tackling Managed Service Companies", or the publication that followed that document, "Managed Service Companies: Transfer of Pay as You Earn and National Insurance contributions debts"? If he has not read those documents, I suggest that he do so before peppering the Minister with questions, the answers to which might be in the documents.

Photo of Brooks Newmark Brooks Newmark Conservative, Braintree

As always, I very much appreciate advice and guidance from more experienced Members of the House, but I will go on.

In the absence of firm data about those who are likely to be affected, let us take time to undertake a thorough study, and hold off on a potentially damaging change until we are fully informed of its consequences. I am not advocating complacency as a solution, and neither is the amendment, but year after year we see well-intentioned changes fall victim to the law of unintended consequences. There is a proverb involving fools and angels that is probably of some use in this instance, and if the Government claim that they have not rushed in, the Minister will already be able to answer all the questions posed by the amendment.

My second point is about the adequacy of the proposed solution. In his written evidence to the Treasury Committee, John Whiting, to whom Dr. Cable referred, commented instructively that,

"more discussion is needed to ensure the targeting is precise with no collateral damage."

That "collateral damage" is of most concern to the Opposition. IT contractors often work through managed service contracts, and the industry will feel the full force of the changes. As one contractor said in his response to a poll by an industry website:

"I have no idea why I have to play this game; in most other countries the taxation is far, far simpler for temporary professional work."

As we all know, small business people, unlike large businesses, have much less mobility: they cannot go overseas; they are stuck here with whatever the Government throw at them.

We are quickly into dangerous territory, because anti-avoidance measures sooner or later come down to subjective moral judgements about "fair shares" or "genuine" companies and so on. But when the "collateral damage" is ordinary people—the constituents of Stephen Hesford, Mrs. Villiers and even mine in Braintree—who may be blissfully unaware that they have transgressed against the Revenue, there is surely some room for caution, if not for outright forbearance.

That leads me to my third point, on the problem of publicity and awareness of changes that, by any estimation, will affect a great number of people. The amendment proposes a delay for further study—a delay that will also offer the Treasury a further opportunity to ensure that all those who work through managed service companies are fully apprised of the changes. I appreciate that the Treasury needs to prevent forestalling when dealing with anti-avoidance provisions, but that need must be balanced against the potential impact on a large class of ordinary workers.

The Treasury's consultation document admitted that there are cases in which workers do not benefit from operating through managed service companies and do not understand the implications of doing so. It admits:

"HMRC compliance units have anecdotal evidence of this happening to vulnerable workers such as recent immigrants."

There is also a further warning on the infringement of employment rights represented by coercing workers into managed service companies. As the Institute of Chartered Accountants submitted to the Treasury Committee,

"we are concerned that the workers employed by MSCs do not usually have a choice when they accept work, about how the engagement is structured. Indeed many will not even realise that they are involved in MSCs."

It cannot be right to press on regardless, with the prevention of forestalling the only justification, and I have no hesitation in supporting the amendment tabled by my hon. Friends pressing for a full report on the various impacts of schedule 3.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Mr. Newmark said that he was "not advocating complacency as a solution". A couple of very good points that he made at the end of his speech concerned vulnerable workers, whether migrant workers or otherwise.

Another part of the economy in which we have had a problem for a long time is the construction industry. I think that action is overdue. The hon. Member for Braintree is too young to remember "the lump" on building sites, but it was operating when I was a teenager, and there is now an updated version of it among construction workers. Not only can it rip off the Treasury and therefore other taxpayers; it can rip off the individual building worker. Worse than that—because of the grey area in which the individual worker finds himself—it can have implications for safety. Some safety legislation covers only employees, as opposed to workers. I therefore suggest to the hon. Gentleman that the amendments that he supports are, in fact, an expression of complacency about a problem that we face in terms of tax revenue and in terms of individual safety.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

Does the hon. Gentleman acknowledge that schedule 3 will not give one person extra employment rights? It will have no impact on the serious problems that he has described. It will give no extra health and safety or employment protection.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I hope that you will allow me to stray from the amendments for a couple of sentences, Mr. Gale. Schedule 3 specifically uses the term "worker"—I cannot tell the hon. Lady exactly where, because we are not debating schedule 3 so I had not prepared myself—in contradistinction to the term "employee", and it has a different implication for certain health and safety measures. If the hon. Lady wishes, I will dig out—later, of course, Mr. Gale—the phrase that includes the term "worker".

The second issue on which I think the hon. Member for Braintree was complacent, despite having said that he was not advocating complacency as a solution, relates to the timing of the introduction of these measures, with which both the clause and the amendments deal. Not only is he complacent about what is a growing problem; he seems, complacently, to want a Treasury Minister to take up the Committee's time by providing all kinds of information that might well be in the two reports to which I referred in an intervention that he kindly allowed me to make but which apparently he has not read. He certainly did not confirm to the Committee that he had read them, and implication was that he had not.

Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

The hon. Gentleman said that individuals could be exploited when they did not realise that they were part of a managed service company. Unfortunately, trying to deal with those problems creates a set of further problems. The Institute of Chartered Accountants said that it had seen correspondence from managed service companies to their customers offering them an alternative service, and advising them to set themselves up as personal service companies of which they would be sole shareholders. They would then be asked to certify whether they were within the rules of IR35. If people do not know that they are part of a managed service company, they will be vulnerable when asked to self-certify on something of which they are not adequately aware. Dealing with managed service companies might create a further problem.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

The hon. Lady might be right. However, I did not refer to those vulnerable workers in the way she suggests. I did not say that they did not realise that they were part of a managed service company.

What I would describe as bogus self-employment—not in an "illegal" sense—has existed for many years. Under Margaret Thatcher's Government, milk deliverers were pushed into what most would regard in a moral sense, though not in a legal sense, as bogus self-employment. There was a fad for it, because of the tax regime. The milkmen realised what they were doing, but they were effectively given no option by those who had hitherto employed them. It is a scandal that has continued for years, and clause 25, along with schedule 3, will help to deal with it.

I do not think we should delay any longer. Both amendments suggest that we should, but I think that there has been enough consultation and enough knowledge of these problems for a long time, and that we should reject the amendments.

Photo of John Healey John Healey The Financial Secretary to the Treasury 9:00 pm, 30th April 2007

We have had a useful debate on clause 25. The clause introduces measures to tackle the problems set out in the consultation document entitled "Tackling Managed Service Companies", which we published last December. As you rightly pointed out, Mr. Gale, schedule 3 contains the detailed provisions, to which we will return in the Public Bill Committee. I look forward to your chairmanship of that Committee, and I have enjoyed your chairmanship tonight.

I am glad that we have been able to arrange to debate the clause today, uncomfortable as it is for our discussion in this Committee of the whole House. It is an arrangement that the Opposition wished for, and I am glad that we have been able to accommodate them. Many of the detailed points that Mrs. Villiers raised clearly relate directly to schedule 3. We will return to and deal with them in detail in the debate in the Public Bill Committee, rather than tonight.

The Opposition amendments would delay the date on which the legislation takes effect. Before I consider those, and the legislation in general, perhaps it would help the Committee if I reminded hon. Members of the rationale for legislating in this sector and outlined the consultation that we have undertaken. I hope that it will help to reassure hon. Members that we are not acting in haste, that we have considered the measures in some detail, and that what we propose is the necessary and right response to the problem that we increasingly face with managed service companies. The questions are significantly different from the questions that we may have considered with IR35 and personal service companies.

Managed service companies are corporate structures through which workers provide labour services. What is notable is that managed service company schemes are mass marketed, and it is not appropriate to use the intermediaries legislation to try to deal with them. In the vast majority of cases, workers in managed service companies are not in business on their own account and the nature of their engagements is equivalent to one of employment.

Mr. Gale, you and the House will remember that the House has taken action not just in the last decade but in previous decades to maintain a clear policy intent, which is that those who are, in substance, employed should be treated by the tax system as being employed. For example, between 1988 and 1996, six separate pieces of legislation were introduced by the Conservative party to counter the use of what were then termed readily convertible assets specifically to avoid class 1 national insurance contributions. The steps that we are taking in respect of managed service companies should be seen in the context of that clear and consistent intent, endorsed on occasions by the House, both in the past decade and previously.

Those mass marketed schemes are almost always promoted on the basis that the worker will pay less tax. Let me refer to one or two such schemes and quote the sort of publicity that those companies were issuing before the pre-Budget report announcement in December. Nova Corporate Services said:

"Our aim...Established in 2001, Nova was set up with one goal in mind—to increase the take-home pay of its members: self-employed people, frequently in temporary employment and largely working through employment agencies.

The result—less tax! Individuals who choose to work through a Nova company pay considerably less PAYE (income tax) and National Insurance than those who continue to be paid directly by employment agencies."

Around the same time, before the pre-Budget report announcement, Brookson detailed the advantages of working through a managed service company:

"Well, for a start we can make your life easier by taking care of all your paperwork and handling all your tax issues. As well as saving you time we can also save you money by reducing the amount of tax payable increasing net pay by anything up to 30 per cent. For a very competitive weekly fee Brookson will"— and it goes on to detail precisely how the company will, essentially, take away any suggestion that an individual, through an MSC, is managing their own affairs or involved in that. It then says:

"With every aspect of administration and accounting taken care of, you are free to concentrate on what you do best—your job."

I could refer to a number of other examples that I have brought into the Chamber with me. If I could read Polish, I could quote similar provisions set out in Polish to attract foreign workers, binding them in from the start of their employment—disguised employment—in this country in this way.

Let me give Members an idea of the scale of the tax benefit, and therefore of the artificial tax arrangements and their impact. Currently, an employee earning £30,000 who incorporates for tax purposes will pay £4,290 less tax and national insurance than other employees on the same salary. It is important to be clear that such workers are being encouraged to use incorporation as a means of disguising their real employment status. We are trying to tackle that.

Workers in MSCs are shareholders in the company, formally. Generally, they are paid a combination of salary at the level of the national minimum wage and dividends, on which a lower rate of income tax applies and on which no national insurance is levied. That is the nature of the tax gain, and it shows the artificiality of the tax arrangements.

Under existing rules—the intermediaries legislation, often known as IR35—employed levels of tax and national insurance should be paid, but in most cases the rules are not followed. That a large and growing number of workers are involved in these mass marketed schemes makes it difficult to enforce them. That is why we need fresh legislation in this area. The use of MSCs has grown sharply in recent years. It is estimated that in 2005-06 240,000 workers were in MSCs. As I hope Members appreciate, there are obvious difficulties in quantifying the impact and the figures, but the Government consider this to represent a significant and unacceptable risk to the public purse, which we cannot allow to continue. The estimated yield from this proposed legislation in 2007-08 is about £350 million. Furthermore, we aim that it will deter future use of MSCs and protect the Exchequer against future losses.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

I would be interested to learn whether the Financial Secretary would plan to publish regular figures on the increase in tax take resulting from the application of schedule 3, as he has never been prepared to do that in relation to IR35.

Photo of John Healey John Healey The Financial Secretary to the Treasury

There are reasons why it is difficult to isolate any tax impact from IR35, which no doubt we can explore, along with the hon. Lady's points on schedule 3, in the Public Bill Committee. However, let me say that when we introduce the provisions we will closely monitor, and report on, how they work. If any revisions are required—I hope that they will not be—we will introduce them; we will explain, and consult on, any proposals, as we have done in respect of this scheme.

It is important to recognise that workers will still be able to work flexibly. Many employment agencies—and in particular their representative body, the Recruitment and Employment Confederation—support the measures, because the agencies are being undermined by MSC providers that do not enforce the current rules properly. Workers can continue in MSCs as long as they pay the right level of tax and national insurance. That is the right approach.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Will my hon. Friend confirm that because of the national insurance implications, some of those workers—who, in lay terms, are in a bogus situation—will not get disability benefits if they are injured at work, will not get jobseeker's allowance if they are made unemployed, and will not have pensionable years of contribution toward a basic state pension?

Photo of John Healey John Healey The Financial Secretary to the Treasury

My hon. Friend has a point—and to be fair to the hon. Member for Chipping Barnet, so did she when she said that this legislation was not specifically about employment rights. However, when workers are signed up to, and sometimes obliged to operate through, managed service companies, as a consequence they forfeit certain employment rights and protections, and are not aware that in operating in that way, they are doing so. That is not surprising, given that the publicity and the appeal is directed, as I have suggested, specifically at the tax advantage, and therefore to the weekly or monthly take-home pay advantage that certain workers may see.

Photo of Stewart Hosie Stewart Hosie Shadow Spokesperson (Women), Shadow Spokesperson (Home Affairs), Shadow Spokesperson (Treasury)

How, therefore, will HMRC define as different and genuinely self-employed the legitimate and ambitious individuals who wish to be flexible and work on their own, who go through reputable recruitment agencies to find their contracts, and who work with management accountant-type firms to do their books, compared with someone who happens to be working through one of those companies? Moreover, although those companies are mass marketed and might have lots of such people, could there not also be innocent people genuinely working on their own who happen to use such outfits because it suits them to have their books and accounts done in that manner? How will those different types of people be distinguished?

Photo of John Healey John Healey The Financial Secretary to the Treasury

The short answer is that the distinction will be made by applying the proposed definition set out in schedule 3. Given that in previous years, the hon. Gentleman has made a really important contribution to Standing Committee proceedings on Finance Bills, I hope that he will be willing to serve on the Public Bill Committee for this Bill, too, and that we can deal with these matters.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

I am grateful to the Financial Secretary for giving way again. Is he prepared to acknowledge that there are freelancers genuinely in business on their own account who operate via managed service companies?

Photo of John Healey John Healey The Financial Secretary to the Treasury

If someone is genuinely operating on their own account and essentially running their own affairs and engaging their labour through a managed service company, they clearly will not be caught by the provisions before us. I answered many of the questions that the hon. Lady raised about freelancers on Second Reading, and she will have the opportunity to probe this one in a lot more detail and depth in the Public Bill Committee. I am happy that we should do that, but the intention behind the legislation is clear, and it is not to catch those genuinely in business on their own account and managing their own affairs— [Interruption.]

Photo of David Taylor David Taylor Labour, North West Leicestershire

Will the Minister make it absolutely clear, as my hon. Friend Rob Marris is attempting to do from a sedentary position, that the terms "freelance" and "self-employed" are not interchangeable and equivalent? They are necessarily different in many aspects.

Photo of John Healey John Healey The Financial Secretary to the Treasury

My hon. Friend, who brings a lot of experience to our debate thanks to his professional capacity before he joined this House, is right: "freelancers" is a colloquial not a legislative term. The test will be whether individual workers run their own company to gain the advantage of taking the profits out of it as dividends. If workers are not running their own business they are likely to be employees, and are therefore likely to be disguising their employment status and not paying the tax that they ought to be paying, as other employees do. It is clearly unfair if two workers carrying out the same work pay different levels of tax and national insurance because one is operating through a structure provided by a third party that fails to apply the rules correctly. There is also the further concern that some workers are encouraged, or even forced, to use MSCs without understanding that they may lose their employment rights. The Government therefore set out objectives and detailed proposals for change in the pre-Budget report in December.

During the consultation, almost all those who commented agreed that the existing rules are not being applied and that action on MSCs is necessary. In its response, the Chartered Institute of Taxation said:

"We acknowledge that some MSCs are responsible for significant underpayments of Pay as You Earn and National Insurance Contributions...we further acknowledge that this is a serious issue that HMRC cannot ignore."

Some respondents commented that their businesses were being undercut by those who did not comply. An employment agency for teachers wrote:

"This has put us at a considerable commercial disadvantage to other employment businesses which have used MSCs to pay their workers...As we also pay employers NIC on our teachers' earnings our margins are significantly lower than those recruitment businesses which choose to use MSCs."

As I said earlier, I am dwelling on the consultation process to emphasise how deliberate we have been in formulating our proposals. During the consultation, officials from the Treasury and HMRC met a wide range of interested parties, and the provisions in clause 25 and the related schedule reflect many of the key concerns raised during that process. I express my appreciation, and that of the Government, to the many people who have offered us technical advice and support, and indeed challenge, to get our proposals in good shape and ensuring that they are targeted on meeting the policy objectives we set out.

As we pointed out in the consultation document, getting the definition of MSCs right requires great care. On the one hand, we are determined to end the abuse of the tax system by MSC schemes, while on the other we recognise the advantages—not least in the performance of the British economy—of a relatively flexible labour market. Legislation should ensure that contractors can continue to operate through appropriate structures and obtain the professional services and support they need. People genuinely in business on their own account providing services through service companies will not come within the MSC definition.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury 9:15 pm, 30th April 2007

Will the Minister acknowledge that someone operating through a personal service company that was entirely compliant with the provisions to be enforced by clause 25 could be brought within the scope of the MSC definition merely because their professional advisers were offering other clients non-compliant services?

Photo of John Healey John Healey The Financial Secretary to the Treasury

From the outset we have constantly made it clear that our intention is that the legislation will not hit those working through personal service companies. The legislation was drafted with that intention and it remains our clear purpose, so I hope during this debate and in the Public Bill Committee to convince the hon. Lady that that will be the effect of our proposals.

At the pre-Budget report, when we published the draft definition of MSCs—the starting point for the provisions in clause 25—it focused on the question of who controlled the company and its finances. Dr. Cable was interested in that point. As Julia Goldsworthy mentioned tonight, and in more detail on Second Reading, we soon realised that some MSC providers were intending to move their MSC workers to companies as directors to give the impression that workers were in control of the company. The hon. Lady claimed that the setting up of such new companies was evidence that the MSC measures would not work. However, the fact that some MSC providers act in that way because they are determined to get around the legislation—combined with the comments of some of the respondents to the consultation that the definition needed to be tougher and more robust—is precisely why we revised our approach, instead focusing more on the business of the MSC provider. That will be more effective because it will enable HMRC to focus on the smaller number of MSC providers.

I hope that the hon. Lady will accept the views of David Heaton, a tax partner in the Baker Tilly accountancy firm and employment consulting group. Writing in a tax journal in April, he said:

"This looks to be a very elegant solution to the difficulty that seemed likely to undermine the new rules. The Treasury is to be congratulated on its consultation exercise and, more importantly, on being prepared to listen and change tack to produce workable new law."

That, indeed, is what I hope that we have produced—workable new legislation. Clearly, we await what happens in practice, but I am encouraged that we are moving in the right direction.

There is a specific exclusion from the definition of an MSC provider of those merely providing legal and accountancy services in a professional capacity. Let me make it clear that even where this specific exclusion does not apply, the purpose of the legislation is not to include within the definition of an MSC provider accountants, tax advisers, lawyers and company secretaries, who provide advice or other professional services to companies and individual clients. Those parties are not in the business of promoting or facilitating the use of companies to provide the services of individuals. Nor are they regarded as involved with the company in the way that the legislation envisages. In other words, simply because someone is not exempt by virtue of proposed new section 61B(1)(b) does not mean that they are caught by the legislation.

The legislation specifically excludes employment businesses and agencies from the definition of an MSC provider. That is because we accept that some of the activities that employment businesses and agencies undertake legitimately as part of the business of placing work seekers superficially resemble what MSC providers do in running their clients' companies. In that respect we recognise the important and legitimate role that those businesses play in the temporary labour market, and it is not our intention to disrupt that.

The hon. Member for Chipping Barnet spent some time on the transfer of debts provisions, so I would like to say a few words of reassurance to members of the Committee about them. The legislation aims to deal with a further problem that we identified with MSCs: that they have often escaped payment of tax and national insurance contributions because they have no assets. Where a debt is established, MSCs are often simply wound up and then begin to trade again. They trade again because their workers are transferred to a new MSC by the MSC provider. Respondents to the consultation were consistent in agreeing that the wider package of measures would be ineffective without debt transfer provisions.

Where the MSC does not pay, the legislation will allow the PAYE debts of MSCs to be transferred to appropriate third parties, such as the MSC provider or the director. Those parties are clearly involved and clearly benefit from the arrangements. If payment cannot be obtained from those parties, the debts may be transferred to others who have

"encouraged, facilitated or otherwise been actively involved in the provision by the MSC of the services of the individual".

Without a provision to transfer debts, the entire purpose of the legislation would be lost. Those benefiting from the arrangements would simply be able to continue promoting and using these schemes with no financial risks. Of course, transferring debts to third parties is not a new principle in our tax system.

For those concerned about the transfer of debt, there is, frankly, a simple answer: not to operate through or encourage others to operate through MSCs. I recognise that there are nevertheless some concerns and I am sure that we will return to schedule 3 in greater detail in the Public Bill Committee. The regulations for the PAYE provisions were published for comment back in February and the consultation closed today. We will consider any comments very carefully and take full account of them in finalising the regulations, which we aim to publish in June. The regulations will contain a number of safeguards and grounds for appeal. The debt transfer provisions are intended to be effective for PAYE and national insurance contributions incurred from 6 August in respect of MSC directors and MSC providers, and from 6 January next year for other parties.

I have dwelt for a moment or two on how the provisions might work, because I thought that it was necessary to do so to reassure Members that the Government have considered the issue in detail and have discussed it in detail with the relevant parties. I also wanted to try to allay the concerns and correct some of the misinformation and the misunderstandings that have been evident. I hope that what I have said has helped to reassure Members that the amendments are not necessary, or desirable.

Let me elaborate briefly on those points specifically in relation to amendments Nos. 1 and 14. The amendments are not necessary because the legislation was published for consultation last December, alongside a partial regulatory impact assessment. During the course of the consultation, officials dwelt in detail on the proposals with a wide range of parties. We received 81 written representations and we set out the points that were made in a summary of the consultation responses, which I published last month. Not only did the consultation confirm our analysis of the problem and the need to tackle it, it provided the further evidence that we needed to inform the full regulatory impact assessment, which was published at the same time as the Finance Bill and which covers many of the issues that the hon. Member for Chipping Barnet is concerned about in her amendment. Importantly, the responses to the consultation have allowed us to refine the approach that the legislation takes in a way that enables us to deal with the key concerns that have been raised.

Finally—[Hon. Members: "Hooray!] I am sure that Opposition Members would not wish me to treat in a cursory way the detailed points that have been raised in the Committee proceedings this afternoon—even though I missed the contribution made by Mr. Gauke.

The recruitment and MSC sectors have already responded to the announced changes and are operating the new rules. I have been encouraged by the willingness of many in the industry and their representatives to work to make the measures effective. Introducing a delay would mean that companies that are already operating the new rules would be thrown into confusion and uncertainty. It would send a signal to those seeking to exploit the use of MSCs that we may not be serious about tackling the abuses. I have to say to the hon. Member for Falmouth and Camborne and the hon. Member for Twickenham that delaying the implementation of the provisions until November, as amendment No. 14 envisages, would constitute a loss of anticipated revenue to the public purse of about £50 million.

In conclusion, we set out clearly in the consultation the serious and growing problem of mass marketed MSCs. We consulted widely. We discussed our proposals in depth. We altered the approach, as set out in the Finance Bill. The clause will help us to tackle bogus companies and it will restore more even conditions. Currently, those observing the existing rules lose out. It will protect the public purse from the sort of artificial tax arrangement that means that people who should be employed, and are in effect employed, are not paying the levels of tax that they should be paying as employed people. I commend the clause to the Committee.

Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury

Taking the decision to become a contractor or a freelancer does not make one a tax dodger. I am not reassured by the Financial Secretary's response. The clause remains flawed and I wish to press amendment No. 1 to a Division.

Question put, That the amendment be made:—

The Committee divided: Ayes 123, Noes 265.

Division number 103 Orders of the Day — Clause 25 — Managed service companies

Aye: 123 MPs

No: 265 MPs

Ayes: A-Z by last name


Nos: A-Z by last name


Question accordingly negatived.

Clause 25 ordered to stand part of the Bill.

To report progress and ask leave to sit again. — [Kev i n Brennan.]

Committee report progress; to sit again tomorrow.