Schedule 3 — Managed service companies

Orders of the Day – in the House of Commons at 9:00 pm on 26th June 2007.

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Photo of Theresa Villiers Theresa Villiers Shadow Chief Secretary to the Treasury 9:00 pm, 26th June 2007

I beg to move amendment No. 8, page 92, line 21, leave out from 'person' to first 'the' in line 22 and insert

'whose sole or main business (either alone or together with that of any associate) is the provision or facilitation of'.

Photo of Michael Lord Michael Lord Deputy Speaker (Second Deputy Chairman of Ways and Means)

With this it will be convenient to discuss the following amendments:

No. 9, page 92, line 23, leave out 'involved with the company' and insert

'regularly involved (either directly or through an associate) with all or most aspects of running the company on an ongoing basis'.

No. 11, page 92, line 29, leave out 'influences or'.

No. 12, page 92, line 29, at end insert 'or'.

No. 13, page 92, line 30, leave out lines 30 to 34 and insert—

'(c) exerts a substantial degree of influence over the provision of those services by providing a standardised company product to the individual ("the worker") whose services are then provided by the company.

(2A) For the purposes of subsection (2), arrangements involve a standardised company product if—

(a) the arrangements have standardised, or substantially standardised, documentation—

(i) the purpose of which is to enable the implementation, by the worker, of the arrangements; and

(ii) the form of which is determined by the provider, and is not tailored, to any material extent, to reflect the circumstances of the worker;

(b) the worker enters into a specific arrangement or series of arrangements; and

(c) that arrangement or that series of arrangements is standardised, or substantially standardised, in form and is connected with the provision of services by the worker.'.

No. 10, page 97, line 14, at end insert—

'(3A) References in section 61B to an associate of a person ("P") shall include a person who, for the purposes of securing that the individual's services are provided by a company, acts in concert with P (or with P and other persons).'.

No. 14, page 98, line 15, leave out 'an officer of Revenue and Customs considers'.

No. 15, page 98, line 22, leave out 'encouraged or'.

No. 16, in page 98, line 26 [Schedule 3], at end insert—

'(2A) No person shall fall within the scope of subsection (2)(c) above unless they knew or could have reasonably been expected to know that the services of the individual were being provided by a managed service company.'.

No. 17, page 98, line 32, at end insert—

'(3A) HM Revenue and Customs may not pursue any person mentioned in any paragraph of subsection (2) under the provisions of this section unless, in the opinion of an officer of Revenue and Customs—

(a) it is impossible to recover the specified amount from any other person mentioned in any of the preceding paragraphs of subsection (2), or

(b) it is impracticable to recover the specified amount from any of those persons.'.

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

Throughout the debate on schedule 3 and managed service companies, the Opposition have recognised that there is an avoidance problem at the borderline between the employed and the self-employed, and that not all workers currently operating through managed service companies are genuinely in business on their own account. We would support measures to tackle that problem, but only if they were clearly drafted and appropriately targeted. Schedule 3 complies with neither of those two conditions, which is why we tabled amendments both in Committee and on Report to try to remedy the problems.

Anne Swain of the Association of Technology Staffing Companies has told me of her concerns about the

"huge amount of uncertainty around these provisions."

The uncertainty around schedule 3 is costing people their jobs and their livelihoods. There is a real danger that innocent parties—contractors who are clearly in business on their own account—will be hit by collateral damage simply because they choose to outsource aspects of the management of the companies through which they provide their services.

After the IR35 debacle and the millions spent on compliance checking, many in the contractor community feel victimised by this Chancellor. They resent the fact that the legislation will make it more difficult to use advisers who specialise in the contractor market. They also find it hard to understand why restrictions are being placed on their ability to outsource matters relating to their company, but larger businesses face no such constraints.

Before addressing the amendments directly, I should make it clear that I welcome the Financial Secretary's clarification in Committee of a number of points relating to how the legislation should be interpreted. I shall refer to a number of his statements during the debate. The Opposition seek to persuade the House, however, that amendments are still necessary. Welcome though the Financial Secretary's words of comfort in Committee were, and welcome though HMRC guidance will be, the protection of a change in the statute will still be needed to remedy the problems with the drafting of schedule 3.

It is possible to use Hansard in interpreting legislation, but only in limited circumstances. In Pepper v. Hart, the House of Lords restricted that to instances in which the relevant statute was

"ambiguous or obscure, or leads to an absurdity".

Nor can HMRC guidance provide an adequate answer to the problems in relation to the legislation. Certainly, it is useful, and it is regrettable that it has yet to be published, despite the fact that the regime has been in operation since April. One cannot, however, realistically expect thousands of contractors potentially affected by the legislation to check HMRC's website and keep track of guidance, as with the problems to which I referred in relation to clause 70.

Moreover, guidance cannot be relied on in court and can be changed or withdrawn at any time. In a number of examples, HMRC indicated in guidance that legislation did or did not apply in a certain way, and then changed its mind and sought to use it in exactly the way that it said that it would not: for example, in Bibby v. Prudential Assurance, and in Sema Group Pension Scheme Trustees v. Commissioners of Inland Revenue. In both cases, HMRC had given a clear indication of how it expected the legislation to work in guidance, and then sought to go back on that.

Relying purely on guidance would also contravene the principle in the House of Lords decision in Wilkinson, and the constitutional principles to which I drew the House's attention during the debate on stamp duty. HMRC's controversial record on the enforcement of IR35, and the numerous cases in which an allegation of failure to comply with IR35 has been made and later dropped, show the risks of leaving tax inspectors with too much discretion. Relying wholly on guidance rather than making sure that the legislation is clear would give tax inspectors too much discretion.

On amendments Nos. 8 to 10, schedule 3 means that any freelancer must ask the key question whether his professional advisers could fall into the category of an MSC provider, which would change his tax status from that of a service business to that of an employee. The definition of an MSC provider is contained in paragraph (d) of proposed new section 61B in schedule 3, and covers any

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

As many professional bodies have repeatedly pointed out, that is exactly what many accountants do. They will frequently advise their clients as to the best corporate structure to use, establish companies for them and go on to provide company secretarial services and process payments relating to those companies. Similar issues arise for company formation agents and other professionals providing company secretarial services.

It is true that the Financial Secretary gave some comfort on that point in Committee, stating that even when the specific exclusion for professionals in subsection (3) does not apply,

"the purpose of the legislation is not to include within the definition of MSC provider accountants, tax advisers, lawyers and company secretaries who provide advice or other professional services to companies in general. Those persons 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 in which the legislation envisages." ——[Official Report, Finance Public Bill Committee, 15 May 2007; c.175-76. ]

That is a welcome clarification, but as Professor Anne Redston of King's college London has pointed out:

"the worry is that this is not what the legislation actually says".

There is no exclusion for those who facilitate the use of companies to provide the services of individuals only in the course of providing services to companies generally. Indeed, it would be quite difficult to draft such a provision without leaving loopholes. It seems to me that looking at the drafting of paragraph (d), the mere provision of services to a range of different companies, some of which happen to be used for the provision of services of individuals, would be enough to bring the adviser within the scope of the legislation, whether the Financial Secretary says so in Committee or not.

Amendment No. 8 would remove the threat from accountants and other professionals who carry out such activities as part of a wider practice of accountancy and business advice. Amendment No. 9 would ensure that only those who had a close day-to-day involvement with the running of the service company and a wide range of its activities would trigger the MSC provisions.

The two amendments would focus the legislation on the sort of situations in which the provider and not the worker is in the driving seat—where the company is essentially an emanation of the provider rather than a separate entity run by the worker. The effect would be to target the MSC provisions at the people the Government seem to have in mind—those for whom the provision and facilitation of service companies is a core and discernable part of their business.

The amendments are revised versions of those tabled in Committee. Amendment No. 10 has been added in response to the concern expressed by the Financial Secretary in Committee that an MSC provider could combine its business with other services to avoid being caught by the legislation. I hope that the changes would ensure that the provider cannot use the cover of linked services provided by associates to avoid measures in the legislation. The amendments are tighter than those rejected in Committee.

Amendments Nos. 10, 11, 12 and 13 address similar concerns, but they can stand alone and should be considered independently by the Financial Secretary. They address the serious problems with proposed new section 61B(2), which provides that if a third party influences the service company, it is sufficient to amount to involvement and to trigger the MSC provisions.

Taking a commonsense interpretation, every professional adviser could be said to influence their client. There is no point in engaging professionals unless the intention is at least to consider acting on their advice. Why would people pay their fees if they are not interested in being influenced by their advice? Again, some welcome comfort can be drawn from the Financial Secretary's comments in Committee:

"I think that hon. Members would accept that there is a difference—between a person who provides independent, tailored advice to a client, who is then able to consider that advice before accepting it or rejecting it, and the person who simply supplies a client with a standard solution or product that the client accepts. It is not the intention that the former situation—the provision of advice—be considered to be influencing in this context. However, the latter situation— supplying a standard solution or product—is regarded as influencing." ——[Official Report, Finance Public Bill Committee, 15 May 2007; c. 175.]

There are two reasons why amendments are still needed despite those assurances. The first concerns the practical difficulties. They are outlined by Institute of Chartered Accountants:

"We are concerned that the definition of 'involved', as explained by the Financial difficult to apply in practice. This relies upon the client of the MSC Provider receiving advice rather than a 'solution' which the client accepts without fully understanding the consequences. This may be determinable if HMRC were present at the conversation with the client but there will be little evidence that can distinguish between the two situations after the event."

Any accountant, particularly one specialising in a particular area, may offer a fairly standardised package to a significant number of clients if they have similar requirements. After the event, it may be difficult to determine whether individual tailored advice has been given but the similarities between the customers has resulted in the same arrangements being made, or whether a standardised solution has been provided into which the adviser has pushed the customer.

The second and more serious problem with relying on the Financial Secretary's statement is the same as before: it is simply not consistent with what the legislation actually says. The explanatory notes say that "influences" should bear its normal meaning. The OED defines "influences" as "to affect the condition of" or "to have an effect on". The Minister's interpretation of "influence" as involving essentially a take it or leave it situation in which the client has little say over the nature of the structure or how it operates is a gloss on the statute and is at odds with the common-sense interpretation of the word.

Amendments Nos. 11 to 13 seek to take what the Minister has said and insert it into the legislation, so that the provision of a standardised service will trigger the MSC provisions but not a bespoke one. While not ideal, such an approach would at least reduce the risk that contractors who use accountants will inadvertently bring their service companies within the MSC provisions.

Another important reason to amend subsections (1) or (2) or both is that the safe harbour proposed in subsection (3) for those who provide only

"legal or accountancy services in a professional capacity" gives inadequate protection to advisers and their contractor clients. There are of course several concerns about what is included in the term "legal or accountancy services" and they were aired in Committee. However, a further worry is revealed when one examines what the explanatory notes have to say about the words "in a professional capacity", which is that

"professionally qualified persons normally would not be considered to be an MSC provider except to the extent that they are in the business of promoting and facilitating the use of companies to provide the services of individuals."

So in looking at the meaning of subsection (3) one is simply thrown back on to subsection (1). It seems that subsection (3) will be of limited use unless the problems with subsection (1) that I have outlined are resolved.

If the Minister will not accept the amendments to subsections (1) and (2), I hope that he will at least address the questions that I put to him in Committee, which he was unable to answer then, about the scope of the safe harbour for professional services.

First, is it the nature of the services provided that determines whether someone is an MSC provider, or is the question determined by the qualification or the professional status of the person providing the service? Is it possible for anyone who is not part of a regulated profession to use the subsection (3) safe harbour? Do people need a current practising certificate to use it? What about accountants and other tax professionals, who are not registered, but who are employed in-house? And to what extent can service providers outside the remit of the traditional professional set-up use the safe harbour?

In the past, I understand that the Government have always been resistant to attempts to control or regulate the term "accountant" on the grounds that that could be anti-competitive. It certainly restricts competition if the outcome of the legislation is that freelancers and contractors can no longer outsource accountancy services to specialist providers but are forced to use only traditional accountancy practices. There is at least a risk that differentiating tax treatment on the basis of whether one holds a qualification from a professional body might be either anti-competitive or breach EU discrimination law.

This debate also gives the Minister an opportunity to address some of the other questions that he did not answer in Committee about different service providers and how they are dealt with by subsections (1), (2) and (3), including in particular franchise advisers; factoring and invoice discounting houses, which help to follow up unpaid invoices; and back-office companies which provide services relating to payroll, supplier payments and so on. Those firms provide some of the very services the legislation uses to identify MSC providers. For example, they often pay the worker's tax and trade creditors. Is it the intention to turn all the clients of back-office service companies into MSCs even when the workers in question are clearly in business on their own account?

I turn now to the second limb of the Government's proposals on MSCs, which is the third party debt rules contained in proposed new section 688A. Those are far reaching and leave professional advisers potentially on risk for thousands of pounds of their clients' taxes, even if they have no avoidance motivation and their involvement with the MSC is inferential or unwitting. Section 688A could leave accountants and other advisers up and down the country liable to the last penny of their personal wealth. In making directors liable, the rules are much more powerful than the normal circumstances where such people are liable for the debts of their companies, never mind the tax debts of people with whom their companies might be loosely connected.

Even a lowly payroll clerk working for a scheme provider could be bankrupted should the Revenue proceed against him or her as someone "actively involved" in the provision of services via an MSC within subsection (2)(c) of section 688A. The Financial Secretary said in Committee that he did not intend ordinary employees of either MSCs or relevant third parties to be caught. However, whether he likes it or not, they are in scope and so their protection will be the tenuous one of a few words in Hansard and the discretion of Her Majesty's Revenue and Customs.

That degree of discretion is a hugely powerful tool in the hands of the Revenue. Serving notice, for example, on a company's employees that they are in danger of having to pay out thousands of pounds in tax debts for their employers' clients could have a startling effect. It could certainly force the employer to pay up to the Revenue in double-quick time, regardless of whether the demand for payment was justified.

"So much the better," the Minister might respond, but there, I think, we have the truth of it. It seems to me that these provisions have been drafted in a deliberately wide-ranging and ambiguous way in order to scare people away from a particular type of service provision, regardless of whether a tax avoidance motive is involved or not.

To use tax legislation to deter and punish in this way raises some significant constitutional concerns. That is not what the tax system is supposed to be used for, and this is no victimless constitutional question. Already, some contractors are finding their work drying up because third parties are afraid to engage them for fear of falling foul of the third party debt rules.

Many of the concerns about section 688A flow from the fact that paragraph (c) of subsection (2) provides that any party who "encourages" the provision of the services of a worker by an MSC could become liable for the tax due on the deemed employment payment imposed by the legislation. That is why we have tabled amendment No. 15 to delete "encourage" from paragraph (c). This probing amendment is designed to elicit some clarity for the many businesses potentially affected by the MSC legislation and deeply worried about whether their day-to-day activities might be viewed as "encouraging" within the meaning of paragraph (c).

For example, by providing companies to be used by contractors an accountant or company formation agent could be said to have encouraged the provision of the services via MSCs. Any accountant who provides advice on the appropriate corporate structure could also, as a matter of logic, be said to be encouraging the use of that structure and hence the provision of services by the MSC. If accountants advertise or promote corporate services to contractors, that surely would amount to encouraging people to use these services. If the legislation were targeted on those who encouraged individuals to use MSCs, one could perhaps see the logic, as that would more accurately focus section 688A on those actively pushing workers into MSCs.

I think that they are the people whom the Government want to target, but that is not what section 688A says, as it refers only to encouraging the provision of the services by the MSC. So as long as a person encourages the company to provide the services, it seems to me that that person is at risk of being caught by section 688A, regardless of whether he or she knew that the company was an MSC.

Arguably, that means end-clients may find themselves liable for the tax debts of the contractors and freelance workers whom they engage. Surely by paying a company to provide services, an end-client is encouraging that company to provide them. What clearer example of encouragement could there be than direct financial inducement? Equally, a worker who finds other contractors to take part in a project could be said to be encouraging the provision of services by those companies.

A further anxiety surrounding the term "encourage" is that it could prevent recruitment businesses from holding an approved list of company suppliers and advisers. Any recommendation or advice regarding a company supplier given to a worker could constitute "encouraging", and the Financial Secretary confirmed in Committee that holding such a list could give rise to problems under the legislation—contrary to the indications given by HMRC on that point. The unfortunate effect of that would be to remove a useful compliance check that at present serves to steer contractors away from dubious operators in the market.

Many of the problems surrounding the concept of "encouraging" fall away if we could insert a requirement of culpability, and that brings me to amendment No. 16. As I have said, these are very powerful provisions and there are very important arguments in favour of restricting those caught by them to people who bear a degree of blame for, or at least had an idea of, what was going on.

In particular, it is critical to remove the risk that I have highlighted—that end-clients could be liable for the tax debts of their contractors—since that risk could have a seriously damaging impact on the flexibility of the UK labour market. The Government seem to think that the use of the term "actively facilitate" imports an element of deliberation or culpability, but that is simply not clear. A person could be actively involved, on a daily basis, with the provision of services but not know much about the corporate structure through which they were provided. As long as someone was actively involved with the provision of services by the company, they could be caught even if they had no knowledge that the company was an MSC or was being used to avoid tax.

Amendment No. 13 would remedy that situation by ensuring that section 688A catches only those who knew, or could reasonably be expected to know, that the company through which the services in question were being provided was an MSC. In Committee, the Minister was unable to explain why he resisted the amendment despite the fact that the Treasury's own consultation document on the provisions indicates that that is exactly how HMRC believes that section 688A will apply in practice.

That was confirmed in a letter to me from the Financial Secretary, dated 10 May this year. He stated:

"Our clear objective is that those who don't know or could not reasonably be expected to know that they are dealing with an MSC should not be within scope of the debt transfer provision".

How does he reconcile that statement with his statement in Committee, when he rejected a defence based on ignorance? By doing that he in effect accepted that it is possible for unwitting third parties to be caught by the third party debt rules. Nor did he explain in Committee why such provisions are acceptable in other areas of legislation, such as the Insolvency Act 1986, but not in this context, where they could do so much to clarify the legislation and reassure people who are connected with freelancers and contractors.

As for amendment No. 14, the Financial Secretary has taken steps to remove almost all reference to "HMRC thinks" in the Bill. The amendment would see the back of "HMRC considers", which suffers from the same defects. Either a tax debt is due or it is not. What HMRC considers to be the case should not be relevant. What should count is whether the situation falls within the scope of the legislation. If we were to grant HMRC the power to levy taxes when it considered them to be due, that would give it far too much discretion and would undermine yet again the principle that it is for Parliament, not the Executive, to determine whether citizens should be taxed. If the Minister is prepared to junk "HMRC thinks", why does he continue to inflict "HMRC considers" on the public?

Amendment No. 17 is designed to prevent local tax inspectors from using section 688A as a shortcut to collect taxes from third parties simply because it is easier than pursuing the taxpayer directly. I have received a number of representations on this point. The Professional Contractors Group is understandably anxious, given the unhappy experience that many of its members have had with HMRC's heavy-handed approach to IR35. It says:

"PCG feels uncomfortable with the prospect of HMRC being able to 'pick low-hanging fruit' by transferring debts to an easier target if the first transferee seems unlikely to pay."

Amendment No. 17 would limit HMRC's discretion in this area and essentially require it to adopt the sequence set out in section 688A(2) in pursuing the different parties. Given the powerful nature of the new power to impose a liability to pay other people's tax debts, it would give huge comfort to know that constraints are in place to require HMRC to pursue the real offenders first, before coming after those whose involvement was inferential and unwitting.

In conclusion, contract working is of key importance to thousands of workers, who value the freedom and flexibility it gives them. I am sure that Treasury Front-Bench Members would agree that it is also critical when competing in a global world economy. The reality is that many hard-working, law-abiding contractors could be hit by the legislation even when they are not dodging taxes or misrepresenting the nature of their relationship with their end clients. It is also clear that the cost of the professional advice that they need could be driven up by the flaws in the legislation and that the uncertainties generated by the Bill could significantly undermine the flexibility of the UK Labour market, about which the Chancellor has frequently boasted.

Above all, the legislation will provide yet another set of complex tax hurdles for small start-up businesses to try to jump over. We should remember that today's one-man service company could easily become tomorrow's Apple, Amazon or Google. If we smother these enterprises at birth, the only people who will gain will be the entrepreneurs of China and India, who are already anxious to move in on our service industries. I urge the House and the Minister to take this final opportunity to grapple with the flaws in the legislation and to deflect the blow that is about to land on so many small services businesses across the nation.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West 9:15 pm, 26th June 2007

I am sure that the whole House will be just as pleased as me that Mrs. Villiers has done her homework. She referred to outsourcing and back-office service companies. While there is an issue to address, I should put this in context. The Treasury must take all reasonable steps to ensure that tax and national insurance are paid. Apart from anything else, social justice requires that, as does the provision of public services to the people of this country on which the Government have such a good record. Those services must be paid for, so tax must be collected.

It is entirely appropriate to clamp down on loopholes because we do not want to support tax dodgers. However, the loopholes must be plugged in a way that does not penalise unduly legitimate and compliant managed service company businesses that attempt to assist entrepreneurs by dealing with their administrative or accountancy needs—those are the back-office functions. Of course, the Treasury must always examine the impact in practice of the legislation that it implements. It must also ensure that people do not get away with dodging taxes, which has undoubtedly been happening in some sectors of the managed service company industry. Schedule 3 is somewhat controversial. Fear has been expressed that the provision might drive people from managed service companies to personal tax companies, which, paradoxically, might decrease the tax take because some people would try to avoid making national insurance payments.

I have received representations from an established managed service company that rejoices in the name of No Longer Limited. The company offers a tax planning and administration service for contractors on a fixed or percentage fee, regardless of their IR35 status, and the self-employed who can join its limited liability partnership. Every contractor undertakes a full compliance check with the company. If that is successful, NLL pays tax and national insurance on its profits on its behalf into a quarterly self-assessment account and ensures that the due dates of 31 January and 31 July are met timeously. For contractors that are businesses in their own right, the alternative to the back-office functions provided by organisations such as No Longer Limited is to set up their own personal service company. Under the classic model for such a company, contractors pay themselves, as employees, a small salary—perhaps just the minimum wage—while the remainder is paid as a dividend, which avoids national insurance and cuts the tax take. That is not in the spirit of what I would like to see.

NLL is owned by Mr. Colin Howell. Part of the purpose of his business is to ensure that there is full compliance and that the right tax bills are paid quickly. He tells me that the new law could have the perverse and unintended consequence that such back-office companies would become no longer viable, which would mean that No Longer Limited would become "No Longer There", which would lead to the loss of up to 40 jobs. It is clearly not for me or the House to adjudicate on such claims today, but I wanted to convey Mr. Howell's representations.

I understand that Mr. Howell will be seeking an exemption, given that that is allowed under proposed new section 61B(3) and (4). If he does that, Her Majesty's Revenue and Customs officials will make a judgment with the full facts in front of them. It would be wholly inappropriate for me to ask my hon. Friend the Financial Secretary for a direction or a decision today—he would not give one; I would not seek one—but I would ask companies such as Mr. Howell's to be given full consideration if and when they claim an exemption to ensure that the law does not result in rough justice. If Mr. Howell's claims are correct, it would be likely, perversely, that the measure would result in a lower tax take and that jobs would be lost as companies moved away from managed service companies. In such circumstances, his firm would have to close down.

I hope that my hon. Friend the Financial Secretary will reassure us about how back-office companies, in contradistinction to the legal and accountancy companies covered by the exemption under proposed new section 61B(3), would be able to obtain an exemption so that a company such as No Longer Limited would not have to close down because its business had migrated elsewhere. I stress that I do not want a decision on that company's case. I am merely citing it as an example of a company providing back-office services that feels that it might be adversely affected by the Bill, yet unable to obtain an exemption. It would be most helpful if my hon. Friend would give us a rough indication of the exemption procedure.

Photo of Colin Breed Colin Breed Shadow Minister, Treasury 9:30 pm, 26th June 2007

It is fairly obvious that, even after extensive debate in Committee and the speeches made tonight, considerable uncertainty remains about the proposals. The aim is to protect legitimate managed service companies, which do a fine job, while seeking out those who use that as a means of avoiding tax and national insurance. Our senses are heightened by the debate in the broad industry that surrounded IR35; we anticipate the same sort of problems arising now.

It is perhaps impossible to get the drafting exactly right, but the amendments represent a valiant attempt to tackle some of the problems that remain even after the assurances that the Minister gave in Committee. We are also concerned about the guidance, because we know that guidance cannot be relied upon, especially when cases are pursued as far as the courts. Guidance is therefore rather insecure. It is Parliament's job to make legislation as accurate as possible and not provide scope for wide interpretation by HMRC personnel. Interpretation is inevitable, and I believe it will be interpreted differently in different parts of the country, which will create problems. I acknowledge that Ministers have striven to improve the clarity, but much uncertainty remains. A number of professional advisers have spoken or written to us and lobbied us.

I assure the Minister that the Liberal Democrats understand the principle and support what the Government are trying to do. However, we are concerned that unless the legislation is tightened—perhaps along the lines set out in the amendments—it will prove to be problematic and may endanger some legitimate businesses that will not wish to continue as managed service companies. The legislation may well prove to be difficult to interpret and be applied differently in different parts of the country.

We support the amendments. I accept that some of them are probing, but the Government must answer them if we are to achieve legislation that is as accurate as we can make it.

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

I thank Mrs. Villiers for going through the amendments in considerable detail. I know that it is late and we have been through this debate in Committee, but it is important because of the potential scale of the impact of the measure.

I share the concerns voiced by many people, including Rob Marris, that some companies, particularly legitimate recruitment and accounting services companies, as well as other back-office firms, may be defined as managed service companies when they are not. I shall go through the definition of an MSC, but first I shall talk about the amendments.

Amendment No. 8 would amend the description of an MSC by tightening the criterion in proposed new section 61B(1)(d) of the Income Tax (Earnings and Pensions) Act 2003, changing the wording from

"a person who carries on a business of promoting or facilitating" to a person

"whose sole or main the provision or facilitation of"

MSC services. That is a useful safeguard to avoid the legitimate back office-type of operation being deemed to be an MSC merely by association. It would also offer some comfort to legitimate recruitment firms, which may be deemed to be MSCs by association with genuine MSCs, because they present as a candidate for a legitimate contract job someone who may not even know their own employment status but who may have been used by an MSC—a real one—that was no more than a gangmaster operation.

Amendment No. 9 would leave out "involved with the company" and tighten the provisions by including the words

"regularly involved...with all or most aspects of running the company on an ongoing basis".

That change offers real protection to companies that place people from an MSC who are presented as bona fide contract workers, but who, as I have said, may not even know their own employment status. That is an extremely important protection.

Amendment No. 11 would leave out "influences or" from proposed new section 61B(2)(b), and would require control to be the criterion that determines whether an MSC provider is involved with the company. Amendment No. 13 would specify in proposed new clause 61B(2)(c) that the company must be required to exert

"a substantial degree of influence over the provision".

Amendments Nos. 11 and 13 are necessary to protect third party companies that are not MSCs from being defined as such; that is particularly important for recruitment firms or accounting companies that facilitate contract employment. By that I mean a recruitment firm that offers any other services—even advice on the nature of payment, on how to invoice or on which contract to take—or an accounting services company with a recruitment arm that assists in the final negotiation of a contract once the contract is put forward by a recruitment firm.

It is easy to see that a third party firm could be defined as an MSC without that protection. The description of an MSC in proposed new section 61B(1)(a), (b), (c) and (d) is clear. Paragraph (a) says:

"its business consists wholly or mainly of providing (directly or indirectly) the services of an individual to other persons".

A recruitment firm would come under that, and an accounting services company might do so if it had any input into the negotiation of a contract. Paragraph (b) says:

"payments are made (directly or indirectly) to the individual...of an amount equal to the greater part or all of the consideration for the provision of the services".

That concerns payment. Paragraph (c) says that a company is an MSC if the way in which the payments are made would result in the individual receiving more than they would if they were a normally employed member of staff, but that is the reason why many people become self-employed contractors; they take a risk and go it themselves, but there are tax advantages, and the income received may be slightly greater. Paragraph (d) mentions

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

That is the whole purpose of a recruitment firm. The paragraph would possibly catch an accounting services company with a recruitment arm, too.

Of course there are some protections, but I do not believe that they are sufficient. That is why I will support the amendments tonight. A protection is offered in proposed new section 61B(4), which says that the only time when a person does not fall within subsection (1)(d)—that is the description of an MSC—is when they only place individuals with persons who wish to obtain their services. As a recruitment firm may well provide assistance with visas for an overseas contract, or specialist training for an offshore contract, or accommodation for a contract in a strange place, they are not only placing individuals; they are doing other things, too, so the protection in new section 61B(4) does not necessarily apply, as subsection (5) allows an opt-out.

Subsection (5)(a) excludes the protection in subsection (4) if the person or associate does anything in subsection (2)(c)—that is, anything that

"influences or controls the way in which payments to the individual...are made".

If a recruitment firm or an accounting services company suggests that the individual contractor invoices weekly, fortnightly, monthly, or three-monthly, according to what suits the contractor, that influences the way in which payments to the individual are made, and therefore the protection in proposed new section 61B(4) does not apply.

Reference has been made to the safe harbour in subsection (3), which says:

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

At face value that sounds fine, but if the firm, particularly in an accounting services company context, has a recruitment or personnel arm that offers advice on visas, training or accommodation, or that assists in any way with the final negotiation of a contract, that safe harbour would not apply.

As the hon. Member for Chipping Barnet said, the Minister gave the Committee certain assurances, and it will be useful to hear what he has to say today. The volume and detail of representations, however, in the real world outside the Chamber are such that he may wish to toughen up what he is going to say or, indeed, tell us that he is prepared to reconsider the Bill's provisions so that we do not have to rely on guidelines and regulations in future.

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

Thank you, Mr. Speaker. I would hate to miss the opportunity to respond to the debate.

Stewart Hosie is right that we have been through this in some detail more than once. He is right, too, that it is an important matter, as hon. Members have emphasised. Mrs. Villiers recognises—and I am glad that she did so so clearly—the need to tackle the avoidance that undoubtedly results from the existence of MSCs. She supports our proposals on two conditions: the provisions should be clearly drafted and appropriately targeted. I hope that I can give her that reassurance tonight, as I have tried to do in previous debates on the Bill. I hope that that reassurance will help Mr. Breed, too, as well as my hon. Friend Rob Marris. I am glad of my hon. Friend's support in principle, as well as his recognition, which was shared by the hon. Member for South-East Cornwall, of the difficult need to balance provisions to catch those whom we want to catch against the need not to bring into the net those whom we do not want to catch or indeed, introduce provisions that will have perverse consequence.

I shall try to deal with concerns about back-office companies that offer administrative services and, in so doing, tackle the question of exemption and whether or not provisions that have been in place for some time have had an effect on employment. I shall then deal specifically with the amendments tabled by the hon. Member for Chipping Barnet so that, without delaying the House unduly, I can deal with hon. Members' concerns. The hon. Lady reiterated, as she has done consistently, understandable concerns about the position of freelancers. Freelancers who outsource any part of their administration are not, and should not be, in danger of being caught by the legislation, which is not intended to, nor does it, catch persons genuinely in business on their own account who receive help to run their company. The legislation catches those who have simply been provided with a company as a means to an end. In achieving that end, they need the company to be run for them.

The legislation therefore does not prohibit small contractors from outsourcing the administration of their companies. They can obtain the support services that they need, but there is a distinct difference between someone who offers back-office services to client companies generally and someone who is in the business of promoting or facilitating the use of companies to provide the services of individuals who, as part of that business, offer support services. Of course, such people can operate through MSCs if they choose—that is not a problem, and we do not discourage it—but they will have to pay the proper employed levels of tax and national insurance.

Let me try to make the point slightly differently so as to pick up a set of associated concerns. Simply because someone is not exempt by virtue of proposed new section 61B(3) does not mean that they are caught by the legislation—a point that I have made in previous debates. If that is to happen, someone must fulfil wholly the criterion of proposed new subsection (1)(d), which links directly to proposed new subsection (1)(B), too. They must first be in the business of promoting or facilitating the use of companies to provide individuals' services.

HMRC will give careful consideration to requests to consider the application and qualification for exemption, but I stress that those providing corporate solutions to persons seeking to disguise employment use a wide variety of structures. Any examination should not provide scope for MSC providers to exempt themselves from the legislation.

Let me tackle the question whether people are going out of business. It seems that some MSC providers are winding up or changing their businesses because there is no longer a tax and national insurance advantage from operating an MSC scheme. That reinforces the point that such schemes existed only to avoid tax and national insurance, and now that that has been stopped, they have no real reason to continue in business.

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

I did not have in mind people being laid off by MSC providers. I was concerned about the contractors who have written to me saying that their source of work is drying up, and about people who organise and provide recruitment services for contractors and who are laying people off because there is so much anxiety about the legislation that they are afraid to get involved in providing services to contractors in case they get caught by the third party debt provisions.

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

The hon. Lady caught me in mid-sentence. Perhaps I should not have been so generous or ready to give way. I was going on to say that as she would expect, we have been watching carefully the impact of the legislation in the sectors that it might affect, and we have no evidence that it has had any adverse effects on employment. Our assessment to date is that the new rules have been operated by many providers since April with no apparent disruption to the labour market.

I turn to the specifics of the amendments. Amendments Nos. 8 and 9, which deal with the definition of an MSC provider, would enable MSC providers determined to sidestep the definition to seek to run a dual business, of which the provider element comprised only 49 per cent. Hon. Members will see immediately that that is an obvious way of restructuring the business to sidestep rules if they were amended as proposed. For the same reason the term "sole" would provide even greater scope for circumvention. Far from tightening the definition, as hon. Members have argued, the amendment would loosen the scope for avoidance—the very problem that we are trying to deal with.

On the tests for involvement with the MSC, amendments Nos. 11 to 13 seek to change these tests, creating tests which would be easy to circumvent. There is no reason why a person purportedly providing business services to a company through which a worker provides their services should seek to influence the way in which a client company provides the worker's services. I explained that clearly and on the record in Committee.

The question of influence, as I explained, is clearly distinct from independent tailored advice which is normally given by accountants and other advisers. Importantly—this is the proposition in the amendments—if the test were merely control, it is likely that many providers would take steps to ensure that their arrangements gave the impression that control lay with the company. Influence would be less easy to disguise.

Amendment No. 13 would remove three of the five tests, and import terms such as "substantial degree of influence" in reference to a standardised product. The weakness with these amendments is that to prescribe involvement in this way would inevitably result in MSC providers claiming that their services did not fall within the detailed strategy description, creating significant risk to the aims of the legislation.

Amendment No. 14 is presumably an attempt to remove the possibility of an officer of HMRC using his discretion to transfer an amount that in other situations would not be considered due. That is not necessary. An HMRC debt can arise only by virtue of one of the existing provisions in the PAYE legislation.

On amendments Nos. 15 and 16, we have listened carefully to the concerns expressed about the scope of the debt transfer provisions. We have already made amendments to ensure that there is greater clarity and certainty about who is or is not involved. Amendment No. 15 would substantially undermine the effectiveness of the transfer of debt provision. The removal of the word "encouraged" would enable those third parties to continue to encourage workers into MSCs without themselves facing financial risk. Amendment No. 16 would open the door to abuse by allowing ignorance as a defence. Finally, amendment No. 17 contains detail that would be more appropriate in the guidance.

In the Public Bill Committee, I indicated that the regulations relating to schedule 3 would be published by HMRC in draft and would be laid before the House once the Finance Bill has received Royal Assent. I also gave the undertaking that HMRC would informally consult interested parties to ensure that the guidance on the legislation provides the clarity that those groups seek. We have held detailed discussions with representatives and experts and are building many of their suggestions into the guidance. We anticipate that the guidance will be published next week, and I think that hon. Members accept that it will be entirely in keeping with the approach that we have taken since the first draft regulations and legislation were published alongside the pre-Budget report.

We have improved the legislation and taken into account the views expressed at every stage of the process. I hope that I have reflected that tonight and provided the reassurance the hon. Members seek. The amendments are unnecessary or would jeopardise the intent of the clause.

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

The Financial Secretary has not reassured me. He has not added anything to his remarks in Committee, but the problems are still significant. The fact that the provision has been proposed at all indicates that IR35 has failed. If the legislation is adopted as drafted, I fear that the Government will be back in a year or so asking for further complicated legislation to try to deal with the problem. I therefore seek leave to withdraw the lead amendment, but I ask the House to divide on amendment No. 13.

Amendment, by leave, withdrawn.

Amendment proposed: No. 13, page 92, line 30, leave out lines 30 to 34 and insert—

'(c) exerts a substantial degree of influence over the provision of those services by providing a standardised company product to the individual ("the worker") whose services are then provided by the company.

(2A) For the purposes of subsection (2), arrangements involve a standardised company product if—

(a) the arrangements have standardised, or substantially standardised, documentation—

(i) the purpose of which is to enable the implementation, by the worker, of the arrangements; and

(ii) the form of which is determined by the provider, and is not tailored, to any material extent, to reflect the circumstances of the worker;

(b) the worker enters into a specific arrangement or series of arrangements; and

(c) that arrangement or that series of arrangements is standardised, or substantially standardised, in form and is connected with the provision of services by the worker.'.— [Mrs. Villiers.]

Question put, That the amendment be made:—

The House proceeded to a Division.

The House having divided: Ayes 201, Noes 279.

Division number 154

See full list of votes (From The Public Whip)

Question accordingly negatived.