Clause 38 - Provision of services through an intermediary: minor amendments

Finance Bill – in a Public Bill Committee at 5:30 pm on 16th May 2002.

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Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs 5:30 pm, 16th May 2002

I beg to move amendment No. 14, in page 24, line 35, leave out from 'payment)' to end of line 28 on page 25 and insert--

'in step Three of paragraph 7 after ''by the worker out of those emoluments'' add ''and deduct also all allowances and the effect of all reliefs to which the worker would be entitled were he the employee of the client in employment assessable to income tax under Schedule E''.'.

Clause 38 applies to traders who have been penalised by the measure known as IR35, which the Government introduced in 2000. Among other things, this had the effect of taxing independent contractors as if they were employees and introduced a rather complicated method of calculating the tax due on their supposed salaries.

The clause somewhat grudgingly corrects some aspects of what was considered to be overkill in the IR35 approach. IR35 targets are given two exemptions that are available to ordinary full-time employees: mileage allowance and partnership expenses. We are pleased to see the provision, which is fair and reasonable, but the amendment would do the correct thing and provide automatic extension of all ordinary employees' tax benefits to IR35 targets. If IR35 individuals are to be treated as though they were employed, they should be covered by the same wider arrangements. Relevant areas include qualifying child care payments and personal incident expenses. The Government have been over-obsessed in principle with the IR35 territory and the amendment offers an opportunity to create a level playing field and provide IR35 individuals with the standard exemptions available to employed individuals.

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

The clause introduces three minor amendments to service company legislation. They are necessary to maintain fairness of treatment for employees and service company workers who work on terms similar to those of employees. We have published separately some amendments to deliver the same proposed changes for national insurance purposes.

Our three proposed amendments fall into broad categories. First, service company workers will get the same relief that conventional employees receive under the new mileage allowance regime for business travel, which came into effect on 6 April 2002. We are not correcting something; we are extending new arrangements. Secondly, partnership intermediaries who reimburse certain allowable expenses to a partner will be able to claim relief for those expenses in the same way as a service company intermediary. Thirdly, service company intermediaries who cease trading during the course of a year will be able to claim appropriate relief in their final corporation tax accounts for the deemed schedule B payment that they are required to calculate under the service company legislation.

Taken together, this small package of changes ensures the continued fairness of treatment that the Government sought to establish between employees and people working through an intermediary or on similar terms to an employee.

Amendment No. 14 would replace a large part of the clause with a short form of words apparently seeking to put those affected by the service company legislation

and those who are directly employed on the same footing with regard to their entitlement to tax relief and allowances under schedule E.

I reassure the Committee and the hon. Gentleman that the amendment is not necessary. The service company legislation already entitles workers affected by it to the same tax reliefs and allowances under schedule E as those who are directly employed. The clause ensures that that remains the case and, as I have already explained, includes certain travel expenses, following the introduction of the new mileage allowance scheme. Therefore, the amendment would, at best, be unnecessary.

I must explain to the hon. Gentleman what the amendment would go on to do, in case he wants to press it to a vote. Contrary to its apparent intention, and I accept what the hon. Gentleman says, the amendment would undermine the treatment that it appears to try to guarantee. It does not need to guarantee it, because it is already there.

First, by stripping out the relevant cross-references to the mileage allowance rules, the amendment would deprive those affected by the service company legislation of the same entitlement to tax relief as a direct employee. It would strip away the parity that the clause puts in place. Secondly, by removing the section on reimbursed expenses, the amendment would prevent partnership intermediaries from being able to claim a deduction for expenses reimbursed to workers that a service company intermediary could claim. Therefore, not only is the proposed amendment unnecessary, but, unfortunately, it would impose on the intermediary companies an unfairness that it does not seek.

I accept what the hon. Gentleman said earlier: that the amendment was drafted to ensure parity. I have given him the undertaking that that is there. I have explained that on this occasion, in the best interests of saving the hon. Gentleman's reputation—[Hon. Members: ''Oh!'']—outside the House, I gently suggest to him that he should not press the amendment to a vote. He may wish to reconsider it, but if he presses it to a vote, he will damage the companies that he claims he is trying to help, and I am sure that he does not mean to do that.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

Specifically, I understand that while, the issue relating to partnership expenses has been addressed, the parallel problem that occurs when partners purchase capital assets has not been addressed, and they receive no relief in the IR35 calculation. Will the Paymaster General confirm that that is correct? If so, given what she has just said, do the Government intend to address that unfairness? If my drafting is as she says it is, I accept that, but the amendment's objective is perfectly clear and fair. I am glad to hear that she agrees with that objective.

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

The hon. Gentleman misunderstands the service company arrangements that were put in place last year. The purpose of the changes was to ensure that an individual who was an employee of the service company received all the rights of an employee. We wanted to prevent an individual

from trying to get all the benefits of an employee and then, when they were clearly working in another company, receiving all those benefits too. We said, ''No, you can't have both. You must be one or the other.''

The clause goes further and includes other reliefs, such as personal incidental expenses and qualifying child care. I am happy to confirm that, for want of a better way of putting it, IR35 workers can claim personal incidental expenses in the same way as a direct employee if they are direct employees and working for the service company.

The Chartered Institute of Taxation has also suggested that we might want to consider giving relief for appropriate child care cost. It is certainly a suggestion that the Government are prepared to examine in their wider consideration of child care costs. On the partnership asset issue, our view is that it is a hypothetical problem that has been put to us without demonstrating that it actually exists. Until it is demonstrated that there is a problem that needs to be addressed, as opposed to a hypothetical problem, why should we take up space in Finance Bills to deal with it?

The rights of employees in service companies are the same and those employees have the same access as any others. All we want is for them to choose which they

are, rather than claim that they are both. I hope that I have reassured the hon. Gentleman that the Government have absolutely no intention of preventing employees of service companies from getting access to all the rights that any employee would have.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

I thank the Minister for her comments, and her implicit assurance that if the partnership asset issue arises, she would seek to address that fairly. On the basis of her responses, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 38 ordered to stand part of the Bill.