(Except clauses 4, 19, 23, 26 to 29, 87 to 92, 131 and 134 and schedules 1, 5 and 38) - Clause 40 - Treatment of deductions from payments to sub-contractors

Finance Bill – in a Public Bill Committee at 10:30 am on 21st May 2002.

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Question proposed [16 May], That the clause stand part of the Bill.

Question again proposed.

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

We and the industry broadly welcome this clause, which provides a cash flow advantage and in part resolves some long-standing problems, but I want to raise two issues, one of which appears as a starred amendment.

First, in parallel territory in the context of IR35, a similar problem was dealt with by ESCC32 for the tax year 2000–01 and its application to subsequent years was to be reviewed. I should be grateful if the Government would confirm that the measure will apply to 2001–02.

Secondly, clause 40 does not provide for tax deducted from payments under the construction industry scheme to reduce PAYE liability to account for tax on payments under that scheme made by an unincorporated taxpayer. Would it not be appropriate to put incorporated and unincorporated organisations on the same basis under the regime?

Although the provision is welcome, the construction industry scheme remains a problem because the Inland Revenue does not always enforce or police it effectively. There are minor improvements in the Bill, but there is a long way to go. Non-compliance and slack administration have the effect that some businesses may be hit hard while others are not noted. Are the Government considering resources to enable the scheme to be more efficient and policed more effectively? If not, is it worth continuing with it?

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

Good morning, Mr. Benton.

I shall deal first with the general comments of the hon. Member for Arundel and South Downs (Mr. Flight) about the construction industry scheme. The clause applies only to that scheme. The Government are between the devil and the deep blue sea. The hon. Gentleman's right hon. Friend the Member for Fylde (Mr. Jack)—I think I can call him my right hon. Friend as well—was in the same difficult position as me. People argued that they wanted the scheme to be more tightly drawn and administered. However, when the compliance regime and its enforcement appeared to restrict activity in which they might want to engage, they came back with the argument that it is controlled

too tightly and is unfair on the industry, which undermines operations.

In response to demands from industry, the previous Government consulted, and it was agreed that the construction scheme would be put in place. Once it was put in place, people started to complain about it—what a surprise. They did not notice that that was going to happen, or they had not appreciated that it was going to happen. In the middle, the Inland Revenue struggles to ensure that it collects the proper amount of tax from the taxpayer.

My approach now, working with the industry and the trade unions, is to review. With representatives of all the organisations that participate in the construction industry, we have undertaken a fundamental reassessment of whether the current scheme, which has to be amended each year, is based on sound principles. One of the big issues that has come up has been whether we could move to electronic issue of the certificates. Industry and the Government are quite keen to achieve that. We are looking closely at how we are taking forward the scheme with the construction industry. I do not want to rush in and change the scheme, so I am taking the approach of stabilising it and making adjustments where it is sensible to do so. However, behind that, with the industry, trade bodies and the trade unions, I am considering the whole operation of the scheme very carefully.

The issuing of a certificate does not mean that a person is self-employed; it simply reflects how they should pay tax and whether a deduction should be made. I am more than happy, as we move to more detailed consultation, to ensure that the hon. Member for Arundel and South Downs is kept informed of that and is able to participate in it. The problem with the construction industry is that ''one size fits all'' does not work. It is a complex industry and we need to fine tune. I hope that that is helpful to the hon. Gentleman in showing the Government's thinking on how we are going to stabilise the operational scheme and ensure that everyone is happy with it.

Extra-statutory concession A32 applies in 2001–02. The hon. Member for Arundel and South Downs asked a question that was really about sole traders and partners, and their scope in the legislation. That brings us back to the point that I made about the scheme in general. We have sole traders, companies, individuals and partnerships. Our tax system treats each in a slightly different way. If we said that all those working in the construction industry had to be treated in the same way because they were in the same industry, we would have some difficulty. As I understand it, the hon. Gentleman was probing to establish why we do not bring partners and sole traders into the scope of the clause. We do not think that it is necessary to bring them in, and the feedback from the industry to date shows that the 18 per cent. deduction rate is about right for sole traders and partners. In practice, that is close to their final tax liability. I am not saying that some may have to pay slightly more, or less, but we think, as does the industry in our consultations, that overall it is a reasonable approximation. However, as with all tax rates and thresholds, this must be kept

under review. If circumstances altered, we would return to the matter. A theoretical problem is being advanced, but we have no information—nobody can give us any, even though we have asked for it—on whether it is a real problem that we should put right. I want to wait until the situation is more than anecdotal because of the issues it creates elsewhere in the scheme.

The 18 per cent. figure is about right for sole traders and partners. However, that was not the case for companies that paid under deductions, the majority of which faced serious cash-flow problems because some or all of the deductions that they suffered were due to be repaid to them—they paid us, we kept it and then we paid it back. The clause deals with real issues for companies. We have had no indication that a problem exists for partnerships or sole traders, but if one emerges over the next year, the Government will return to the matter. Rather than tinker with the scheme every year, we are yet again working with the industry to establish a scheme with which everyone is happy and which works well.

In the construction industry there is the problem of bogus self-employment. The Inland Revenue pursues compliance, but that sometimes becomes difficult because sub-contractors are chased through sub-contractors, and companies are not always able, or willing, to disclose information that we need.

I hope that I have explained to the hon. Member for Arundel and South Downs the main points relating to his amendment that was not selected. I take it that it would have been a probing amendment. I hope that I have allayed his fears for now.

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

I thank the Paymaster General for her helpful reply.

Question put and agreed to.

Clause 40 ordered to stand part of the Bill.