Clause 24

Finance Bill – in a Public Bill Committee at 12:15 pm on 15th May 2007.

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Landfill tax: bodies concerned with the environment

Question proposed, That the clause stand part of the Bill.

Photo of Paul Goodman Paul Goodman Shadow Minister (Childcare), Treasury

Members of the Committee will see from the explanatory notes that the clause gives powers to Entrust—it is not actually named in the notes, but it is the regulatory body that oversees environmental bodies that make use of the landfill communities fund—and to HMRC, which oversees Entrust. The scheme, which allows a portion of the landfill tax to be given to local community social and environmental schemes, was reformed in 2003 following fears that it was being abused to some degree. The HMRC website lists further changes that the clause will bring about. How many environmental bodies had their approvals by Entrust revoked in 2004-05 and during subsequent years, and what is the cost of administering the scheme?

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

The clause should improve the operation of the landfill communities fund, which was known until last year as the landfill tax credit scheme. Every member of the Committee will have a significant number of projects or schemes in their constituency that have been supported in recent years by the landfill communities fund—valuable projects, such as improving, building and repairing village halls, churches or historic buildings, or providing sports facilities, cycle trails and wildlife sanctuaries. Since the fund was set up, it has received £875 million towards such ends, providing projects and schemes that benefit a spectrum of our communities.

HMRC approves a regulatory body to oversee the fund. Currently, that body is Entrust. We have not specified Entrust in the legislation, because, as the hon. Gentleman will recognise, there might be circumstances—although we do not have this planned—in which the regulator body would change. It does not seem sensible, therefore, to specify Entrust in the legislation.

Entrust oversees a fund that we increased in the Budget by a further £5 million, so that it will be worth £65 million in this coming year. It already works to conditions agreed by HMRC that are contained in its terms of approval, which is a document agreed between HMRC and Entrust each year. The statutory instrument provided for by the clause will enable the commissioners to impose enforceable conditions. In the event of a failure to observe those conditions, they may take steps in extremis to revoke the approval of the regulatory body.

The statutory instrument will give a binding effect to any targets or performance measures that the commissioners might wish to see from Entrust. It will also allow Entrust to add or remove conditions on environmental bodies in line with best practice and the principles of better regulation. Under the conditions of its approval, Entrust will now have to provide the commissioners with advance notice and obtain their agreement to any general conditions it intends to impose on environmental bodies.

The first condition that is being added will require environmental bodies to provide project details in advance of spending. That is already established as best practice and is followed in the vast majority of cases. However, at present when it is not followed and when there is resistance from the environmental body, Entrust is not in a situation in which it can require that the environmental body follows those best practices. Indeed, as things stand, an environmental body that was determined not to follow the best practices as set out by the regulator could challenge Entrust’s ability to insist on them. The clause and the regulation that stems from it will remove that uncertainty and reinforce Entrust’s hand, quite rightly, in ensuring that environmental bodies follow the best practice that it sets. There is negligible cost to the Exchequer from the changes.

The hon. Gentleman simply asked how many environmental bodies had had their approvals revoked in 2004-05. A very small number have had them compulsorily revoked. My estimate, from dealing with this territory in the past few years, is fewer than five, but, if he will accept this way of dealing with things, I shall write to him if I recover further information from HMRC.

The statutory instrument goes wider than the clause, but it came into effect on 1 April, in line with, and in time for, Entrust’s new financial year, and the business plan that applies to it.

Question put and agreed to.

Clause 24 ordered to stand part of the Bill.

Schedule 3

Managed Service Companies

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

I beg to move amendment No. 38, in schedule 3, page 90, line 16, after ‘payments’, insert ‘for a year of assessment’.

Photo of Roger Gale Roger Gale Conservative, North Thanet

With this it will be convenient to discuss the following amendments: No. 39, in schedule 3, page 90, line 19, after ‘services’, insert ‘for that year of assessment’.

No. 40, in schedule 3, page 90, line 21, leave out from ‘person’ to ‘the’ in line 22 and insert

‘whose sole or main business is the provision and facilitation of’.

No. 41, in schedule 3, page 90, line 23, leave out ‘involved with the company’ and insert

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

No. 42, in schedule 3, page 90, line 24, at end insert—

‘(1A) In considering whether a company is a managed service company within the meaning of subsection (1), no regard shall be had to any other companies with which the MSC provider is involved’.

No. 43, in schedule 3, page 90, line 35, leave out ‘subsection’ and insert ‘subsections’.

No. 44, in schedule 3, page 90, line 35, after ‘(1)(d)’, insert ‘or (2)’.

No. 45, in schedule 3, page 90, line 36, leave out from ‘providing’ to end of line and insert

‘services of a nature provided by advisers in a professional capacity, including legal, accounting and company secretarial advice.’.

No. 46, in schedule 3, page 90, line 36, at end insert—

‘(3A) For the purposes of subsection 3, accounting advice includes, but is not limited to, advice and assistance concerning:

(a) preparation or provision of records, returns, financial statements, reports or financial information concerning accounting;

(b) auditing, insolvency or taxation matters;

(c) communication and representations made on behalf of a client to third parties in matters concerning accounting, auditing, insolvency or taxation.

(3B) The Treasury may by order provide for a non-exhaustive list of professional services which fall within the meaning of subsection (3) and (3A) above.

(3C) The Treasury may not make an order under subsection (3B) unless a draft of it has been laid before and approved by a resolution of the House of Commons.’.

Government amendment No. 97

No. 47, in schedule 3, page 91, line 2, at end insert—

‘(3A) An MSC provider may be a partner in a partnership (other than the individual referred to in section 61B(1)(a)) and may, for the purposes of section 61B(1)(d), carry on, through the  partnership, the business of promoting or facilitating the partnership to provide the services of individuals.’.

No. 48, in schedule 3, page 92, line 2, leave out ‘mentioned in section 61D(1)(b)’ and insert

‘which satisfies both section 61D(1)(b) and section 61D(1)(c).’.

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

It is a pleasure to address the Committee in the pre-lunch graveyard slot. Schedule 3 provides for the insertion of new section 61B into the Income Tax (Earnings and Pensions) Act 2003, which contains conditions setting out the definition of what is known as a managed service company; that is the focus of this measure. Where the relevant conditions are satisfied in relation to a particular company it will be obliged to account for PAYE and national insurance on payments that it has made in connection with the services of the workers whose services it provides.

If the company does not make those payments, schedule 3’s proposed new section 688A of ITEPA allows HMRC to pursue certain third parties for the tax liability. The provisions represent the Treasury’s latest attempt to police the borderline between those operating and providing services of a freelance and contracting nature through companies, and those who are employed. They are a successor to chapter 8 ofpart 2 of ITEPA, the controversial measure commonly referred to as IR35.

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

The hon. Lady will recall our debates in the House on clause 25. She and I discussed IR35, which she has now conveniently mentioned. I said to her that Opposition Members had overplayed its problems, and were overplaying the problems with the schedule, and that no one had ever approached me in my constituency subsequent to the previous so-called row.

After I said that, one of the so-called organisations that she seeks to represent put on its website a message encouraging people in Wirral, West to contact me if they had had problems with IR35, because I had said that there had not been any. No one contacted me, except one person who turned out not to be my constituent. What she is about to say is overplaying the problems with the schedule.

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

I do not accept that we are overplaying concern about schedule 3, and I shall refer to some of the contractors who have been in touch with me about the fact that their work is in jeopardy and they are suffering problems because of the schedule and the uncertainty associated with it. I understand that IR35 has cost an incredible amount of money and time in compliance checking. It is regrettable that the Government have always refused to publish any information on the revenue that they have collected through IR35, given the significant compliance burden that it has placed on every contractor; every time contractors enter into a contract with an end client they must check. That costs money. I am not convinced that the revenue raised as a result has justified that compliance cost.

The Opposition are happy to support properly targeted attempts to crack down on abusive behaviour in that area. However, we are concerned that legitimate freelance workers who are genuinely in business on their own  account will be hit by schedule 3 where they choose to outsource functions relating to the service company with which they are connected. Similar concerns have been expressed by a range of bodies, including the Institute of Chartered Accountants in England and Wales, the Chartered Institute of Taxation, the Law Society, the Professional Contractors Group, the London Society of Chartered Accountants, the Institute of Directors and the Association of Technology Staffing Companies.

The goal of the amendments that we have tabled is to prevent the new framework from biting on genuine freelance workers who are not in a disguised employment relationship. We also seek to ensure that those professionals who advise freelancers and small service companies are not unwittingly or unfairly caught up in the legislation and made liable for the tax debts of their clients. Lastly, we seek to prevent the serious damage that could be caused to the flexibility of the UK labour market if staffing companies and the end clients who engage contractors find themselves at risk as a result of schedule 3.

Above all, we will be seeking clarity and certainty from the Minister about what his legislation means. That is an incredibly important task for the Committee—even more important, dare I say it, than in our previous debate on how many zero-carbon homes there might or might not be. The confusion surrounding schedule 3 is causing enormous anxiety and it is already costing people their jobs. To illustrate that, as I told the hon. Member for Wirral, West, who intervened earlier, I will refer to just three of many representations that I have received from people worried about the proposals.

Ian Preece, director of Greybeard Consulting Ltd, told me:

“the biggest issue I have with the proposed legislation is the fact that it is impossible to understand if you will be ‘caught’ or not. Therefore trying to understand if I will be affected or not is akin to gazing into a crystal ball.”

Andrew Frith of AFMS, an IT consultancy based in the north-west, told me:

“We seem to have fallen victim to the new MSC regulations even though the legislation is not yet on the statute books and in any case would not seem to directly affect our company at all. The problem is that due to the transfer of debt provisions...recruitment agencies are not prepared to deal with us ‘just in case’ we come within the provisions. Our supply of new work for our consultants has dried up...we are now making a significant loss and have already had to take action by giving notice to our newest recruit.”

Chris Cumber, who runs a small contracting business, said:

“My concern is that my accountant appears unable to answer my question ‘Does his involvement make my company an MSC?’. I seem to be spending more and more time worrying about uncertain taxation and less time actually producing income for my company. The latest attempt is badly worded...and designed...to have us contractors running around like ants”.

He concluded on this pessimistic note:

“It will all end in tears with some case-law, which is totally counter-productive for the Chancellor’s coffers and for us contractors”.

Having introduced the general issues, I will deal with amendments Nos. 40, 41, 45 and 46, which go to the heart of the concerns that I have set out. Subsection (1)(d) and subsection (3) of proposed new section 61B, which these amendments seek to amend,  play a central role in determining the scope of the provisions under discussion. Paragraph (d) states that a company becomes an MSC if it is involved with “an MSC provider”, which is defined as someone who

“carries on a business of promoting or facilitating the use of companies to provide the services of individuals”.

Subsection (3) provides a limited carve-out from paragraph (d) for certain professional advisers.

Amendments Nos. 40 and 41 would restrict the scope of paragraph (d) so that it bites only where someone

“whose sole or main business is the provision and facilitation of” the use of companies to provide the services of individuals, is

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

Amendments Nos. 45 and 46 would clarify the ambit of the protection afforded to professionals under subsection (3).

Those four amendments seek to address the concern that the definition of MSC provider is very wide, and would catch anyone involved in setting up companies as part of their business—for example, lawyers, accountants and company secretaries. The amendments tackle an important flaw in the legislation, in that it could hit genuine freelancers who choose to outsource aspects of the management of the companies through which they work. Without clarification, paragraph (d) could also impose significant risks on those who regularly advise freelance workers and it would leave them potentially liable for the tax debts of their clients, as well as leaving them at risk of being sued by other people who might be drawn into the MSC net or the third-party debt rules as a result of the professional adviser’s activities.

The danger is that that will drive up the cost of professional advice for small companies, as advisers withdraw from the market or charge higher fees in order to compensate for the increased risk that they are undertaking. The intention behind the four amendments is to ensure that the legislation does not impose unreasonable restrictions on contractors who want to outsource administrative functions in relation to their service companies and that ordinary professionals on a day-to-day basis are not included in the definition of MSC providers.

The key question that the Committee needs to address is how do we ensure that a sensible line is drawn between those professionals operating on an ordinary, day-to-day basis and the dubious operators whom HMRC wants to shut down. The Institute of Chartered Accountants has highlighted, naturally, some of the problems that its profession faces. It points out that many accountants will recommend a corporate structure to a client, provide them with an off-the-shelf company for that purpose and then go on to carry out the necessary company secretarial services.

Without clarification of the legislation, it would appear that a professional accountant who advises her client to incorporate in that way is “promoting” the use of companies under paragraph (d). If she provides an off-the-shelf company for that purpose, she is “facilitating” the use of companies under that  paragraph. However, as the Institute of Chartered Accountants points out, those activities are an incidental part of a professional accountant’s business of providing an all-round service to the client.

Considerable concern has been expressed about the wide scope of the concept of “promoting” in paragraph (d). If accountants provide services relating to company structures, will advertising those services automatically bring them within the scope of paragraph (d)? Arguably, promoting services relating to setting up companies is promoting the use of those service companies, which could pull them into the scope of the MSC provisions. Any clarification the Minister can give on what “promotion” means and how it will operate in practice would be very welcome.

Subsection (2) of proposed new section 61B introduces a second concept: influencing. The problems in this area are compounded by newsection 61B(2), with its broad concept of involvement with a company. It is focused around the concept of “influence”, yet any professional adviser could be expected to influence their client. People do not go to professional advisers and pay them large fees unless they are considering acting on their advice. Advice and influence are inextricably linked. In particular, many advisers will give clients advice on the best way to make payments. That could bring them within new subsection (2)(c). Surely it is not worth engaging an accountant unless they have at least some influence over the company’s finances or activities. That seems to bring them within the scope of new subsection (2)(d).

The solicitors Blake Lapthorn Tarlow Lyons, advising members of the Association of Technology Staffing Companies, commented on the influence tests:

“Note that it is enough for any one of these (still rather sweeping and hard to interpret) tests to be satisfied.

They do not all have to be satisfied.

Clearly this captures many so called Personal Service Companies who thought that they would be outside the new legislation...The test can be satisfied by the fact of the MSC provider receiving ongoing payments linked to the contractor’s ongoing services, or ‘influence’ over how payments are made or activities carried out.

Therefore it is intended that the only types of PSC who are outside the new regime are ones who genuinely do not use third party assistance to setup or operate or manage their PSC.”

There is at least a risk that the concept of influence could be so broad as to cover insurance companies. By way of illustration, selling insurance to small service companies, for example to cover professional risk, certainly facilitates the use of such companies, which could pass the test set out in paragraph (d) of proposed new section 61B. However, an insurance company that sells such policies to contractors may lay down particular rules and working practices to mitigate risk. Does that mean that the insurance company is “influencing” within the meaning of subsection (2)(b)? There is therefore a danger that it could become liable for the tax debts of the companies it insures. As an insurance company, there is no way it could get the protection of subsection (3), because it cannot be described as offering services relating to accounting or legal services.

Similar problems occur for company formation agents. A core part of their business is setting up companies. Again, their services facilitate the use of companies that provide the services of individuals. It seems that the legislation is not intended to bite in that way. It is not intended to hit ordinary accountants, insurers or company formation agents who just happen to be providing services to small service companies as part of their business.

HMRC seems to have indicated that the target of the legislation is those who set up companies to provide the services of individuals as a discernable and core part, not an incidental or occasional part, of their business. Amendment No. 40 translates that informal indication into the wording of the legislation. Proposed new section 61B(1)(d) would catch only those whose sole or main business is providing or facilitating the use of companies through which to provide the services of individuals. It is these specialists that HMRC seems to be concerned about. The Opposition believe that amendments Nos. 40 and 41 would greatly assist in targeting those providers, while leaving other advisers outside the scope of the legislation.

HMRC has also indicated that the average accountant, company secretary, or formation agent would not be caught by the legislation, because they are not sufficiently involved with the company, even if they have set it up and run its books and statutory returns. It seems to want to focus on someone who takes over all the activities of the company, so that its ostensible proprietor has no meaningful involvement. Why not make this clearer in the legislation? The situation the Government seem to want to get at is where the company is essentially the creature of the scheme provider. In seeking to draw a distinction between what they describe as “personal service companies” and “managed service companies”, they seem to be concerned about a situation where the worker does not really have any involvement with the company at all and the company is the emanation of the scheme provider and not a genuine going concern.

Amendment No. 41 would give real substance to that interpretation by stating that companies would be caught in the definition of an MSC provider only if they are regularly involved in almost all aspects of the way the company works. Situations where the company is a genuine going concern and the worker has merely decided to outsource an aspect of running it, are less likely to be hit if the Committee were prepared to accept amendment No. 41.

It is not enough for HMRC to issue guidelines which seek to remove and mitigate some of the risks, which I have just outlined, for both contractors and their professional advisers. Guidance does not give enough certainty. Firms under risk of falling within the MSC provisions are under significant financial and legal risk to the last penny of their personal wealth. They are likely to have to make significant provision for litigation risk, and there are indications that the risk may be uninsurable. Guidance cannot be litigated in court, so there will be no clarification through legal proceedings. As the Institute of Chartered Accountants of England and Wales has pointed out:

“There is no substitute for having a legal definition.”

Clarification of what this provision means is needed now and not in two or three years’ time, when a case may have made its way through the courts.

I turn now to the closely linked issue of the safe harbour for professional advisers in subsection (3), because the Minister will no doubt tell me that that sorts out all the problems. If amendments Nos. 40 and 41 were adopted to rein in the scope of paragraph (d), most of the problems in relation to professional advisers would fall away and the scope of the safe harbour in subsection (3) would become much less important. However, amendments Nos. 45 and 46 seek further clarification on the safe harbour for professionals and the meaning of

“providing legal or accountancy services in a professional capacity.”

Amendment No. 45 would broaden the range of professionals who could use the safe harbour, while retaining the focus on services provided in a professional capacity, such as through a practice. Amendment No. 46 would set out some of the services that will not trigger problems with the MSC legislation. Given that the real difficulty in finding a general formulation that covers the wrongdoers but leaves the innocent adviser outside the framework, setting out a non-exhaustive list of services could be one of the simplest and most effective ways to give the clarity and certainty that we so badly need here. It would give critically important assurance and guidance to those who want to comply with the legislation.

Proposed new subsection (3)(b) would also give the Treasury power to set out in secondary legislation further examples of services that professionals could safely provide without incurring any risk of the MSC legislation. Parliament would also have the chance to keep a close eye on how the legislation is working in practice when the secondary legislation came to it for scrutiny.

The simple question for the Committee to consider is what types of services can accountants, lawyers and other professionals continue to offer to small service companies without losing the protection of the safe harbour set out in subsection (3). There seem to be at least three possible approaches. First, a narrow one, which says that a safe harbour covers only basic, traditional accounting services and legal services, such as bookkeeping. Secondly, there is a wider definition that could cover any services ordinarily provided by accountants. The third approach would cover accountancy services ordinarily provided in the course of an accountancy business.

We need much greater clarification on services, such as invoicing and routine tax advice, company secretarial services and IR35 compliance checking, and on which side of the divide they fall. Accountants frequently perform many of those services, so a wide interpretation would not cause a problem. However, if a more restrictive interpretation is correct, setting up companies and company secretarial services might fall outside the safe harbour and leave the accountant at risk of liability.

Photo of Stewart Hosie Stewart Hosie Shadow Spokesperson (Women), Shadow Spokesperson (Home Affairs), Shadow Spokesperson (Treasury) 12:45 pm, 15th May 2007

The hon. Lady is making a good case, but she seems to be narrowly focusing on accountancy in general and not on secretarial services. In the case of many contractors, the agents whom they instruct may  well advise them on specialist training courses before, for example, taking an offshore North sea job. They could be advised on accommodation, if they were going to take a job in engineering or a contract job in the middle east. Those are perfectly legitimate things to do in the early stages of acquiring a contract, so should we not agree that the scope of the exemptions must be as wide as possible rather than using the narrow definition for accountancy?

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

If I understand it correctly, the hon. Gentleman is concerned about the position of employment agencies and staffing companies, which I shall come to in due course. He is absolutely right to say that it is not only accountants and lawyers under consideration here. We must ensure that we get clarity from all the relevant parties, or contractors are going to find life very difficult—their costs will increase and the flexibility of the UK labour market will be damaged as a result.

I have a series of questions for the Minister about what is meant by “in a professional capacity” in subsection (3). 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 of the professional status of the person providing the service? If someone is providing services “in a professional capacity”, do they fall outside the MSC provider definition, regardless of what services that they perform? 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 practice certificate in that profession to use the safe harbour? Does one need to be part of a traditional professional practice? What about accountants and other tax professionals, who are not registered but who are instead employed in-house? And to what extent can service providers outside the remit of the traditional professional set-up use the safe harbour?

That brings me to a series of questions about accounting service companies, which have emerged in recent years to offer companies cheap, commoditised services, which were previously offered only by accountants. Does the Minister envisage that any accounting service companies would be able under any circumstances to use the carve-out in subsection (3)? Some of them seem to think that they can carry on almost as normal, if they have an accountant on their books. Does an accounting service company have to be owned by qualified professionals with current practising certificates to use the safe harbour?

Clearly there are players in the accounting services sector that the Government want to shut down. HMRC has some justified concerns in this area, but my concern is that there is no evidence that all accounting services are somehow dodgy. Do the Government envisage that any of those companies will be able to survive under the new framework? Do they want to shut them all down? If so, a slightly unfortunate side effect of the legislation seems to be that freelancers would be completely barred from using specialist providers to manage their company affairs and would be restricted only to using the more traditional accountants, who have a more broadly based area of work. I would be interested to hear whether there will still be room for cheaper and more commoditised, factory-style services.

As partly adverted to in the intervention by the hon. Member for Dundee, East, in focusing in people who hold legal or accounting qualifications, subsection (3) misses some of the important problems caused by schedule 3—solving a problem for lawyers and accountants does not solve the problem with schedule 3. For instance, the subsection (3) safe harbour does not seem to take into account how many professionals hold qualifications other than accountancy and legal qualifications. Company formation agents have been mentioned, and other examples include those holding qualifications relating to company secretarial services or to tax, such as those from the Association of Taxation Technicians or the Chartered Institute of Taxation.

Photo of Adam Afriyie Adam Afriyie Conservative, Windsor

Should mention also be made of software manufacturers, which write software that performs such functions without the intervention of an adviser?

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

My hon. Friend makes a good point. Many different sectors are affected by the changes, but my concern is particularly about the impact on the IT sector, where contractors and freelancers perform such a valuable role. The nature of the IT sector is that, very often, specific people are wanted to build a specific project. Keeping permanent employees on an ongoing  basis is very difficult if the project only lasts a few months. Critical in scrutinising schedule 3 is for the Committee to assess the impact on the IT sector, including the point made by my hon. Friend the Member for Windsor.

I understand that a number of professional bodies, such as the Institute of Chartered Secretaries and Administrators, is seriously worried that their members may fall into the definition of MSC providers automatically—after all, their business is to set up and run companies. By amending proposed new subsection (3) as I propose in amendment No. 45, those professionals can gain the same protection as accountants and lawyers.

The status of other professionals is also uncertain under the current wording of subsection (3). Other professionals whose activities might conceivably bring them within the scope of “promoting” or “facilitating”, yet seemingly without the protection of the safe harbour, could be management consultants, franchisers who help franchisees run their business, factoring and invoice discounting houses which help follow up unpaid invoices, payroll companies and business advisers. I would be very interested to hear from the Minister how he sees their status under proposed new section 61B.

It being One o’clock,The Chairmanadjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Four o’clock.