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With this it will be convenient to discuss the following:
New clause 7— False self-employment in the construction sector—
(2) The report referred to in subsection (1) above must in particular examine the setting of criteria for automatically deeming people to be employed for tax purposes if they meet those criteria.
(3) The Chancellor of the Exchequer must publish the report of the review and lay the report before the House.’.
Clauses 17, 18 and 20 stand part.
These important clauses are designed to prevent the use of agencies and intermediaries in tax avoidance planning. In particular, the measures are designed to stop the avoidance of employment taxes and national insurance contributions in false or bogus self-employment cases. Under clause 16, when an agency supplies workers to an end user, unless these workers are not under the control, direction or supervision of that end user, or PAYE is otherwise operated, the agency will be responsible for operating PAYE.
Clause 17 allows HMRC to pursue PAYE debts from officers of a company when the correct amount of PAYE has not been deducted and fraud is involved. Clause 18 introduces further record-keeping requirements for agencies and employment intermediaries to help HMRC to enforce the new regulations. Clause 20 states that if a UK agency uses non-UK intermediaries to engage workers who are then supplied to UK companies, the UK agency will be responsible for operating PAYE.
Essentially, this is a crackdown on bogus self-employment. Clause 16 amends existing agency legislation in the Income Tax (Earning and Pensions) Act 2003. It was announced at Budget 2013 that the Government would be strengthening legislation to prevent the use of onshore and offshore intermediaries, otherwise known as employment agencies, to avoid income tax and national insurance. We are all aware of the circumstances in which employment agencies may have agreements with companies—in the construction and retail sectors, and particularly in the agricultural sector—to provide a set number of workers for a set number of hours at a set price. For the purposes of tax, the agency designates those workers—sometimes unwillingly, from the worker’s perspective—as self-employed, and that is how PAYE and national insurance contributions can be avoided. If the agency is based offshore, the problem is made more acute, as HMRC often finds it difficult to track down the agency and to deal with the problem. The new rule proposes that if a worker is under the supervision, direction or control of someone else, they should be designated as an employee and paid through PAYE rather than self-employment.
In general terms, we are pleased that the Government are introducing these measures. The issue has been the subject of much discussion, not least by the trade union movement. I am sure that the Minister will be pleased to know that the construction union, the Union of Construction, Allied Trades and Technicians, gave what it described as a “cautious” welcome to the Government’s plans to clamp down on false self-employment, as workers in the construction sector are those who have traditionally found themselves under pressure to be classified as self-employed, or have no option but to do that. However, to all intents and purposes, they are turning up at a place of employment to work set hours doing exactly what is specified, often with equipment that is provided to them. In no real sense could they not be seen as employees.
Both UCATT and Unite have consistently campaigned on such issues—not only on the definitions, but on the often-related health and safety implications. It is important to recognise that there have been such campaigns over a period of time.
Clause 16, which is the key measure, is supported by clauses 17 and 18. Clause 17 arranges for agency PAYE debt to be moved personally to the company directors, while clause 18 allows the Government to make supporting provisions on record-keeping requirements, returns of information and penalties by regulation at a later date. Clause 20 focuses on the obligations of UK intermediaries in cases involving non-UK employers.
I want to say a bit more about the proposals in clause 20. The Government’s plan is to create employment obligations on offshore employers employing workers in the UK. If the offshore employer fails to pay, as HMRC’s powers do not extend offshore, the charge will, in specified circumstances, be moved to an onshore engager of labour. In a sense, the intermediary will be made wholly and immediately responsible for accounting for the tax and national insurance obligations of all workers who are ultimately engaged by an offshore business.
I want to ask a number of questions about the clauses. While we feel that it is important that some of the issues have been recognised, more needs to be done, and we have to keep on top of the issue.
To return to a theme that has run through today’s debates, what assessment have the Government made of the impact of changing the record-keeping requirement on businesses? Will the Minister respond to a suggestion that has been made by a number of organisations that more robust and effective compliance activity in the area, with sufficient resources devoted to it, will be required to bring the problem under control? The legislation is simply one part of the process. To what extent will it be monitored and policed to try to change the culture in organisations that have used such methods in the past?
Do the Government believe that businesses are aware of the changes that must be made and the impact that implementing the proposals will have on them? How will they be monitored to ensure that they deal smoothly with the process of assessing workers’ status, liaising with employees, dealing with contracts and so on?
On clause 20, I would be particularly interested to know how the changes will be publicised to the people affected. At the end of the day, there are implications for not only employers, but those people who have been designated as self-employed. They will become part of the employee headcount as a result of the changes, so how is the issue being discussed, and how is information being supplied to them?
Do the Government intend to undertake any further review of agency workers and the question of employed and self-employed status? Of course, many people take up the opportunity of self-employment, and we would not want to suggest that there is something wrong with those who are legitimately self-employed and doing the right thing by making a contribution to the community, and paying their way and their taxes. We must be able to crack down on schemes through which people are assessed as self-employed although they are, to all intents and purposes, employees, with self-employment used simply as a tax-avoidance measure. Such an arrangement also grants fewer rights to those involved.
My hon. Friend describes an interesting scenario. He is aware that I have a background of working in social services. I can think of few situations in which such an approach would be considered to be good practice for the provision of care for those who require it, or for building people up in the longer term and ensuring that they are properly trained and adequately supported in a difficult job.
A practice that was traditionally associated with what was called “the lump” in the construction sector seems to have expanded. It has also been used in agriculture, forestry and various other jobs relating to land management, and it increasingly appears to have moved into the retail sector. We now see it perhaps moving into the care sector, so where will it go next if we do not get a crackdown?
Further to the point raised by the hon. Member for Scunthorpe, does the hon. Lady accept that such arrangements are now used to get around minimum wage regulation? That gives us even more reason to support the measures.
The hon. Gentleman makes a good point—I would have arrived at it in due course, had he not beaten me to it. He highlights another real concern, especially when we look at some of the sectors into which the practice is moving, such as retail and care.
The hon. Gentleman leads me neatly on to the point that there are already pretty detailed provisions in place for enforcement on agency workers and false self-employment. However, if HMRC is not given adequate resources, will the monitoring and policing of the new arrangements be any more successful than that of the existing ones? If more people are brought into the scope of the legislation but HMRC does not have the focus or the resources to pin down and deal with the problems, will the proposal make the difference that is required?
The construction industry has been particularly affected by bogus self-employment in the past. Does the Minister have any idea about how he will look at the situation as the new legislation beds in? Is there a plan to carry out further research to look at any issues that arise? The construction sector is critical to getting growth back in the economy. We want infrastructure projects and house building, but we do not want a scenario in which poor practice and tax avoidance measures are able to continue. Will the Minister say something about that?
The Minister knows that in our discussions on previous Finance Bills, I have been keen to probe the whole issue of guidance. Legislation can be one thing, but the how guidance is framed and offered to people to enable changes to be made is also important. Does the Minister intend to provide guidance setting out the evidential requirements that would support a genuine self-employment arrangement? My understanding is that the employment status indicator tool on HMRC’s website does not deal with the complexities around third-party appointments involving intermediaries or agency arrangements, so what does the Minister intend to do in that regard?
Perhaps the Minister will say something about the guidance that will be provided to ensure that the large numbers of people affected by the changes are aware of their new obligations and absolutely clear about the penalties for non-compliance. It needs to be made abundantly clear not only that people will be expected to comply, but that action will be taken against those who choose to ignore the new arrangements. What steps will the Government take to protect the employment rights of workers who may have been forced into accepting the so-called self-employment status and are not aware of the short and long-term effects on not only their benefits, but their future pension rights?
Individuals can find themselves in a situation in which they work as an employee, yet on a self-employed basis, because that is a condition for their getting work. They are often fearful of raising the issue, so what framework needs to be put in place to protect them so that they can raise issues without threatening their livelihood?
It will be interesting to hear what the Minister says about my hon. Friend’s important and valid point.
The involvement of the trade union movement has been crucial. It is difficult for people when the only way they are able to earn some money—perhaps at the minimum wage—is to agree to agency arrangements or certain contracts. It is difficult for people to speak out for fear of losing their opportunity to earn a living and keep their family, and at the same time they know that there are significant longer-term impacts for their pension rights and ability to access support if they are unable to work. Many people are completely unaware of the dangers regarding their rights at work, so perhaps the Minister will say a little more about how things will be taken forward. Of course, we want bogus self-employment to cease and to ensure that the right arrangements are in place, but we must also ensure that employees who had to be designated as self-employed over the years do not find themselves at a further disadvantage because we are doing the right thing.
I have been working with bona fide employment agencies on this, and I have raised with the Minister the concern of many of them that expenses are being incorporated into the overall rate, which brings the net rate below the minimum wage. HMRC has taken several companies to court for that. The most important thing that this or any Government can do is enforce the existing rules.
The hon. Lady makes an important point about bona fide agencies. There will be scenarios in which, perhaps on a short-term basis or to fill gaps, employment agencies have a role to play. However, the Government are, correctly in my view—Labour have argued for this for some time, as have the trade unions and the construction sector—looking to ensure that those are genuine scenarios and bona fide organisations and that self-employment is not being used to avoid not only paying the taxes due, but giving workers the rights to which they are entitled and thus putting people in situations in which health and safety at work is not given proper priority. On a positive note, it is good to see that this issue now garners support from quarters where, in the past, it did not. That is helpful.
I suspect that colleagues may wish to contribute, because many feel strongly about this. I have asked the Minister questions and I am sure that, when the time comes, he will be suitably inspired to respond to them. I shall leave my remarks at that to allow others to make contributions.
I shall confine my remarks to bogus self-employment and talk not so much the taxes, but the lives lost because of it. As Members across the Committee will know, we have just commemorated workers memorial day, when we were told that far too many people lost their lives at their place of work. I come from an area that previously had many heavy industries; we saw lives lost on a regular basis, so we know the value both of health and safety and of the commitment to good practice on the part of those who work in sector.
We were told that something like 140 people across the country died at their places of work and, out of that, by far the vast majority were in the construction sector, which has seen a sustained increase in false self-employment. As the Committee will be aware, those people who present themselves to work as bogus self-employed are not too keen to report any injuries or, indeed, any health and safety infringements or failures in their working environment, which leads to dangerous conditions for those who work with them regularly.
What identifies people who turn up at constructions sites as self-employed? Turning up without any tools or training and so on should identify someone as not being self-employed. The relevant criteria need to be set. It is plausible for the Minister to take on board our proposed provisions. This bogus self-employment is not only unfair on employees, it is not even fair on employers. There are many employers who stick by the rules, pay their tax and so on, and find that those who take on these bogus self-employed can undercut them in bids for contracts. That is not fair to employees or employers. Our acceptable and obvious proposals are that
We want the construction sector and the Government to set out for employers the criteria for what exactly self-employed means in the sector, so that can be clearly identified for tax purposes. I fear that if we do not do something about this, next year we will see, once again, an unacceptable number of workers losing their lives on construction sites.
The growth of self-employment is often welcomed; it is often presented as offering great benefits to the economy. The problem for some people is that it has become a way of life because they have no choice. They have not necessarily said that they want to be self-employed, start a business or set up a company. However, self-employment terms are the ones on which particularly construction, though not only construction, operates. That is a serious issue.
Constituents tell me that, for them, it becomes an issue only when something goes wrong. For example, in Edinburgh in the mid-2000s, when there was a lot of construction work going on, people were often able to go from one contract to another without any great gap, so it felt like they were working permanently even though they were not. It came as a big shock when the work suddenly dried up. A lot of sites and building firms decided that if the market was not particularly healthy, they would simply stop work until it got better. That is commonplace in that field. The workers suddenly discovered that they were not entitled to things to which they had assumed they had an entitlement. That is a serious matter, and people are often quite angry about that. People are astonished that they are not getting what they had taken for granted. Given that they had often been working continuously, that shock was effectively redundancy when the contracts came to an end. When we fall ill or have an accident, we take for granted things that act as a safety net. That is why people are often angry when they suddenly discover that the net is not there.
Both parties to this may have perceived certain advantages, but for a lot of people in this position—and they really are employees—they have not had a great deal of choice. It is not anything new; we know that it has gone on in the building trade and elsewhere for many years. We thought we had legislated to deal with one form of it, but it has come back. There are other disadvantages: people cannot necessarily get a mortgage because they do not have permanent employment. It is only when people want to do such things that the disadvantages become that obvious.
It is important that we broaden the scope of the legislation. If people want to be self-employed and fully understand what they are taking on—it has many advantages for those who are well equipped to deal with the flexibility—they are making that positive choice. In the building trade, there is not any choice. For my city and, I suspect, for others, it is true to say that self-employment is the only game in town. People cannot go to one place and be an employee and go somewhere else and be self-employed. It cannot be right that self-employment is the only game in town, because choice is not there. For that reason, new clause 7 would be valuable.
I omitted to say what a pleasure it is, Mr Caton, to serve under your chairmanship again today. I hope I have now set the record straight. I rise to support the remarks of my hon. Friends the Members for Kilmarnock and Loudoun, for Edinburgh East and for Inverclyde. I, too, cautiously welcome the Government’s proposition. It is a welcome step forward on something that has been an issue for many years. The issue was the backdrop to the 1972 building workers strike, which led to 24 trade union members being prosecuted under the trade union legislation of the day. Some of those individuals found themselves behind bars. Let us remember that a central part of what they were campaigning on and were on strike about was abolishing the lump. Here we are, some 42 years later, and the scourge of the lump still afflicts the construction industry.
Sadly, the issue of bogus self-employment does not just afflict construction. As we have seen, the consequences of the deregulation of the labour market have expanded into other areas. I am particularly worried about that, having seen the dreadful scenes on the BBC’s “Panorama” programme last night. I do not know whether those workers were agency workers. The issue is bad enough in the construction sector, but we are talking about workers providing care in sensitive settings to extremely vulnerable people. It is essential that those workers are properly trained and remunerated and that there are safe and adequate recruitment practices to ensure that the right calibre of people are recruited to do that work. The real fear is that, as a consequence of the growth in employment agencies, we are seeing bogus self-employment spread into other sensitive areas.
While I welcome the Government’s proposal, they could go somewhat further. A former great parliamentarian, Winston Churchill—a Conservative who the Conservative party and the whole country venerate—said that
“the good employer is undercut by the bad and the bad by the worst”.
The new clause would go a long way to driving out the bad and eradicating the worst employers from our country. We know, do we not, that employment agencies are responsible for some of the worst aspects of worker exploitation in our country. That exploitation not only has a massive impact on those individuals and creates unfairness for other employers, but has a knock-on implication for the wider economy. We heard from the hon. Member for Solihull about people being paid below the minimum wage through employment agencies using these loopholes. Thankfully, we have seen HMRC acting and making prosecutions against them, although, sadly, it does not have enough inspectors to deal with that abuse. There should be more of them and more investment.
That is something else that the Minister ought to consider seriously. I hope that we are united, across the Committee, in wanting to ensure that nobody is allowed to contravene the law and exploit workers. We need proper enforcement agencies to ensure that the bad employers, and the worst ones, are brought to book. We need HMRC staff to be able to deliver the sanction and protection that the workers deserve.
Having worked in the construction industry and seen the dreadful health and safety conditions when I was working in it, back in the 1972—despite my youthful appearance. I know that it is hard to believe, but it is true. [Interruption.] Indeed, it is true. I think it is down to the vegan diet.
We must deal with bogus self-employment. In a different incarnation, I worked as a welfare rights officer. I represented a number of individuals who had been treated as self-employed although they were employed earners. I represented people who had sustained industrial accidents.
My hon. Friend the Member for Edinburgh East said that, often, when people—workers—sustain an accident, they anticipate that there are certain protections in law to ensure that they can keep the wolf from the door and continue to put food on the table, because we have a welfare state that cares for people who have fallen on difficult times. Many of them are shocked to find that when they seek that support, having been deemed to be a self-employed worker, many protections available to employed earners are not there for them. I represented many people in such circumstances a considerable number of years ago—25 years or so—and it is still a problem. It is not just a problem on the scale that it was then; it is even getting worse. The measure is a welcome step forward, but we need to go further.
Not only is bogus self-employment bad practice and not only does it have an impact on good employers, whom we should all encourage, and not only does it have an obvious impact on workers, who are exploited in this way, but it results in a significant loss to the Exchequer in lost tax. At a time when the Government are short of funds and have been incapable of growing our economy, and with the slowest recovery from a recession for more than 100 years, surely, we want to ensure, do we not, that we maximise the income to the Exchequer so that we can continue to support the sort of public services that make our society a decent place to live in.
Alec Shelbrooke rose—
It is a pleasure to serve under your chairmanship, Mr Caton. I agree with the hon. Gentleman; we must bring in as much tax as we are owed. Therefore I take it that he will make representations to Unite soon, to ask it to pay the tax it owed last year.
I had hoped that the hon. Gentleman would make a slightly more serious point, rather than indulge in the customary anti-trade union rhetoric that we hear from Government Members. Let us remember that if we had a stronger trade union movement, many exploitive practices that we are concerned about and debating today would not exist. The trade unions are there to protect the workers and ensure that employed earners are given status, so that we can not only provide those workers with protection but secure the income that the Exchequer desperately needs.
I simply say to the hon. Gentleman that it is not anti-trade unionist to say that tax should be paid. Indeed, I am a proud trade unionist. I was a member of Unite for many years until it went the wrong way and I gave up my membership. It is not balanced to say that any criticism is anti-trade unionist, because trade unions supply an important part of health and safety. I have worked on construction sites. We must remind ourselves that only in the past month, someone was killed building Crossrail. There is essential work to be done in all areas, and trade unions are important. I say to him gently that I find it a bit offensive, when talking about paying tax, to be seen as anti-trade unionist.
I am grateful to the hon. Gentleman for that clarification. If I caused any offence, I am sorry and I withdraw it. He is absolutely right that tax owed needs to be paid, but I do not want to get involved in a debate about the point that he raised in his previous intervention. It would not be appropriate, and, in any event, we may get called to order by Mr Caton.
I am mindful of your previous comment, Mr Caton. However, I do think it is a little bit rich for the hon. Gentleman to say that if we had stronger trade unions, this would not be a problem. We had a Labour Government for 13 years. That Labour Government tackled many of those issues. It is not just for the trade unions on either side of the House; it is the Government’s job as well to ensure that people are not exploited.
I agree with the hon. Lady. If I gave the impression that stronger trade unions would eliminate the problem, I withdraw that comment. I was not making that point; I was trying to point out that a stronger trade union movement would certainly have a positive impact on the issue and would make it more difficult for the kind of exploitation and tax fiddling in which some exploitative employers indulge.
However, the hon. Lady is absolutely right and I agree that there is a clear role for Government as well. I would like to see the Government working in tandem with the trade union movement to drive out the bad and exploitative employers, ensure that we create a safe working environment, enable us to grow our economy and ensure that the entire country can benefit from the fruits of economic growth. With that, I conclude my remarks.
It is a pleasure to serve under your chairmanship again, Mr Caton. I was not going to speak about this particular clause, but I think that it is important, particularly given the mirth that some of these issues have caused to those on the Government Benches, to remind ourselves that it is no laughing matter that 2 million working people around the world die annually in their places of work. Until we introduced the much-vaunted health and safety legislation, the rate of attrition in construction in this country in the early to mid-1970s, and before that, was 200 to 300 deaths annually. In the post-industrial heartlands of this country, many thousands of people still die annually as the result of industrially contracted diseases such as mesothelioma, pneumoconiosis and emphysema. That is not a matter for mirth.
It is therefore important that we highlight the situation. Many of my friends, who I have known for many years, are caught in exactly that trap. Many of my friends, who I have known for many years, are caught in exactly that trap. Working in construction, they have been forced into self-employment, where they have to look after their own insurance and a difficult cash-flow situation. Sometimes they have to wait months for payment from the construction parent companies. The practice starts at the very top. Big, well-known and well-regarded construction companies win contracts and tenders to build things, and they subcontract everything.
I wonder whether we need to look at incentivising the construction industry to work in a completely different way. One of the major problems that construction has had in this country is that the industry has singularly failed, over many decades, to train its future work force. The apprenticeships created by large construction comprise only about 40% of the future skilled labour work force—plasterers, electricians, plumbers, joiners and so on—that the industry needs. With such a poor rate of training, where do we get the labour from? Largely, I am afraid, we get it from eastern Europe. They are very good people, who are ready, trained and off the peg. In they come, largely because of the singular failure of big construction to train its own future work force.
Health and safety is important, and it is still completely relevant in this day and age. Bogus self-employment, which is widely used across many sectors but largely in construction, is a way of getting around the regulations for big organisations that subcontract everything, and the people at the bottom have to take the stick.
May I express my pleasure at the positive response that the clauses have provoked from the Opposition? All the contributions from Opposition Members have been positive, and I am particularly grateful to the hon. Member for Derby North, who, in a characteristically conciliatory and bipartisan speech, welcomed the proposals and said that the issue was a long-standing one. The point is that the Government are addressing an issue that is about fairness. I will set out the details in a moment, but I am pleased that we have the Committee’s support. The hon. Member for Kilmarnock and Loudoun quite rightly raised some practical questions, which I will attempt to address in a moment. The recognition that the Government are doing the right thing is pleasing.
The hon. Member for Derby North was certainly very positive today, and I look forward to similar contributions over the course of our proceedings. Clauses 16, 17, 18 and 20 are all designed to stop employment intermediaries being used to avoid employment taxes. Opposition Members have tabled a new clause that would commit the Government to conducting a review of disguised self-employment in the construction sector. I will deal with the new clause, but I would first like to explain the effects of the clauses I have mentioned, which are pertinent to the issue because they will tackle the use of employment intermediaries to disguise employment as self-employment.
Some labour providers have created structures that are specifically designed to avoid tax and national insurance and gain a commercial advantage over those who play by the rules and by their spirit. The clauses are designed to put a stop to such practices. They will provide a level playing field for compliant labour providers who help to facilitate the UK’s flexible labour market. The avoidance we seek to stop takes two forms: falsely presenting employees as self-employed, and placing the employer or employment business of the UK worker outside the UK. Both those models rely on standardised substitution clauses within contracts in an attempt to avoid existing agency legislation, and clause 16 strengthens the existing agency rules to stop that.
The clause also introduces a targeted anti-avoidance rule to prevent people from setting up even more convoluted arrangements in an attempt to avoid the changes. We recognise that there may be times when fraudulent documents are provided to employment intermediaries. Such documents might claim that the worker is either already having pay-as-you-earn deducted, or is not subject to supervision, direction or control. To deal with that possibility, we have included a provision that deems the person who provided the fraudulent documents to be the employer for tax purposes.
Clauses 17, 18 and 20 support clause 16. Clause 17 allows HMRC to transfer a company’s outstanding pay-as-you-earn debts to directors where HMRC has used the targeted anti-avoidance rule or the provision relating to fraudulent documents. Clause 18 provides HMRC with the power to create legislation requiring employment intermediaries to keep records, to provide them to HMRC and to penalise the intermediaries if they fail to do so. The clause supports HMRC’s compliance work, ensuring that it is targeted where the risk is highest. Clause 20 clarifies that where a UK employment intermediary has placed workers who are being employed or engaged outside the UK, it is the UK employment intermediary that is responsible for administering pay-as-you-earn.
Let me explain the background to the changes. The clauses target structures set up to present workers as self-employed, when they are really employees. The practice has been a growing problem in recent years and has spread from the construction industry to other sectors. What started as a problem affecting temporary workers is now increasingly affecting permanent workers. We have evidence of large, household-name businesses moving their employees off the payroll and into those types of arrangements. That is not acceptable. Workers lose out on their rights, competitive disadvantages are created for compliant businesses and the taxpayer foots the bill.
The changes will also ensure that pay-as-you-earn obligations apply where intermediary structures are set up outside the UK to employ or engage UK workers. To be clear, the clauses will not generally affect internationally mobile workers who come to the UK for a period of time and also work in other countries. That is because the employers of such workers do not generally attempt to manipulate the existing legislation. The provisions are designed to target employers of people who live in the UK, work in the UK and, more often than not, have always lived and worked in the UK. We have examples of employers of UK teachers in Jersey, of UK nurses in Guernsey and UK crop pickers in Singapore—that is clearly not right.
I will now briefly describe what each of the clauses under consideration does. Clause 16 changes the agency legislation. It is no longer enough to claim that the worker can send a substitute so that the legislation does not apply. Instead, the clause refocuses the legislation so that it applies where the worker is subject to supervision, direction or control, or the right of supervision, direction or control. Some concerns have been expressed about the changes meaning that everyone working through an intermediary will be deemed to be an employee for tax. I assure the Committee that that is not the case. Workers can still be engaged as self-employed, either directly or through an agency.
I am aware of some confusion about what
“under supervision, direction or control” means in practice. To help people understand, HMRC has worked with industry representatives to develop extensive guidance, including examples. Clause 16 also changes who the employer is for income tax purposes. The employer for tax purposes will be the employment intermediary placing the worker with the end client.
HMRC has been shown evidence that employment intermediaries have sometimes been given false documents. There is some concern that the practice will spread and that documents will be produced stating that the worker is having pay-as-you-earn deducted by someone else in the contractual chain, or that there is no supervision, direction or control over the worker, when this is not the case. In such circumstances, where the employment intermediary has acted in good faith, it is clearly not fair for them to be penalised. For that reason, the clause also brings in a provision that, where fraudulent documents have been provided, the party that provided the documents to the employment intermediary is the employer for income tax purposes. That will ensure that, where intermediaries have done their due diligence, asked the right questions, received the necessary assurances and acted in good faith on the documents provided, they will not be penalised. Instead, those who have sought to deceive are the ones who suffer the consequences.
Some think that the clause does not go far enough to protect employment intermediaries. There have been representations that a “reasonableness test” should be included in the legislation. However, HMRC has some experience in this area and knows that those who are seeking to avoid the legislation will spend many years in the courts arguing that what they have done is reasonable. That would undermine the changes and mean that we could not provide the level playing field for which the industry has been asking for so long.
In addition, the clause introduces an anti-avoidance provision. Those involved in avoidance in the labour market are quick to adjust and to come up with new and innovative ways to avoid tax—in fact, I have been alerted to one such scheme by my right hon. Friend the Chief Secretary to the Treasury. We are therefore introducing a targeted anti-avoidance rule to ensure that the legislation cannot be circumvented.
I fully support what the Minister is trying to do, but none of the provisions mentions national insurance. Does he agree that many of the issues he is seeking to deal with also apply to national insurance? Will he comment on what the effects might be?
Of course, national insurance matters have to be dealt with in national insurance Bills, and that would be the case here, but my hon. Friend is absolutely right to raise the point. Very often national insurance is the issue behind a lot of these sorts of arrangements.
Clause 17 allows HMRC to transfer companies’ outstanding pay-as-you-earn debts to directors personally. The transfer provision applies only where the targeted anti-avoidance rule has been used or the employment intermediary has provided fraudulent documents. That will stop companies involved in fraud or avoidance closing down and then setting up again days later under another name, leaving a trail of unpaid tax in their wake.
Clause 18 supports HMRC’s compliance work in this area. It introduces a power that will allow HMRC to create legislation requiring employment intermediaries to keep records and provide them to HMRC. Those will include details of people who they place with clients but from whom they do not deduct pay-as-you-earn. The clause also provides for regulations to be made to enable HMRC to issue penalties where any of the information or documentation is not provided. HMRC will consult on the draft regulations over the summer.
Although the Government have invested £1 billion to help HMRC on tax avoidance, the cuts to HMRC amount to £3 billion, so there is a discrepancy. If more of our HMRC centres are to be closed, how will we achieve what the Minister wishes to achieve with the clauses? There simply will not be the people to help the fight against tax avoidance. The Public and Commercial Services Union is concerned, and that concern is well founded. The PCS is running a campaign for tax justice. I am sure the Minister can see the value in that.
The hon. Lady could lead me into a much broader debate on tax avoidance and tax evasion. The Government’s record in that area is extremely strong. If we focus on output rather than input, the amount of yield that HMRC is likely to bring in over the course of this Parliament is almost double the aggregate yield it brought in during the previous Parliament. That is a significant increase in its performance.
The hon. Lady is right that there have been cuts to HMRC. We have to remember that it undertakes a lot of administrative tasks that can now be done much more efficiently and cheaply as a consequence of greater use of new technology, and it has been able to make savings in its IT contracts by renegotiating the terms to get a better deal for the taxpayer. Its record of delivery is strong, and I am not at all embarrassed that we have been able to reduce costs within HMRC. The Government have reinvested a substantial element of those savings in HMRC to improve its compliance performance and to give it the resources to deal with tax avoidance and evasion generally, including in the area that we are debating this afternoon.
This afternoon, we have been discussing tax avoidance and evasion by disreputable employment agencies. One of the strongest things we have done as a Government is introduce the general anti-avoidance rule. Will the GAAR be applicable in the present context, working against people who keep on finding ways around that are strictly in compliance with, but not in the spirit of the rules on tax that should be paid?
My hon. Friend is right. We are the first Government to introduce a general anti-abuse rule into our tax system that will be a useful additional tool to HMRC. We have never said that the GAAR is a solve-all policy. It is useful to assist HMRC and could potentially be used in this area, but, as I mentioned earlier, we also have a targeted anti-avoidance rule that I think will assist. In front of us, we have a set of measures that not only deals with the specific problems that exist at the moment, but gives us the powers, because of that targeted anti-avoidance rule, to address innovative behaviour that tries to get around those measures.
Clause 20 makes changes to clarify that, where a UK worker is employed or engaged offshore, and they are supplied to an end client through a UK employment business, it is the UK employment business, not the end client, who is responsible for administering PAYE. The change makes clear where the tax obligations lie and stops those setting up such schemes claiming that there is no financial risk to the UK employment intermediary.
Over the past year, HMRC has consulted extensively on the proposals. It has held numerous round tables and received 150 written responses to the two consultations. The Government have revised their approach to address comments and concerns raised throughout the process.
The Government believe that the changes made through the clauses are the best way of tackling the use of employment intermediaries to avoid tax. The proposed changes to legislation will level the playing field for UK businesses and ensure that compliant UK businesses that facilitate the UK’s flexible labour market are not undercut by those seeking to avoid tax. Employers will have to fulfil their duties and ensure that workers have the protections and benefits to which they are entitled.
New clause 7, tabled by Opposition Members, would review disguised self-employment in the construction sector and examine the option of setting criteria for automatically deeming people to be employed for tax purposes if they meet those criteria, a policy on which the previous Government consulted in 2009. I am sure that some hon. Members remember the 2009 proposals, which involved moving from the long-standing case law approach to determining employment status based on a series of absolute tests.
Case law gives flexibility to accommodate genuine diverse engagement practices. Absolute tests do not have subtlety and are therefore hard to design. As set out in the consultation response document, stakeholders at the time felt that the criteria proposed could undermine legitimate commercial practice, as well as risk capturing large numbers of genuinely self-employed workers, particularly in a sector such as construction, where the difference between employed and self-employed is not always obvious. The Government believe that the changes introduced by clauses 16 to 18 represent a more targeted way of tackling false self-employment, in a way that will not inadvertently impact on the genuinely self-employed.
Employment intermediaries are the biggest mechanism for delivering false self-employment in all sectors and are being aggressively marketed to employers and employment businesses. While the Government appreciate the certainty that objective criteria might provide, this is not something to be considered lightly or rushed. For example, we have taken more than 12 months to develop and test the new salaried members rules for limited liability partnerships, introduced by clause 68 and schedule 13, which are designed to ensure that LLP members who are, in effect, providing services on terms similar to employment, are treated as employees for tax purposes.
The salaried members rules represent an approach akin to that envisaged by the new clause, so it would be preferable to see how these changes, and those introduced by clauses 16 to18, bed in before undertaking further work in this area. Nor does it make sense to look at just the construction sector, given the growing problem of false self-employment in other sectors. Let me reassure the Committee that the Government will closely monitor the impact of the changes introduced by this Bill on false self-employment, and will bring forward new measures to tackle any continued abuse in this area as required. On that basis, I hope that the hon. Member for Kilmarnock and Loudoun will not press the new clause to a Division.
Let me now deal with the questions raised by the hon. Lady. She asked how all businesses would be made aware of the changes. HMRC and the Treasury have met extensively with people in the industry and representative bodies. Guidance has been published to ensure that people know when and how the changes will apply. As to whether this could affect the genuinely self-employed, while the absence of any obligation to provide a personal service has long been held as an indicator of self-employment, and it is also most unlikely for a person who is personally providing their services in a genuinely self-employed capacity to be under the supervision, direction or control of someone else, the inclusion of a standardised substitution clause within contracts has for too long been used as a way of avoiding being caught by the agency legislation. As I mentioned earlier, when someone is genuinely not under supervision, direction or control for the manner in which they undertake their duties, it is fine for them to be engaged on a self-employed basis.
I was asked whether the returns are likely to be burdensome and costly. We do not believe that that will be case. The Government are mindful of the cost implications and aware that HMRC has restricted the information required to a minimum. This will enable HMRC to monitor compliance with legislation to address both false self-employment and the offshoring of payrolls, and to support the response to non-compliance. HMRC’s compliance strategy will be to help those genuinely trying to get things right, but target and take action against those wilfully attempting to avoid the legislation. As to the suggestion that the existing legislation could work and address the matter, and that we do not need new legislation, over a period of time, these schemes have been developed specifically to target weaknesses in the existing legislation. The clause strengthens and clarifies the existing legislation, ensuring that there is a level playing field for all businesses.
On the reporting requirements and the delay there and whether that will allow intermediaries to find other ways to circumvent the legislation, I come back to what I said a moment ago to my hon. Friend the Member for Solihull. We have introduced a targeted anti-avoidance rule to deter such avoidance. There will be no delay in enforcing the legislation to target those intermediaries involved in the facilitation of false self-employment who may find other avoidance vehicles.
Returning to the issue of guidance, additional guidance has already been published. HMRC has undertaken to continue to work with the industry to ensure that there is sufficient guidance and to update guidance as required. There is also a technical consultation over the summer on record-keeping requirements. In terms of monitoring compliance in the construction sector specifically, all subcontractor payments made are returned to HMRC under the construction industry scheme. That will enable a close monitoring of the extent of non-compliance. On the impact on business generally, particularly in the construction sector, the measure will create a level playing field for businesses, ensuring that compliant UK businesses that facilitate the UK’s extremely flexible labour market are not undercut by those seeking to avoid tax. We do not believe it is fair that compliant businesses can be undercut by businesses that are avoiding tax.
The measures could also benefit workers who are currently losing out on entitlements to statutory benefits because their employer is not paying the appropriate secondary national insurance contributions—a point raised by a number of hon. Members. Workers are often unaware that such arrangements are even in place until they attempt to claim statutory benefits such as maternity pay or sick pay, which is all the more reason for the Government to take action on that long-standing issue.
These are important changes to agency legislation. In total, the changes will ensure that the right tax is paid when employment intermediaries are used. The changes will also ensure that the right amount of tax is paid for individuals engaged by or through an employment intermediary, thereby ensuring that they are in the same position as someone engaged directly by an employment business. Setting up contrived structures will therefore not result in a tax advantage. The changes will help to provide a level playing field across the labour market. I hope the clauses will have the Committee’s wholehearted support.