The new clause and new schedule 1 make changes to ensure that the off-payroll working reform is extended to medium and large-sized organisations in all sectors outside the public sector from April 2021.
The reform moves the responsibility for determining whether the off-payroll working rules apply from an individual’s personal service company to the client engaging them. It also requires the client, or the party paying the individual’s personal service company to account for and deduct employment taxes where they are due, rather than that responsibility resting with the individual’s personal service company. The change is not the imposition of a new tax, but is focussed on improving compliance with the already existing off-payroll working rules.
The off-payroll working rules have been in place for nearly two decades. They are designed to ensure that individuals who work like employees but through their own personal service company pay broadly the same income tax and national insurance contributions as those who are directly employed. Without those rules, nothing prevents individuals from being engaged off-payroll simply to reduce the tax and national insurance contributions rightfully due.
Personal service companies have traditionally had to self-assess whether the rules apply. Unfortunately, non-compliance with the off-payroll working rules outside the public sector is widespread. The public sector reform has demonstrated that organisations engaging individuals are better placed to assess the employment status for tax of that individual.
There have been several attempts to tackle non-compliance with the rules in recent years. In November 2015, the Government carried out a consultation on how to improve the effectiveness of the off-payroll working rules. Since then, the Government have carried out three further consultations on reforming the rules. During this period, several alternatives to the original off-payroll working rules were suggested. The Government fully considered alternative proposals as part of the extensive consultation process on the reform.
In general, the approaches suggested would create a group of people who are exempt from the employment status tests and subject to a separate and advantageous tax regime, which the Government did not consider to be fair to the majority of working individuals who are subject to the existing boundary between employment and self-employment. Options such as administrative changes and strengthening HMRC’s compliance response were also discussed, but the consultation found that those would not be sufficient to tackle the problem.
The off-payroll working rules were reformed in the public sector in April 2017, shifting the responsibility for determining whether the off-payroll working rules apply from an individual’s personal service company to the public sector client engaging them. That was because organisations are better equipped to make the correct employment status for tax assessments than are individual contractors, and HMRC is better able to monitor their compliance. This reform is effective in reducing non-compliance with rules: it raised an estimated £250 million in additional revenue in the first 12 months, with independent research showing that it did not damage the flexibility of the labour market.
Following the successful implementation of the reform in the public sector, the Government announced at Budget 2018 that it would address the unfairness elsewhere in the labour market by extending the reform to the private and voluntary sectors from April 2020. In developing these latest changes, the Government have listened carefully to feedback from the implementation of the public sector reform and held many sessions with stakeholders since then to improve the design of the reform for all sectors.
Non-compliance with the rules outside the public sector remains widespread and is forecast to cost the Exchequer more than £1.3 billion a year by 2023-24 if not addressed. This is not sustainable. It denies the taxpayer revenue for important public services and perpetuates an unfairness between individuals who may work in the same way but pay different levels of tax. It also results in a disparity of tax treatment between the public sector and other sectors.
The changes made by new clause 1 and new schedule 1 would move the responsibility for determining whether the off-payroll working rules apply from an individual’s personal service company to medium and large-sized organisations across all sectors that receive the individual’s services. This change will not apply to engagements with the 1.5 million smallest businesses. It is important to note that this change is not an imposition of a new tax, but focused on improving compliance with off-payroll working rules that already exist.
The new clause and new schedule were originally published in draft in July 2019. HMRC took a number of steps ahead of the scheduled introduction in April 2020 to ensure organisations were ready for the reform. In November 2019, HMRC launched an enhanced version of the check employment status for tax––CEST––tool. HMRC worked with more than 300 stakeholders to make the tool clearer, reduce user error and consider more detailed information. HMRC also set up dedicated teams providing education and support to all organisations affected, including one-to-one support for 2,000 of the UK’s biggest employers and direct communications to around 40,000 medium-sized businesses. This was supported by workshops, guidance, online learning and roundtables to help those organisations make the right decisions.
The Government also conducted a review of the implementation of the reform, which was published in February 2020, and announced that HMRC would take a supportive approach to compliance in the first year of the reform, with penalties being applied only in cases of deliberate non-compliance. The new clause and new schedule are being introduced at this stage via a Government amendment with a new commencement date of
The Government very much value the important role that contractors play in the labour market and want businesses to be able to design their workforces, and work with those workforces, in a way that makes sense for them. This reform does not change that.
I am winding up, so perhaps I could let the hon. Lady introduce her point in her speech.
When their engagement meets the tests of an employment relationship, contractors should not pay less tax than those who are directly employed. I therefore move that new clause 1 and new schedule 1 stand part of the Bill.
Our position on IR35 has been well rehearsed in previous and recent debates on the Floor of the House, but let me revisit some of those points, because this debate is closely followed outside Parliament and matters to people across the country. Self-employment is a vital part of the UK economy. People who are genuinely self-employed deserve to be properly supported while also ensuring that everyone pays the right amount of tax. Historically, the tax arrangements for self-employed people have differed from those for people on payroll, reflecting the fact that self-employed people have lower levels of protection in areas such as holiday pay, sick pay and other rights and benefits that people would enjoy if they were employed on payroll. Clearly the system has also been subject to abuse, and it is right that we tackle that abuse.
Some of the anxiety arises from concerns that the Treasury, and the Government more broadly, sometimes have a tendency to think of the self-employed as if they fell into only two categories of people. The first is the very wealthy, who use self-employment status to avoid paying their fair share of tax, which should obviously be clamped down on. The second is the very low paid, who work in parts of the economy that are deemed unproductive—even to the extent that some people would think it desirable that such workers were not engaged in those forms of employment, as if that were the best way to tackle the UK’s poor productivity statistics. The true picture of self-employment in the country is a lot more complicated than that, and huge numbers of self-employed people make an enormous contribution to the economy and who provide a whole range of services that benefit citizens across the country and businesses more generally.
It is right that the Government have taken the decision to delay the implementation of the roll-out until April 2021 due to coronavirus. The Opposition would again impress on the Government the need to use the additional time ahead of implementation to provide an additional review and to learn from the mistakes of the public sector roll-out and the continuing anxieties about the planned private sector roll-out. Those concerns were expressed in the House of Lords report entitled, “Off-payroll working: treating people fairly”, which concluded that the Government must address IR35’s inherent flaws and unfairness, a point that was supported by the ICAEW.
The Opposition urge the Government to use this time wisely. We believe it is necessary for the Government to take a broader approach in order to modernise the law on employment status and to look at how it interrelates with tax status, so that we have a genuinely joined-up approach that brings together the issues of tax and employment law. Notwithstanding the planned roll-out of IR35, the Chancellor made it very clear, when he announced the self-employment income support scheme, that there will be consequences for future Treasury policy and future tax arrangements for Britain’s self-employed. That message was heard loud and clear by the self-employed, but if we are asking them to pay a greater contribution, we also have to address the inherent challenge and, in many cases, the injustice around their employment protections and the levels of social protection and social insurance that people enjoy if they are employed, as opposed to self-employed.
As the shadow Chancellor has said, having addressed this issue many times both in her current role and in her previous role:
“We really need a joined-up approach to the issues that brings together the consideration of tax and employment law and levels up protections for the self-employed, as well as dealing with the current implications of the tax system that boost bogus self-employment.”—[Official Report,
She made those remarks back in April 2019; it is now June 2020. I am not sure that, in the year that has passed since she made those comments, the situation has changed particularly and that things have improved. The delayed roll-out is something that has been widely welcomed, but it is crucial that the Government use this time wisely. It is not clear from the year that has just passed that the Government will use the next year any better.
Before I get into the substantive detail of this issue, I want to touch on the process and where we find ourselves at this moment in time with the new clause that has been tabled by the Minister. It is simply not acceptable that such a contentious tax matter was first introduced through a 45-minute money resolution debate in the House, instead of being subject to the full scrutiny of the Budget process.
The money resolution debate took place after the Finance Bill was published, meaning that the Government were able to introduce the detailed IR35 tax law as a Finance Bill amendment. The result of what can only be described as a procedural whizz is that Opposition parties cannot do what they were elected to do and amend the proposals as the Bill goes through its line-by-line scrutiny. Frankly, that is not good enough. I certainly thought better—perhaps wrongly—of the Government in that regard. Of course, that entire process missed out those MPs who have been disenfranchised from taking part in the House as a result of the Government’s shocking processes in recent weeks.
On the substantive issue at the heart of this, let us be clear that IR35 is creating a new group of zero-hours employees paying full taxation but without receiving the associated employment rights. What is just and fair about that? Speaking as a Member with a constituency that is dominated by the oil and gas sector, I have been inundated—inundated—with correspondence from contractors outraged by the decisions that the Government are seeking to take, particularly so given that we are in the middle of a global pandemic. I hope that the huge concern that I and others have about the long and, frankly, short-term sustainability of the oil and gas sector, and the impact that that has on employees, has not escaped the Government’s notice. To then add a further layer of complexity into their employment status is simply unforgivable.
In the north-east of Scotland, we are witnessing job losses hand over fist. Barely a day goes by when companies are not shedding staff. That is applicable to most sectors at the moment, be it hospitality, tourism or aviation, but it is very rare for a sector of such scale to be so dominant in one city, as is the case in Aberdeen. What the Government are seeking to do in relation to IR35 is a slap in the face to those workers who are having to deal with the most difficult of challenges.
Not only are the Government hitting those contractors—many of whom went down that path in good faith—with IR35, but they are failing to deliver any sectoral support to the oil and gas industry. Not a single penny of sector-specific support has been provided by the UK Government for the oil and gas sector, irrespective of the fact that the Treasury has lined its pockets with North sea oil and gas revenue for decades. It is time to give back, not time to double down on the damage, so I urge the Government to reconsider what they are putting forward.
My hon. Friend makes an excellent point about contractors in the north-east of Scotland. In my constituency of Glasgow Central, it is IT contractors, many of whom came to live in Glasgow from India. They work in the IT sector and have found that their contracts have not been renewed with companies that they have been working for, and they are now really struggling to find employment, causing them a huge deal of uncertainty at this time, particularly with the coronavirus crisis.
I welcome the intervention from my hon. Friend, which goes to the nub of the issue that we are discussing. The Government’s policy is, frankly, to turn their back on those people who need support at this time.
If the proposed changes—making every medium and large sector private business responsible for setting the tax status of any contractor they use—were to come into effect, I would worry for the industry”— the oil and gas industry—
“and its ability to attract the highly skilled workers they need. It is also predicted that changes could see a worker’s income reduced by up to 25 per cent. Many of these workers are my constituents.”
Many of those workers are also my constituents, and it is simply not good enough. I am glad that there is cross-party support in north-east Scotland for opposing what the Government are seeking to do, and I sincerely hope that that cross-party ethos will be found in this room today, before the Government do more damage.
I just want to pick up on one final point. I think the Minister said in his opening remarks that he listened carefully—that the Government have listened carefully. They have not listened to the House of Lords—I do not say that with any joy, being a member of the Scottish National party—which has been clear that they need to pause this policy and go back to the drawing board. I urge them to do just that.
The issue of off-payroll working has attracted much attention in the House and beyond. Clearly, there are some problems to solve, but they are not easy problems to solve.
In some cases, the issue is straightforward. People work for one employer for prolonged periods up to several years and they really are employees, because they do similar jobs to colleagues and use company equipment, but they do so on different terms. It may be that they are better paid in terms of headline salary than their immediate work neighbours, but the situation is more complex, because they are not paid for holidays or potential pension contributions and so on.
Some workers may have been put under pressure to become self-employed by less scrupulous employers who have sought to save money on things such as NI payments. I have read of cases—I am sure we all have—where the imbalance of power that can exist between an employer and an employee has seen pressure on people to choose a particular route. That is not satisfactory for those employees or taxpayers generally as revenue for public services is missed.
While some may have been pressured into becoming self-employed, vast legions in our economy have chosen the self-employed route because they enjoy the challenge of that type of work or they want to be more in control of their own destiny, which being your own boss can achieve, or many other personal reasons.
That is to be really encouraged, because the flexibility that self-employed workers, often on contracts, provide has been a great boost to our economy. It is one of the ingredients that has contributed to the recent economic progress that we have enjoyed. Being swift of foot in response to commercial opportunities gives a competitive advantage. It has allowed companies to bring in extra resource where they need to boost operational capacity. It has allowed extra skills to be brought into a company when needed. Many people I have met or corresponded with in my Harrogate and Knaresborough constituency have highlighted to me that they have built careers adding real value to their clients.
There are some sectors where the use of contractors is more prevalent than others. We have just been hearing about the oil and gas sector, but that includes IT and technology more broadly, as well as marketing and the creative industries, sectors where the UK is strong, and where I worked before coming into this place. This is about bringing skills and capacity into a company when needed but when there is not enough work for long-term permanent employment. There is also the issue of the growing sector of interim managers.
I see a balance to be struck here in the way the issue is taken forward by Ministers between protecting some employees and recognising that the vast majority have chosen self-employment and are providing real value. We need to balance employment rights and protections between the employed and self-employed, while ensuring that the rules do not have a sclerotic effect on our economy. Flexible, nimble companies responding to customers, adding value, creating wealth and grabbing opportunities is how economies grow and jobs are created. Ensuring that is preserved is critical to the operation of these rules. That is something the Minister must consider as he takes this forward.
I refer hon. Members to my entry in the register of Members’ interests. This is clearly a contentious issue, but the majority of employers and contractors I have spoken to agree that some kind of reform is necessary.
Our tax system must be fair, but it should also support those who take risks to grow businesses and innovate in a way that benefits our whole economy. It should not offer advantages to those who are using PSCs to create wealth only for themselves. I am certainly not saying that it is wrong to create personal wealth, just that our tax system should not offer particular advantages in doing so and tax should not be avoided as a result. We must balance flexibility with fairness and it is not fair that two people doing the same job in broadly the same conditions pay different rates of tax. We must recognise that those who are genuine contractors do not have the same benefits as employees—they do not have the same job security—but where someone is to all intents and purposes an employee, they and their employer should pay their fair share of tax and national insurance.
I have personal experience of running a small business in the tech sector and I believe that current practices discourage people from becoming employees in some sectors. For example, in the tech industry, people with certain programming skills can command such high day rates as contractors that there is very little incentive to become an employee in a small company. That is a particular issue in a sector where there is a shortage of talent and a great demand for skills.
While there is and always will be a role for contractors, contracting costs can be prohibitively high for start-ups and scale-ups, and those businesses find it difficult to recruit employees with the right skills. Start-ups and scale-ups need employees—people who are committed to the company, who can help shape its culture and, importantly, who can pass on their knowledge and skills to new employees as the company grows. Labour market flexibility has to work for employers and employees. At the moment, the very businesses that we most need to grow and innovate are struggling to recruit skilled employees, especially in areas outside London and the south-east, such as Sheffield and Barnsley, which I represent.
I believe that the reforms will make employment and the benefit that it brings more attractive. As I said, we should be using the tax system to support those who create wealth not only for themselves, but for our whole economy. In that way, any tax saving to an individual or company is an investment for the taxpayer, not just lost revenue. A great example of that is the research and development tax reliefs, which I am delighted have been increased in the Bill and will encourage the kind of innovation that the UK really needs to boost growth and productivity. They are incentives that help to create wealth for us all.
In contrast, using a personal service company to reduce an individual’s tax burden does not benefit the taxpayer. The individual’s income tax and national insurance savings are not used to create other jobs or to invest in technology or create products, and so the taxpayer does not receive any return on the lost revenue. Where a worker is genuinely self-employed, facing additional risks, with none of the benefits of employment, there should be no change, but where someone is to all intents and purposes an employee, improving compliance should make sure the taxpayer does not lose out.
I understand that any changes bring risks and uncertainty and I am pleased that the changes to IR35 have been delayed for a year to give our economy some chance to stabilise after covid-19, but fairness should be the foundation of our tax system and properly applied, the regulations will help to achieve that aim.
I will respond to the many important points raised by hon. Members, who I thank for raising them.
My hon. Friend the Member for Penistone and Stocksbridge is absolutely right to highlight the importance of making employment attractive. It is vital that best practice be spread throughout the economy as rapidly as possible and if the effect of that is to create a more level playing field between two sides of a particular divide, that would be a very valuable thing. The Government’s concern is that there is an unfairness in that someone can be, as it were, latently employed, although working for a personal service company, and that is the concern that the Government seek to address.
My hon. Friend the Member for Harrogate and Knaresborough is absolutely right to emphasise the importance of having a flexible and nimble economy. He is right, and the hon. Member for Ilford North is right, to focus on the effect of the self-employment and self-employed contractors in making this happen. For reasons I will come on to, this reform does not tax the self-employed. It does not tax anyone. What it does is to change the determination for people who are not self-employed but who are in fact employed, and to determine whether they are or not.
The hon. Member for Aberdeen South made a series of comments that I am afraid are simply not true. He was very rude about the Government’s decision to introduce this via a separate resolution, but the details of the change were announced as part of the Budget resolutions. They were not moved. They could and may well have been discussed—I do not recall the details—during the Budget debates. Therefore, it was perfectly open to the House to scrutinise those details, although the resolution was not itself moved. If the resolution had been moved, it would not have been possible for us to legislate with anything like the same straightforwardness for the move to an April 2021 deadline. That was the purpose of delaying moving the resolution. The effect was that the resolution was debated on the Floor of the House of Commons in and of itself—given a separate debate to that resolution in order to discuss that. Therefore, the idea that there has been any short-circuiting of due process is entirely wrong.
Of course amendments can still be tabled on Report, and the hon. Gentleman may seek to do that. He was very rude about the reform, saying it would lead to zero-hours contractors, and calling it shocking, but is he planning to support it? Will he vote in favour of it or against it? That will be the true measure of his and the SNP’s position on this important reform.
Finally, the hon. Gentleman talks about the Lords Economic Affairs Committee, but of course he is entirely wrong about that. We have yet to respond to the Lords Committee—we will do so in due course—but we have engaged very closely with it on a whole variety of different areas. If he speaks to Lord Forsyth, he will know that I approached Lord Forsyth personally, having just become Financial Secretary, to reopen the relationship and make it flourish. Indeed, I volunteered to appear in front of the Lords Economic Affairs Committee last year precisely to hold myself and the Treasury accountable in this area.
The Minister has gone through a number of the points I made, but one that he did not touch upon was the impact that the proposal will have upon contractors working in the oil and gas sector, given the huge challenges facing those workers at the moment. What message would he give those contractors, whose future is uncertain in any case, but who are facing this change on top of an already devastating situation?
We are obviously very concerned about the effects of coronavirus, which is precisely why we have delayed the implementation of the reform by a year. The message I would give is that we absolutely respect and support the work that those individuals are doing and understand the position they are in. The Government have rapidly made available very important sources of support for the economy across a whole range of different areas and sectors of work and, indeed, in the benefits system, both for businesses and families and the sustaining of jobs. Therefore, there is no absence of respect or support for the people the hon. Gentleman describes.
The hon. Member for Ilford North mentioned the diverse nature of these different forms of employment. He referred to the self-employed, but actually the self-employed are not taxed by this. The genuinely self-employed are not affected by the reform. The reform is designed merely to change the way in which the status of someone who is latently employed—actually employed, but perhaps unaware of it or not behaving on that basis—is determined. The hon. Member asks us to use the additional time appropriately. We have got before April 2021. I have said already, but let me say again that we are in the process of commissioning external research into the effect of the public sector reform. As he will be aware, the early research immediately after the public sector reform did not bear out the dire predictions regarding flexibility or reduction of income, but we will make sure that external research into the longer-term effects of the public sector reform is completed and placed in front of the House before April next year.
Can I ask the Minister about the impact assessments that will be done? What monitoring is his Department doing of the chilling effect that this is having on contracts right now? What I am hearing from contractors in my constituency is that those contracts are not being renewed now and it is already having a chilling effect, regardless of when the measure is coming in. What monitoring is he doing of the situation?
As I have said, in relation to public sector reform, the external research did not detect any great chilling effect. We will be looking at the longer-term effects of public sector reform. On this reform, it is undoubtedly true that the measure is nudging some companies to consider whether people they had thought of as contractors are not, in fact, employees. In some cases, they are having to review the structure of their workforces. I do not think that is a chilling effect on the status of those contracts, because those people were always latently employed. It is then for the contractor and the company to work out what future arrangement they wish to have.
The IT contractors from India who I mentioned earlier can choose to go anywhere in the world. They have chosen to locate in Glasgow because the work is there, the skills are there and they have a good community in my constituency. If the contracts are not there, they will take their skills and their money and go somewhere else. What is the Minister doing to mitigate against that?
That is a claim that the hon. Lady makes and we will be able to test it over time through external research. It is not a view that has been validated so far in the roll-out to the public sector. It is a diverse and vibrant area of our life and it may well have more resilience overall than she is giving it credit for, but we will not know until we have seen the effects of the reform.
The final point, raised by the hon. Member for Ilford North, is to do with rights. Of course, the measure is to do with the determination of tax due, but the Government have put in the Queen’s Speech a substantial commitment to bring forward a Bill in that area following the Taylor review. I know that my colleagues in the Department for Business, Energy and Industrial Strategy take that very seriously.