Personal Service Companies (Select Committee Report)
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Lord Newby (LD)
My Lords, I thank all noble Lords who have taken part in the debate. It is correct to say that, with the exception of the noble and learned Lord on the Opposition Front Bench, all noble Lords who have spoken served on the committee, and therefore I can doubly thank them for the work they undertook on a very short timescale. As the noble Lord, Lord Myners, pointed out, this is an extremely complicated area, while my noble friend Lord Higgins made observations on the procedure in terms of the pace of the committee’s work. The Government response, however inadequate some noble Lords feel it to be, and the speed with which we have been able to hold this debate are a good example of your Lordships’ House scrutinising how we attempt to implement public policy, and I hope that it will be followed more frequently in the future.
I hope that I am able to reassure the House that the Treasury and HMRC take this report and the issues it raises extremely seriously. There is one area where I am not going to be able to satisfy noble Lords, which is their understandable irritation at the non-attendance of a Treasury Minister. The experience of your Lordships’ House of Treasury involvement in the work of its Select Committees over a number of years has been variable. When I served on the Joint Committee on the draft Financial Services Bill, not only did the Chancellor of the Exchequer of the day refuse to turn up, he refused to allow his officials to turn up and he refused to allow them to send a written response to our questions on the administrative workings of tax on the basis that it would undermine the sovereignty of the Commons in that area. We thought that that was very unsatisfactory at the time. I can assure the House that I drew this committee’s views to the attention of colleagues in the Treasury before the debate and that I will do so again.
However, I think that both the Treasury and HMRC take the work of the committee very seriously and they are acting in response to that work. In some cases the committee has looked at and made recommendations in areas where work was already under way, but some of the recommendations made by the committee are being taken forward where work was not under way, specifically in relation to the questions around personal service companies’ self-assessment returns and employers’ returns. As a result of the work of the committee, these are now being reviewed with stakeholders with a view to making any necessary changes as soon as practicable. That is a concrete example of the influence of the committee in getting real change.
The committee did not confine itself just to the use of personal service companies, but looked more widely into the engagement of workers in today’s labour market, and that was reflected in a number of speeches in the debate. The UK has one of the most flexible labour markets in the world and we recognise that that is one of the reasons why our economy has been more resilient and has recovered faster than many other western economies. We recognise that personal service companies are a key feature of this flexible and dynamic labour market and will continue to contribute to its growth. Regrettably, however, as noble Lords have made clear, there are those who see such arrangements as an opportunity to avoid paying their fair share and there is abuse of the system, not least among those on low pay who are often unaware of the situation in which they find themselves. Clearly, that is not right. The Government have provided a clear mandate to HMRC to ensure that everyone pays the right amount of tax. One of our biggest challenges is effectively to tackle avoidance while encouraging genuine enterprise. We have introduced a plethora of measures to encourage enterprise, but at the same time we have legislated to stop avoidance and help HMRC bring money in more quickly. Since 2010, we have introduced 42 changes to tax law in order to close loopholes and we have invested an extra £1 billion in the area of preventing and deterring tax avoidance, thus bringing in billions of pounds for the Exchequer.
IR35 is the central theme of the committee’s report. It is one of the best known, least popular and least well understood pieces of anti-avoidance legislation. HMRC has been working hard to change this, and I shall come on to it later. However, the real starting point of the debate is the analysis carried out by HMRC on the estimates, which showed that more than half a billion pounds of Exchequer receipts would be at risk were IR35 to be abolished. The noble Baroness, Lady Noakes, said that she was sceptical about the figure, as undoubtedly was the noble and learned Lord, Lord Davidson of Glen Clova. I am not sure whether my noble friend Lord Palmer dismisses the figure altogether, because he is not normally a man who likes to throw away 550 million quid. The assessment made by HMRC is robust—to use the word of the noble and learned Lord, Lord Davidson—but inevitably there are challenges around estimating the deterrent effects of anything. While we can quibble over whether it should be £550 million or slightly more or slightly less, the bald point is that I do not think anyone who looks at this would doubt the broad conclusion that hundreds of millions of pounds of revenue depends on keeping IR35 in place, and that is why we are going to do so. All our past experience has shown a number of UK incorporations to be very sensitive to available tax incentives. Therefore, we believe that there continues to be a compelling need for this legislation.
In 2011, the Office of Tax Simplification recommended that HMRC improve the administration of IR35. Since then, HMRC has been working with stakeholders, including the IR35 forum, to help people understand the legislation, to reduce the burden on compliant businesses and to address many of the concerns that were subsequently raised by the committee. The committee concluded that the guidance issued on how the system works was “far from satisfactory”. A comprehensive review of the guidance has been undertaken and new guidance was published one week ago following widespread consultation. We are confident that it will be an improvement.
One area in which HMRC has been making substantial changes is how it conducts IR35 inquiries. Many noble Lords touched on this area. I think there has been a certain amount of confusion about the numbers. When it was first introduced, the number of IR35 reviews was extremely high: more than 1,000 in 2002. It then fell dramatically so that in the final year of the previous Government there were 12. That number has now increased to 256, which shows a considerable increase in effort and commitment to ensure that this is not a voluntary area of activity. As we pointed out in our response to the committee, three new compliance teams were created in April 2012, and a fourth team has been put in place over the past year to further enhance HMRC’s ability to respond to IR35 risk.
Is this enough? How do you decide on the very many competing claims for the use of HMRC compliance staff? The answer is that HMRC has to do a risk assessment across the whole range of its activities, which attempts to work out how best to deploy the resources at its disposal. In this area HMRC has looked afresh at the way in which it assesses risk to enable it better to target those who deliberately flout the rules. The number of people involved and the number of cases that have been taken reflect the fact that it has decided to give a greater priority to this issue.
However, HMRC recognises that there is more to be done. In partnership with the forum, it is currently reviewing how it administers IR35 in the round, including the compliance strategy. HMRC and the forum will publish a joint report, with recommendations, in the autumn. A number of noble Lords referred to the forum. Its role has developed since its inception so that its external members now feel that they are driving forward its agenda. It is looking at the contract review service, about which there have been a number of complaints, and the business entity tests, which are being reviewed and changed, very much with the full participation of the forum.
As noble Lords have said, when it was introduced IR35 legislation was looking at people on relatively high salaries and in the professions. Clearly, there has been a big change over the past 15 years in that a very large number of low-paid workers have been brought within the net of personal service companies. Some of these low-paid workers are being forced or enticed into structures, including personal service companies or umbrella companies, and they are clearly in many cases unaware of the full implications of those arrangements.
In this year’s Finance Bill, we tackled a particular model that was being used to engage workers as self-employed when in reality they should have been employees. I hope that demonstrates that we take this area extremely seriously. As part of our concern about how low-paid workers are treated, we are also committed to increasing compliance with the national minimum wage. HMRC actively targets employers who flout their responsibilities and investigates complaints against them. Just last month, a number of those who failed to pay the national minimum wage were named by HMRC for their failure to comply. We have quadrupled the maximum penalty payable by employers who break the law in respect of the minimum wage to £20,000 and we will be legislating in this Session to increase the maximum penalty per underpaid worker to £20,000. So we are doing quite a lot in that area.
However, we recognise that there are a number of problems in ensuring that low-paid workers are aware of what is happening to them and of their rights. At one level, this is a question of joined-up government. Obviously, HMRC is not the only arm of government dealing with people in this situation. HMRC is working with the Gangmasters Licensing Authority, the Home Office and BIS to address the issue of low-paid workers’ rights, in particular in relation to their employment status, how they are engaged and how they are paid. HMRC has a pay and work rights helpline, which provides individuals with a confidential route to discuss these issues. We have updated the guidance on employment status and HMRC’s employment status indicator tool, both of which are accessible online, along with two explanatory factsheets. HMRC is now working more closely with BIS on how to improve the dissemination of the relevant guidance.
I was very taken by the comments of my noble friend Lady Bakewell about people who are really at the bottom end of the income and opportunity ladder, who are often illiterate. Clearly, how one reaches people in that situation is extremely complex and difficult—they are certainly not going to use the employment status indicator tool, whatever they do. We recognise the need to put further effort into dealing with that issue.
A number of noble Lords expressed concern that the Government were not taking enough action in respect of the public sector and off-payroll workers. I think that is rather unfair. The Chief Secretary made it clear to all departments that they needed to limit the length of time any off-payroll worker was employed to six months or less. There has been a review of how this has operated, which has led to action being taken against two departments, the Department for Transport and Defra, which failed to bring senior executives on to the payroll. Defra was fined £102,000 and the Department for Transport £398,000. Real action is being taken and I suspect that the Permanent Secretaries of those departments, as accounting officers, do not like the fact that they are being fined by the Treasury for not doing what they are supposed to be doing, and that this will prove to be a good corrective.
Questions were asked about local government and the devolved Administrations. With regard to local government, the Secretary of State for Communities and Local Government wrote to the LGA to highlight the issue and has published guidance on it while the Chief Secretary to the Treasury has written to the devolved Administrations in similar terms, so we are taking serious action to ensure that the public sector acts to stop some of the abuses at the top end. With regard to what happens further down the scale, should the public sector have a very strong presumption against using personal service companies for people who earn less than the current reviewable amount of £220 a day?
Lord Higgins
Where is the money to pay the fine coming from? Is this simply a transfer from one part of the Government to another? Is it an appropriate sanction? Should someone not be fired?
Lord Newby
Well, it is a transfer of money from one part of the Government to another, but this is hardly surprising since it is one part of the Government that has transgressed a rule set by another part of the Government. As for firing senior civil servants for not having kept this properly under review, I am rather tempted by the suggestion—but if it were a principle, we would rapidly find that there was a depletion of civil servants, not specifically in this area but from a whole raft of other areas where there may have been the odd transgression that was not stamped down on quickly enough.
The noble Lord, Lord Davidson, asked an extremely interesting question about the Scottish situation and the relationship between the UK and Scotland, and asked whether there had been discussions with the Scottish Administration on this issue. I am not absolutely sure but I am almost sure; I suspect that there have not been.
This debate has confirmed that personal service companies play a vital role in the UK economy. However, there are those who seek to exploit such arrangements to gain a tax advantage. Because of this, in our view there is still a clear need for IR35. However, there is still more to be done in improving its administration, and HMRC, in partnership with the IR35 Forum, is working very hard on this. We welcome the committee’s recommendations, which will help with this very important work.
Lord Palmer of Childs Hill
Before the Minister sits down, I wish to take up the point about the £500 million saving, which the Minister said I had little regard for. My regard is that it is mythical—there is no proof of it. If HMRC has proof of this, will it bring it forward? The problem with a deterrent is that it is hard to tell what you have deterred and how much you have gained. If there are people who should have been in IR35 and were then brought into it, specific details would be available of the money that had been recovered. I say to my noble friend the Minister that I have no confidence in the figure of £500 million; if I had, I would not have raised the matter.
Lord Newby
My Lords, I think the point is: what would happen if the restraint were lifted? Would individuals pay more or less tax? HMRC has looked at the behaviour of individuals in a whole raft of other areas where it has a lot of experience, and has drawn what it believes to be reasonable conclusions—which I have looked at and which seem reasonable to me. By definition, though, you cannot absolutely pinpoint how much evasion of tax you have deterred; that is impossible to do with any degree of certainty.