Westminster Hall

Thursday 4th April 2019 Westminster Hall

Thursday 4 April 2019

[Mike Gapes in the Chair]

Sub-Committee on Disinformation

Thursday 4th April 2019 Westminster Hall

Digital, Culture, Media and Sport Committee

Select Committee statement

16:19

[Mike Gapes (in the Chair)]

We begin with a Select Committee statement. Damian Collins will speak on the publication of the 10th report of the Digital, Culture, Media and Sport Committee, on the launch of the Sub-Committee on Disinformation for up to 10 minutes, during which no interventions may be taken. At the conclusion of the statement, I will call hon. Members to put questions on the subject of the statement and call Damian Collins to respond to them in turn. Hon. Members can expect to be called only once. Questions should be brief. I call the Chair of the Digital, Culture, Media and Sport Committee, Damian Collins.

[Damian Collins (Folkestone and Hythe) (Con)]

It is a pleasure to serve under your chairmanship, Mr Gapes. Earlier this week, the Select Committee published its 10th report on the creation of the Sub-Committee on Disinformation, which followed our reports on disinformation and fake news—the final report was published in February this year, with the interim report published in July last year. Our reports on that important subject were based on an inquiry that spanned about 18 months and that took in thousands of questions and many witnesses.

The focus on disinformation and fake news comes from our belief that there is a genuine danger to democracy and society in the deliberate and malicious targeting of disinformation at citizens, largely using social media to influence what they see and their opinions about politics, society and institutions. In the discussion about disinformation, much of the focus has been on it being used in election campaigns or around political events, but it is by no means limited to that. Disinformation is becoming a serious issue in the health sphere, in particular, with anti-vaccine information and stories being disseminated through social media.

The problem of disinformation is not limited to the period of our inquiry. When we established our initial inquiry, we were particularly concerned about the role of disinformation in the United States presidential election and other elections around the world, and about the role of foreign states and, in particular, agencies such as the Internet Research Agency in St Petersburg that deliberately create campaigns and mechanisms to spread disinformation through social media and target people relentlessly.

That has become a bigger societal problem as people increasingly get their news and information through social media. In this country, about half the population receives news principally through social media. That means that, rather than going to a curated news space, such as a newspaper, a broadcaster’s piece of news or a news organisation’s website, they are receiving news and information that has been shared by their friends on social media in bitesize chunks, or they are being targeted with information by advertisers and other organisations that promote content.

We know that, during the US presidential election, the number of shares of the top 20 fake news stories was greater than that of the top 20 real news stories. The issue is fundamental to the way people receive news and information because, on the channel where they increasingly receive it, they often do not know why they are receiving it or much about the organisation that is sending it. Disinformation is often dressed up to look like real news, but it could be hyper-partisan content from people with a high degree of bias or, more seriously, content that is totally fabricated. That has been an issue for some time, but it is of growing importance because of the scale and reach of social media.

When we look at the potential application of technology, the problem is only set to get worse, given the phenomenon of deep fake content. That is when someone takes a recording of your voice—I am sure they would not do it in your case, Mr Gapes—and creates a fake video image of you, then writes their own words and has them played out through your mouth in the film. We are all familiar with those grainy films that emerge during political campaigns whose production quality is not great because they are often shot on someone’s smartphone. Imagine the capability to do that easily in a totally fake way and to release a film of a politician supposedly saying something malicious or misleading during the final days of an election campaign. That capability exists, and we need the tools in place to fight back against it.

Since we published the Committee’s report in February, we have seen other events that lead us to believe that this is an ongoing and growing problem. We were all shocked and appalled at the way in which harmful footage from the terrorist attack in Christchurch, New Zealand, was livestreamed on Facebook and shared continuously on social media platforms around the world, and particularly YouTube, for a number of days afterwards.

We are also concerned about the role of organisations that spread news and information about political events in this country—this is particularly linked to Brexit—but that we do not know much about. The Committee’s inquiry identified an organisation called Mainstream Network, which was contacting people through social media with adverts and asking them to lobby their MP to vote in favour of a hard Brexit and to “Chuck Chequers”—to use the expression at the time—and not support the Prime Minister’s negotiating strategy.

People have a right to a political opinion, and there is nothing wrong with that, but when they are being targeting by an organisation and they do know who is doing that, who is providing the money or who is supporting that organisation, that becomes a problem. In our campaigns as politicians, we have to put legal imprints on our leaflets, posters and flyers to make it clear who they are from, but people do not have to do that online, and those loopholes are being exploited. We have also seen campaigns and organisations other than just Mainstream Network, such as We are the 52% and Britain’s Future, where large amounts of money are being spent to target people with messaging, but we do not know who is doing that. That is going on all the time and on a growing scale.

The purpose of the Sub-Committee is to provide an institutional home for the Select Committee to build on the work of its initial inquiry, to look at new incidents of disinformation campaigns, where they lack transparency and where they are deliberately misleading, and to recognise that this is a form of harmful content that needs to be addressed. We look forward to the publication of the Government’s White Paper on online harms, which I believe will happen early next week, so that we can see what ideas they propose and understand more about their response to the Select Committee report, which covered many of those issues. The Sub-Committee will look at the issues arising from the White Paper and at the areas where the Government are looking for a response and consultation.

[Julian Knight (Solihull) (Con)]

rose—

[Mike Gapes (in the Chair)]

Order. Interventions are not allowed.

[Damian Collins]

The Sub-Committee will be the forum through which we look for areas where the Committee can analyse and respond to the White Paper. It will also be the forum through which we seek to hold regular sessions with important organisations and people who are investigating similar issues, and particularly the Information Commissioner.

The first meeting of the new Sub-Committee will be on Tuesday 23 April when we return from the short Easter recess. We will then question the Information Commissioner, principally about her investigation into the work of Mainstream Network and connected organisations, to understand more about who is funding that organisation and who is behind the dissemination of the content that it is sharing. That will be an important first step in the Sub-Committee’s work.

I appreciate that hon. Members have questions that they want to ask me—one of my Committee colleagues wished to jump the gun—so I will not use up every second of my 10 minutes. The Sub-Committee is a new step for the Digital, Culture, Media and Sport Committee, which has never created a Sub-Committee before. We have done so because we recognise the concerns about the spread of disinformation and the pivotal role that social media play in that.

Disinformation is a growing issue for democracy and society, and we need to provide robust public policy responses to tackle it at source, as well as through the channels through which it is shared. We also need to look principally at the responsibilities of big technology companies to act more effectively against the dissemination of disinformation, to provide more tools for their users to help them identify untrustworthy sources of information, and to provide greater transparency about who is promoting that content.

[Julian Knight]

I was not certain whether I was allowed to intervene, but I will ask my question now. I welcome the advent of the Sub-Committee. In terms of the scale, this is not just about Russia or potential foreign actors intervening in our Brexit-related political crisis from a UK base or from overseas; it goes on worldwide. It is not just one foreign actor, but perhaps up to 39 foreign actors. Does my hon. Friend, the Committee Chair, agree that we need the Sub-Committee to be long standing and its scope to be as wide as possible in looking at all those other countries and what they are up to in terms of British politics?

[Damian Collins]

My hon. Friend makes a very good point. This is a worldwide problem. As he knows, we took evidence during our inquiry about problems to do with disinformation in South America and across Europe—this is not just about Russian campaigns of disinformation. The reason why we decided to create this institutional home for our work on disinformation is that such work runs beyond the scope of any one particular inquiry; indeed, looking to develop successor inquiries with a narrow, defined remit could restrict us from looking at other material from elsewhere around the world.

We look forward to the Government’s White Paper and their response to the Select Committee report, because this country could provide a world-leading framework for understanding the liabilities and obligations of technology companies in terms of acting against known sources of disinformation, and I would include disinformation as a form of harmful content, along with other forms of extreme harmful content.

My hon. Friend is quite right that this is a global problem, and I hope our work in exposing what is going on can benefit other inquiries. As he knows, one reason why we established the international grand committee as part of our disinformation inquiry was to aid our partnership work with other Parliaments that are investigating these issues so that we could benefit from their insights and to share our own work.

[Ian C. Lucas (Wrexham) (Lab)]

Less than two weeks ago, in the current febrile political environment, I was sent information from a closed Facebook group making the entirely false allegation that I had paid for two coaches to go to the march in London. I was made aware of that only because an individual contacted me and gave me the information. Does the hon. Gentleman agree that it is really important that closed groups on platforms are investigated and that this issue is dealt with urgently by Government? If so, what role does he see the Sub-Committee playing in that process?

[Damian Collins]

The hon. Gentleman, who is a member of the Select Committee, makes an important point. He will know that we discussed the role of groups with Facebook during our investigation. We believe they play a significant role in spreading disinformation; it is not just through targeted advertising that someone can drive content through a platform such as that. Indeed, as he knows, the Committee’s final report on disinformation touched on how far-right organisations are using closed Facebook groups with hundreds of thousands of members to spread content very quickly through the web. Content posted into the group by a group administrator goes immediately to the top of the news feed of members, who may in turn share it.

These closed groups may be closed to the public, but Facebook can tell what is going on in them, and it should act where closed groups are behaving irresponsibly or maliciously in spreading lies and disinformation about people. It can see who the administrators are and who is doing that.

As a consequence of the attacks in Christchurch in particular—having an independent regulator with the power to go into the tech companies to see what is going on would facilitate this—we should do an audit of the sorts of groups and organisations that were sharing and promoting the vile content involved. That could provide a really important map of the way in which these far-right groups, in particular, co-ordinate online and spread disinformation.

The hon. Gentleman is quite right that this is not just about global news stories such as the Christchurch attacks; disinformation is also taking place in individual communities. We should be able to report such things to Facebook and know that it will investigate and take action against groups, including by closing them or the administrator down if necessary.

[Dr Lisa Cameron (East Kilbride, Strathaven and Lesmahagow) (SNP)]

I thank the hon. Gentleman and all members of the Committee for a very important report. I know that the Minister is working extremely hard on these issues.

My question is about making it easier or more streamlined for the police to investigate closed Facebook pages. At this point in time, it seems to be very difficult for the police to access information even when they have suspicions about it. The fact that individuals can post anonymously without giving their own details seems to exacerbate the situation whereby they feel they can post whatever they like without any responsibility.

[Damian Collins]

The hon. Lady raises a number of very important issues. Co-operation with the authorities is important. We have seen too many cases where different social media companies have been criticised for not readily sharing information with the police as part of an investigation. Often the companies have very narrow terms of reference for when they would do that; sometimes if there is an immediate threat to life or if information might be related to a potential terror attack, they will act. However, we see hideous crimes that affect families in a grievous way and those families want the crimes to be investigated efficiently and speedily, and for the police to get access to any relevant information. I think we would have to say that the current system is not working effectively enough and that more should be done.

There should be more of an obligation on the companies to share proactively with the authorities information that they have observed. They might not have been asked for it yet, but it could be important or relevant to a police investigation. Part of, if you like, the duty of care of the tech companies should be to alert the relevant authorities to a problem when they see it and not wait to be asked as part of a formal investigation. Again, that sort of proactive intervention would be necessary.

I also share a general concern, in that I believe tech companies could do more to observe behaviour on their platforms that could lead to harm. That includes self-harm resulting from a vulnerable person accessing content that might lead them towards a pattern of self-harm. Indeed, one of the particular concerns that emerged from the Molly Russell case was the content she was engaging with on Instagram.

The companies should take a more proactive responsibility to identify people who share content that may lead to the radicalisation of individuals or encourage them to commit harmful acts against other citizens. I think the companies have the power to identify that sort of behaviour online, and there should be more of an obligation on them to share their knowledge of that content when they see it.

[Mr Khalid Mahmood (Birmingham, Perry Barr) (Lab)]

It is always a pleasure to serve under your stewardship, Mr Gapes.

The Committee has produced an absolutely superb report—such detail—and it is to be welcomed. It raises serious issues in relation to the power of the platform providers, and their lack of usage of the powers they have to identify people and to do something with that information. That is very important. The Government should consider how to tackle the people who put this material on these platforms. We should get the providers to work through these issues with the Government and stop the false information that is being put up.

This issue affects huge numbers of people because, as the Chair of the Select Committee said, a lot of people take such information as gospel, as most of their media input is from social media, so it has a huge effect. I urge the Government to look at this issue seriously and to consider how we can push the social media platform providers to have a better response and remove false media reports that are put online.

[Damian Collins]

The hon. Gentleman is absolutely right. One of the issues at the heart of this—it comes up again and again throughout our report—is the obligations of the tech companies. A social media platform is not necessarily the publisher of content; it has been posted there by a user of the platform. However, the social media company can observe everything that is going on and it curates the content as well.

When someone goes on social media, if they just saw what their friends had posted most recently, that would be one thing, but because social media algorithms direct users towards particular content, we are concerned not only that harmful content can exist, but that when individuals start to engage with it, they are directed to even more of it. I think that we should not only consider the responsibilities of the tech companies to remove harmful content when it is posted, but question the ethics of algorithms and systems that can direct people towards harmful content.

[Angela Crawley (Lanark and Hamilton East) (SNP)]

I congratulate the hon. Member for Folkestone and Hythe (Damian Collins) on an excellent, wide-ranging and groundbreaking report, and I congratulate all the members and staff of the Digital, Culture, Media and Sport Committee on it. My hon. Friend the Member for Argyll and Bute (Brendan O’Hara), who demonstrates great knowledge of and enthusiasm for this inquiry, asked me to make a few points.

The inquiry started an ongoing worldwide conversation about the threats posed by shadowy, unaccountable and anti-democratic forces. As I understand it, in February the Digital, Culture, Media and Sport Committee hosted its first ever international grand committee, which included representatives of countries such as Canada, Ireland, Argentina, Belgium, Brazil, Singapore, France and Latvia. The Committee has also formed a new Sub-Committee as part of that international grand committee.

I recognise that it must have been difficult in a fast-moving environment to produce the formal report of an 18-month inquiry in such a timely fashion. I congratulate the Committee on establishing the Sub-Committee. Although the hon. Gentleman may already have answered this question, can he say exactly when the White Paper, which has been delayed repeatedly, will be published? Does he have any information on that White Paper that he could outline today?

[Damian Collins]

I have some information on that, but given that the Minister is here, I will leave it to her to respond. The official word is “imminently”, which I think means “very imminently”. We look forward to the White Paper; it is an important piece of work that I hope will lay the foundations for turning the work of our inquiry, and other work that the Government have done, into real policy. We could establish in this country a world-leading framework for dealing with these issues.

[The Minister for Digital and the Creative Industries (Margot James)]

Life in Parliament is full of surprises at the moment. I must confess that I had a complete misunderstanding about today’s hearing; I thought it was in the main Chamber. When I alighted on the Order Paper on my return from a meeting outside the House and saw that this hearing was absent from it, I thought that it must have been moved—along with so many other things in Parliament at the moment. That explains why I have no official documentation whatsoever.

However, as my hon. Friend the Member for Folkestone and Hythe (Damian Collins) knows, this is my top priority across what is a very broad brief. I will therefore respond based on my own understanding, the excellent remarks that have been made by hon. Members, and of course the report of my hon. Friend’s Select Committee, which I read from cover to cover. I commend his work as Chairman, and all hon. Members who serve on that Committee, which exemplifies the power and potential that a Select Committee can bring to policy making. I am delighted to hear of the new development that my hon. Friend has announced: the Sub-Committee that he has set up specifically to tackle disinformation sounds like an excellent initiative.

I was delighted to hear that at the first meeting of that Sub-Committee, Members will be able to question and hear from the Information Commissioner, whose office is the leading data protection agency across Europe. That is partly because of the reputation of Elizabeth Denham, the commissioner; partly because of the huge additional resources that we have given the Information Commissioner’s Office; and partly because the office is leading on an investigation into the misuse of data, primarily by Facebook but by other platforms as well.

[Mike Gapes (in the Chair)]

Order. Can I direct the Minister to ask some questions?

[Margot James]

Yes, please do. I need some direction.

[Mike Gapes (in the Chair)]

This is not the normal procedure.

[Margot James]

I see. I am so sorry. You have been very forbearing with me as I completely misinterpreted my role.

[Mike Gapes (in the Chair)]

Up until now, yes.

[Margot James]

I thought I was making closing remarks. Should I be asking questions?

[Mike Gapes (in the Chair)]

Yes, please.

[Margot James]

I will convert some of the comments I was going to make into questions, then.

My hon. Friend the Member for Folkestone and Hythe indicated that he might want to know when the White Paper is coming out. We intend to publish it early next week—Monday, in fact. That White Paper is very broad, and I think it is an excellent piece of work. It has been informed by the work of my hon. Friend’s Committee, as well as by many other Members and external bodies, and also by the hard work of our officials in the Department for Digital, Culture, Media and Sport.

The White Paper will raise a number of questions, and I will take the opportunity to ask my hon. Friend about closed groups, encrypted content, and anonymity. From my knowledge of the White Paper, I think those are the three biggest challenges when it comes to delivering on the objectives that my hon. Friend has set out for internet companies. There are various experts working in those areas of encryption and private groups, and I would welcome my hon. Friend’s comments.

[Mike Gapes (in the Chair)]

Order.

[Margot James]

Is that all right, Mr Gapes?

[Mike Gapes (in the Chair)]

That is fine, but we have limited time, because we have another statement and then a normal debate after that. Thank you very much. Damian Collins, did you wish to respond?

[Damian Collins]

I will respond briefly. To add to the Minister’s comments, we have all benefited enormously from the work of Elizabeth Denham and the ICO. It has demonstrated that it is one of the world-leading organisations in its field, and the fact that it has invested so much of its time into this area has helped enormously. This was an extremely long inquiry, and I place on record my thanks to all the Committee Clerks, particularly Chloe Challender the Committee Clerk and Josephine Willows the Committee specialist. They worked tirelessly, well above and beyond the call of duty, to support the Committee in its investigations.

The Minister has touched on some important issues. We discussed closed groups earlier, which are an important mechanism for allowing content to be shared virally and at great speed, particularly on Facebook. That sharing can be done not just through advertising, but through those closed groups. We know that social media platforms can observe what is going on in closed groups, and part of their responsibility should be to monitor that activity, particularly if those groups are being used to spread harmful content.

Encrypted media is also an important issue, and I have some concerns about the vision that Mark Zuckerberg has set out for Facebook, effectively bringing Facebook, Instagram and WhatsApp together. If that means all content being shared through encrypted channels, it would give the platforms an excuse to say that, because they cannot see what is being shared, they have no responsibility for it. I do not think that is acceptable, especially when those platforms will be using data gathered about their users to help facilitate contact via encrypted channels, and will still have a good understanding of what is going on. That is why the idea of a regulatory system is such an important step forward. As we have seen from the way Ofcom works with broadcasters, we need a regulator that has statutory powers—the power to go in and investigate, with the backing of Parliament—and the flexibility to look at new challenges as they arise and establish new standards for what is a responsible, ethical and acceptable way of working.

Elsewhere in the world, encrypted channels are increasingly becoming the principal mechanism for sharing information in election campaigns, particularly WhatsApp in India and Brazil. In any country that has a smartphone-connected electorate—as so many countries now do —sharing of political information through encrypted media will be an increasingly big problem. In our report, we tried to address many of the issues that exist today, and there are things that we can get on and deal with now. However, we may look back in five years’ time and say that, even having done all those things, the challenge of responding to disinformation being spread through encrypted media is one we still have to crack. We cannot leave that challenge to the tech companies on their own; we cannot leave it to them to solve that problem for us. We need to establish a clear legal framework, whereby it is clear what duty of care and responsibility tech companies have to ensure that their technology is not abused by people who seek to do others harm.

China and the Rules-based International System

Thursday 4th April 2019 Westminster Hall

FOREIGN AFFAIRS COMMITTEE

Thursday 4th April 2019 Westminster Hall

Select Committee statement

[Mike Gapes (in the Chair)]

We move on to the 16th report of the Select Committee on Foreign Affairs, on the topic of China and the rules-based international system. Tom Tugendhat, the Chair of the Committee, will speak for up to 10 minutes, during which time no interventions may be taken. At the conclusion of his statement, I will call Members to put questions on the subject of the statement and call Tom Tugendhat to respond to them in turn. Members can expect to be called only once, and questions should be brief.

13:57

[Tom Tugendhat (Tonbridge and Malling) (Con)]

It is a particular pleasure to serve under your chairmanship today, Mr Gapes. Your contribution to the Foreign Affairs Committee over the past 20 years has been truly exemplary, and indeed, your contribution to this report is one of the reasons why it was such a success. I am very glad that you are chairing this hearing.

Today, the Foreign Affairs Committee published its report on China and the rules-based international system. We worked on this inquiry for more than a year, including a trip to China to understand how the UK was seen from a Chinese perspective. As ever, we are very grateful to many people who submitted evidence to us, and especially to those who gave oral evidence, including the former Prime Minister of Australia, Kevin Rudd.

China is seeking a role in the world commensurate with its growing economic power, and the UK should welcome its desire to take part in global governance. We do not believe that China wants to jeopardise the benefits that it has reaped from a stable, rules-based international system. However, it has consolidated power in the hands of the Communist party under President Xi, and the UK’s China strategy needs to reflect that. On many issues, China is a viable partner for the United Kingdom. The threat that environmental degradation, for example, poses to the Communist party’s legitimacy has led China to join international efforts on climate change and sustainability.

However, on other issues that China perceives as challenging its domestic control, such as global initiatives on human rights and free societies, it has opposed international approaches. It is appropriate that this statement follows one from the Select Committee on Digital, Culture, Media and Sport, given how many of the concerns we considered overlap with that Committee’s work.

Indeed, in the area of human rights, the evidence suggests that China does not intend to reform the rules-based international system. Rather, it intends to subvert it by promoting an alternative version of human rights that stresses economic development at the cost of the universality of individual civil and political freedoms. In our report, we urge the Foreign and Commonwealth Office to increase its efforts to hold China to account for its human rights violations by using UN mechanisms, public statements and private diplomacy.

During the inquiry, we also heard troubling allegations of Chinese attempts to interfere in the UK’s domestic affairs. The openness of the UK’s political system and society is a fundamental source of our strength. However, in the face of an autocratic state seeking to increase its influence abroad, that openness can also be a source of vulnerability. The UK needs to decide how to draw the line between legitimate attempts to exercise influence and illegitimate attempts at interference. It is a topic that we on the Foreign Affairs Committee will be looking at further in our new inquiry into autocracies and UK foreign policy.

The Committee also noted its concern about the Chinese Government’s approach to Hong Kong. The Sino-British joint declaration on Hong Kong is a legally binding international treaty registered at the UN. It is of great importance to UK national interests and the health of the rules-based international system. China’s adherence to the letter and spirit of the declaration is a key test of the sincerity of its commitment to global governance. We were therefore deeply concerned by evidence that Hong Kong’s autonomy is at risk, especially in the area of the rule of law. We are concerned that the Chinese Government are moving away from an approach of “one country, two systems” towards “one country, one system”. We therefore urge the UK Government to continue to raise concerns about Hong Kong publicly and privately with the Hong Kong authorities.

We support the Government’s efforts to increase the UK’s presence in the Indo-Pacific—including its military presence—in line with its capacity and other defence commitments. The region is vital for global trade and home to a number of UK partners and allies. Communication about those efforts is crucial. Poorly communicated military deployments in the Indo-Pacific could be perceived or depicted by China as a crude attempt to contain the expansion of its influence.

The UK should focus instead on core principles, including freedom of navigation, the rights of states—including China’s neighbours—to form and maintain alliances of their choosing, and the importance of a balanced and consensual regional security order. We urge the Government to ensure that initiatives to expand the UK’s military presence in the Indo-Pacific are explained with reference to those principles.

China’s belt and road initiative—perhaps the most famous and well-known aspect of its foreign policy—is likely to have geopolitical effects that are as important as, and potentially more important than its economic impact. That Chinese-led investment in foreign countries, and in developing countries in particular, need not conflict with British interests. Asia’s infrastructure gap is real, and exporting the fruits of China’s spectacular growth could be a way to close that gap while addressing China’s own economic needs. The UK should help China with that. It can gain economic benefits from doing so, including by focusing on areas in which the UK has particular value to offer, such as legal and financial services.

However, in its current form, the belt and road initiative raises concerns in relation to UK interests. There is a risk that Chinese investment could encourage countries to strike deals that undermine international standards or that leave countries with unsustainable debt that undermines their political stability. The Government should take a strictly case-by-case approach to assessing belt and road projects and refrain from expressing a view on the initiative as a whole.

For the UK to come up with a comprehensive strategy to guide its relationship with China, it will need to answer some key questions. What are the drivers of Chinese foreign policy? What are the major goals of UK policy towards China? What is the bottom line of UK interests, values and national security considerations on which we are not prepared to compromise?

The UK’s approach to China reflects an unwillingness to face the reality of China’s strategic direction. Building a deeper partnership with China is still desirable, but we must recognise that there are hard limits to what co-operation can achieve and that the values and interests of the Chinese Communist party, and therefore the Chinese state, are often very different from those of the United Kingdom. In the report, we call for the Government to produce a single public document that defines its China strategy, crafted through a cross-Government process directed by the Foreign and Commonwealth Office. That chimes with findings emerging from all the substantial inquiries we have undertaken.

The FCO has a diminished grip on our Government’s international strategy. It needs to reassert itself as the focal point for that strategy and regain some of its self-confidence and authority. Without a comprehensive approach, the UK risks prioritising economic considerations over its other interests, its values and national security. A constructive, positive UK relationship with China is possible and desirable, but it will require strategy, rigour and unity in place of hope and muddling through.

[Chris Bryant (Rhondda) (Lab)]

I, too, think it is a delight that you are in the Chair, Mr Gapes, although in a way it would be better if you were sitting down here, because I think your contribution would be useful. I commend the Committee on which I sit on our wonderful report. I think the Chairman has outlined the issues very well. How concerned is he that the British Government are a bit mealy mouthed sometimes when it comes to issues such as the Uighurs? More than 1 million people are in probably the largest concentration camp in the world, effectively being reschooled or re-educated—whatever we want to call it. Also, how worried is he by Italy’s recent deal with China? With that, we are beginning to see all the possible dangers of the belt and road initiative that he pointed to coming into the European Union.

[Tom Tugendhat]

I thank the hon. Gentleman for his points. His contribution to the report was extremely important, as he knows. He raises two points that we looked at in various different ways. The Italian question came up at the end of the report process. On the question of the Uighurs, one of the things that came out strongly is that it is not simply a Chinese domestic issue. The repression of Muslim communities in western China will almost certainly have repercussions on other areas, including the UK and our allies in the region, as radicalism is likely to increase and further violence may follow from that.

As the hon. Gentleman will have heard, this is one of those moments when one must remember that one is looking at various forms of China. We are seeing the Chinese security state experimenting with its powers, particularly in Xinjiang. In some ways, one could say that modern China is an experiment. The challenge to which we do not know the answer is whether old men with tech can beat young people with ideas. So far, we do not know.

Italy’s deal with China is part of a long pattern that we have seen in Chinese foreign policy, which is to divide alliances and seek to break up groups. In this case, that is to split Italy from the rest of the European Union. It is interesting that when President Macron met President Xi only a few days after that deal was signed, he insisted on having Chancellor Merkel and President Tusk in the room at the same time to make the point that the European Union was still a united entity when dealing with Chinese trade. The hon. Gentleman is absolutely right that the Italian decision to go on its own poses some important questions, not only for the European Union but for the United Kingdom.

[Dr Lisa Cameron (East Kilbride, Strathaven and Lesmahagow) (SNP)]

I thank the hon. Gentleman for explaining his report in such detail. The report is excellent and thorough, and I commend all members of the Committee as well as its excellent Chair. Will he tell me how important he thinks soft power is in building our future relationships with China and ensuring that we foster them in the most positive ways, such as through cultural exchange, art and literature, which are important? I had an excellent visit to the Brunei gallery to see the exhibition of John Thomson, who was a devoted Scottish photographer. It was curated by Betty Yao. In the 1800s, he took the earliest pictures of China. I know that the ambassador has been very positive on the connections. Will he comment on taking forward soft power and culture, and that connection?

[Tom Tugendhat]

The hon. Lady makes some important points on soft power. We did not look specifically at the area of arts that she talks about, but we did speak to people about universities. The university sector is an extremely important element of the UK’s soft power, particularly in Scotland, which has universities with international reputations such as St Andrews, which is merely an example of the much larger university sector.

When we look at the university sector in terms of soft power, it is important that we look at both its influence and the challenge that dealing with autocratic states can pose. The hon. Lady is right that soft power is very important; it allows us to spread cultural values and to influence future generations of Chinese society. However, it also gives the Chinese state an opportunity to influence some aspects of the UK.

We took evidence from some universities and professors who commented on the nature of the intervention in UK civic life that the Chinese state has made, on occasion, in seeking to close down debate or discussion in UK universities by using Chinese students as an economic lever over our university sector. That is clearly important, and something we need to be cautious about. It is one of the reasons why many of us on the Committee are so supportive of the work of the BBC World Service in setting out a neutral and open information network for the world.

[Jim Shannon (Strangford) (DUP)]

I, too, thank the Chair of the Committee and all its members for this comprehensive report. As he and the Minister will know, I have a deep interest in human rights. Pages 28 and 29 of the report are clear about the persecution of ethnic minorities or religious groups. The hon. Member for Rhondda (Chris Bryant) mentioned the Uighur Muslims. House Christians, Buddhists and the Falun Gong also face persecution. The Chair of the Committee will be aware of the debate that we had in Westminster Hall a short time ago about live organ transplants or extraction on a commercial basis, with some 90,000 transplants per year in China.

I know that the Minister is very sympathetic to the issue—this is not a criticism, by any means—but I wonder whether the Committee gave any thought to how to address the human rights exploitation, which is clearly at a clinical, surgical level. Although the Chinese constitution says that there is freedom of expression, there clearly is not. How can we persuade the Chinese Government, through the Minister and our Government, of the changes that we feel they should put in place?

[Tom Tugendhat]

The hon. Gentleman’s record on defending human rights, and particularly the freedom of religion and belief, is second to none in this House, and I am grateful to him for those points. In the inquiry, we restricted ourselves to focusing on the UK, our relationship to China and how we should shape our position. We therefore did not look at the house Churches, the Christian persecutions or the Buddhist persecutions that he speaks of.

We looked at the Uighur element because of the repercussions on the UK of increased radicalisation in Muslim communities. We also recognised the closing down of freedom of expression in Hong Kong, and therefore the intervention in the rule of law, because we have a specific commitment, lodged with the United Nations in the Sino-British treaty, that we are obliged to maintain.

Furthermore, we also inherit some aspects of that rule of law, because we continue to send judges to the court of final appeal in Hong Kong. The undermining of the rule of law in Hong Kong could therefore affect the perception of UK justice here at home. We are focused on how we can influence the UK Government to change their actions in relation to protecting the UK’s interests. That is why we focused, as I said, on the Uighur and the Hong Kong elements in relation to human rights.

[Martin Docherty-Hughes (West Dunbartonshire) (SNP)]

I congratulate the Chair of the Committee, who my hon. Friend the Member for North East Fife (Stephen Gethins) holds in high regard. If the UK Government decide to uphold the UN ruling on the Chagos islands, in respecting the international rules-based system, they risk letting China in and upsetting the delicate balance of power in south Asia and the Indian ocean. If the UK Government do not respect the decision, they undermine the rules-based system, allowing China further to erode and undermine the balance of power in the South China sea with its base construction. Which is it to be?

[Tom Tugendhat]

I am impressed with the ingenuity of the hon. Gentleman in relating the Chagossians to a Foreign Affairs Committee report on China. There is a difference, which I will leave the Minister to explain, with the British Government’s position towards the Chagos islands and the British Indian Ocean Territory. I will not be drawn on that—forgive me.

I will say that the UN law of the sea, which guarantees freedom of navigation in all parts of the world, is an extremely important underpinning of world trade. It is extremely concerning that nations are restricted in transiting through international waters, because that can have severe repercussions on not just our own community and trade but those of very important allies such as India and Japan, which share our interest in free trade. We therefore need to be very supportive of democratic states in the area, whose economic lives will—I hope—be increasingly linked to our own.

[Mr Khalid Mahmood (Birmingham, Perry Barr) (Lab)]

I congratulate my hon. Friend, as I will call him, on this excellent report, which has been put together in such detail. I will ask a couple of questions, particularly on what he thinks the Government will do regarding the Indo-Pacific routes, and how we can push the Government to make some clear lines in relation to them.

My hon. Friend raised the belt and road project, which will have a huge effect on Europe and on what we do. China has to meet international standards, in relation to products, the way they are transported, the areas that they go through, and the people who are affected. It has to trade on the same level footing as we do. He also rightly raised issues surrounding democracy in Hong Kong. I press the Government to support that and to continue to move forward; we have a responsibility to do so.

Finally, soft power was mentioned—where we have a huge advantage. My hon. Friend rightly mentioned universities, which are very important, as is the World Service, but I urge him to look at the British Council, which does a phenomenal amount of work in this area. The British Council’s presence in China, looking at the issues, will lead to more young people and students coming to our universities. That is a great tool of soft power that we do not use as much as we should.

I thank my hon. Friend for the report, and urge him to look at those questions. The Minister is a very good fellow, and I am sure he will be supportive.

[Mike Gapes (in the Chair)]

There were a lot of questions there, but we do not have much time.

[Tom Tugendhat]

Mr Gapes, I will be as brief as you are in Committee. [Laughter.]

[Mike Gapes (in the Chair)]

No longer!

[Tom Tugendhat]

I will pick up on the points that have not been covered, particularly those relating to the British Council. My hon. Friend the Member for Birmingham, Perry Barr (Mr Mahmood) is right that we did not explore its work, but it is an extremely important element of Britain’s soft power.

The work of the Department for International Development in China is also interesting, because it has ceased, in many ways, to be a donor agency instead of a partner agency. That is an area in which our partnership with China is reaping rewards, not just for China but for the United Kingdom and many other countries in the region. Our assistance in professionalising Chinese aid and sharing best practice is helping in many areas. That is an expression of soft power that we often overlook. We often look at DFID’s soft power as a donor agency, but being a partner agency is an important element too.

[The Minister for Asia and the Pacific (Mark Field)]

Let us not beat about the bush: the rise of China is the big geopolitical issue of our age. It is fantastic that the Committee has put so much work into its report. I know that it makes a lot of recommendations; there may be some that we do not entirely agree with, but having appeared before the Committee, I hope that we can work closely together on its important work.

My hon. Friend the Member for Tonbridge and Malling (Tom Tugendhat) quite rightly pointed out the importance of the juxtaposition between the two reports debated in this Chamber today. I think it is wishful thinking to assume that there will be a global protocol for the internet. It may be slightly disingenuous for Facebook and others to suggest that they can work towards one, because there is no doubt that there are fundamental differences in values. Equally, this is a world in which we need to work both in bilateral relationships and internationally.

May I touch on the rather provocative question asked by the hon. Member for West Dunbartonshire (Martin Docherty-Hughes)? Of course our view is that the judgment of the International Court of Justice was advisory, rather than being a judgment that we are necessarily subject to, but there is a risk that in trying to address these issues we could be accused of being mealy mouthed. Fundamentally, I am not quite sure where we will come out. There is a great risk that if the injustice to the Chagos people continues for any great length of time, we will be accused of riding roughshod in the way that has been suggested. I am being very candid with the hon. Gentleman, but I think that it is right to do so.

[Mike Gapes (in the Chair)]

Order. May I gently suggest that we get back to China?

[Mark Field]

Well, there was an issue relating to China there—the fundamental issue of standing up for the rules-based international order. We will need to work closely on it with partners and recognise that China will not respect that order, although it respects order in its own right, and that it will want us to adapt and evolve those rules for a 21st century in which it will be an even bigger player.

I do not think I have any more questions, but more questions will arise from a full analysis of the Committee’s excellent report, to which we look forward to providing a full written response in due course.

[Tom Tugendhat]

The Minister’s response, both on the Chagos islands and on other areas, shows why he is highly respected in his brief and why he is such an important part of our diplomatic effort around the world. I am extremely grateful for his contribution. I am particularly grateful that he brought up the comparison between democracy and autocracy with respect to the question of privacy and openness. He is right, because democracies fundamentally require privacy to survive and autocracies fundamentally compel openness. That is a challenge that we are seeing around the world.

It remains for me to thank you, Mr Gapes, because your contribution was invaluable throughout; the hon. Member for Dudley North (Ian Austin), who was also a fantastic member of the Committee; and our Committee staff, who have been instrumental. Sadly, our specialist Matthew Harries was with us all too briefly and has now taken up a different opportunity elsewhere, but he was absolutely first rate; he could not have been better or more diligent in his preparation and his efforts. Our Clerk Hannah Bryce has been exemplary in keeping our rather disorderly Committee together on our trips—she is extremely impressive. I thank them both, along with our other Clerk, who I am glad to see in a new place, from my perspective—sitting next to you, Mr Gapes.

IR35 Tax Reforms

Thursday 4th April 2019 Westminster Hall

14:22

[Ged Killen (Rutherglen and Hamilton West) (Lab/Co-op)]

I beg to move,

That this House has considered IR35 tax reforms.

It is a pleasure to serve under your chairship, Mr Gapes. We are now a year out from the Government’s extension of the IR35 rules to the private sector, and we are halfway through the Treasury’s further technical consultation, which is due to conclude on 28 May. Although the IR35 reforms are a complicated issue, I hope that this debate will provide an opportunity for us to add something to the process, raise the concerns of constituents who will be affected by the changes, and flag up to the Minister our anxieties about the IR35 roll-out into the private sector.

The rules have been a long time in the making. It was in the late 1990s that concerns began to creep across Whitehall that private service companies were becoming a widely utilised tool to disguise worker status, allowing some workers to perform the role of an employee while they and the employer reaped the tax benefits of a business-to-business relationship. We all want to tackle non-compliance and tax avoidance and close any loophole that allows an employee to leave their employment on a Friday and return to the same role in the same office on the Monday as a contractor or consultant through a PSC, paying less tax. The question, however, is how it is being tackled and what impact it will have on legitimate small businesses and the clients who engage them.

The last Labour Government introduced provisions to allow the tax authorities to take a closer look at contractual relationships to identify where an intermediary, such as a PSC, may be being used to avoid tax contributions and associated workers’ rights. That legislation, known as IR35, was introduced in 2000 following the March 1999 Budget statement. It was a controversial measure at the time, and calls to scrap it came from different parties. However, although the initial implementation created problems that still bedevil the modern IR35 rules, the legislation took important steps to avoid a contraction of the tax base as self-employment increased across the UK labour market and to ensure that where individuals acted as employees, they were treated as such.

In many ways, the objectives of the original IR35 rules were significantly ahead of their time. The growth of self-employment in the UK economy has produced several structural problems, with employment status and the gig economy leading to situations in which employers can privatise the reward of lower-cost labour through tax avoidance, but socialise the risk that comes from cutting corners, with the costs borne inevitably by the public purse.

The Select Committee on Scottish Affairs, on which I sit, has looked closely at the impact that unclear worker status can have on the wider economy. Our inquiry considered the findings of the Taylor review and supported its conclusion that there is an “overwhelming case” to tackle the lack of clarity around employment status. We also supported its recommendation that the Government should produce

“a clearer outline of the tests for employment status, setting out the key principles in primary legislation”.

Perhaps at the moment the Government lack the necessary bandwidth and political capital to follow through fully on the review’s recommendations, but that is ultimately where we must end up.

One of the major issues with the IR35 changes is the great difficulty in assessing whether an individual should be caught by the rules. Her Majesty’s Revenue and Customs’ guidance and tools are far from 100% effective, and there is a lot of complex case law. I would therefore be grateful if the Minister said what progress the Government have made on the issue and on the Taylor review’s recommendations.

It is impossible to look at the myriad changes that the labour market is likely to go through in the coming decades and not conclude that legal clarifications will need a serious rethink, particularly to secure the integrity of the tax base that will be all too important in an ageing society. In many ways, the IR35 rules are a stopgap in the journey towards a statute book that supports 21st-century employment practices and the realities of modern workers’ lives. I have no doubt that the objective of the reforms is correct, but their implementation threatens to scupper any associated benefits.

The roll-out of the IR35 rules in the public sector has raised several concerns that need to be ironed out. Independent research has highlighted problems in implementing the reforms, including initial unfamiliarity with the legislation and guidance, which has resulted in compliance problems. Many public authorities were found to be overly cautious or to have judged more contractors to fall within the rules than they should have.

The incentive, of course, is on the fee payer to take a cautious approach rather than leave themselves potentially vulnerable to future tax liabilities. If there are agencies in the contractual chain, it is the agency immediately above the PSC in the chain that becomes the fee payer and is therefore responsible for the liability of an incorrect status decision, so an agency is unlikely to dispute a decision that brings the contractor within IR35 even when it should not be. I know that the Government are exploring options for the consequences for businesses that fail to use reasonable care in making a decision. Will the Minister update us on progress in that area?

Concerns have also been raised about the reforms’ impact on the ability of public authorities to recruit contractors in sufficient numbers and with the required range of skills, as a result of which the rates for off-payroll workers have increased in some areas. Some contractors have been put off working in the public sector at all.

Many of those problems in the public sector have been solved, or at least mitigated, but the private sector presents a very different problem, with significantly greater variation, potentially weaker channels of communication and less room for manoeuvre when things go wrong. That has led a number of membership organisations, including the CBI, to call on the Government to extend the trial period in the public sector and offer extra resources to support the initial roll-out when the private sector is eventually included. The CBI was so concerned that it even went as far as to ask the Government to eliminate the prospect of an early roll-out in 2019.

We are in a state of great uncertainty about our future relationship with the European Union and its likely impact on businesses, the economy and private sector recruitment. I wonder whether the Government will consider delaying the roll-out beyond 2020 if it is deemed necessary. I have received representations from constituents who operate as contractors and have enormous reservations about the extension of these rules, and I am sure other hon. Members have received such representations.

One constituent who came to my surgery set out his concerns about the complexity of the system. He has deep reservations about whether it could be implemented successfully and about the costs when things go wrong. He says:

“I have no idea how clients will assess my work when the responsibility transfers to them, and neither do they”.

He believes there will be widespread non-compliance as clients struggle to make assessments and default to playing it safe. He works in IT, and also has deep fears about where ultimate liability will rest. I know the idea is that the fee payer is responsible, but contractors are looking at recent HMRC decisions about various schemes that were deemed legal when they were set up, which are now leaving individuals with massive retrospective tax bills. There is a worry that poor application of the rules now could end up meaning that individuals face bankruptcy later down the line if they are chased for payment.

My constituent sums up his concerns by wondering if there will be any point in continuing as a contractor at all. Among the reasons, he cites potential problems for processing expenses. In the public sector, we have heard about the removal of the 5% allowable deduction from the income of personal service companies for general expenses incurred in running the business. If all engagements are treated as caught by IR35, all the income accounted for is either tax, national insurance contributions or net pay, so there is nothing to set running costs against.

My constituent also says that the situation could lead to him setting up an umbrella company, which would increase costs. He is seriously concerned about that, as he is about the potential for disproportionate costs to be passed on to the contractor by clients. He says:

“Ultimately, if the benefits are removed from me and I am actually paying more tax than a regular employee, with none of the rights, then I have a difficult choice to make. What will my clients do if they cannot source flexible skills in the contract market due to many others doing the same as me? They have two choices: one is to hire an employee, which defeats the ‘flexibility’ argument. If they cannot hire an employee just for the duration of a project, they will most likely go to a large organisation, such as IBM or Capita who will charge them 2-3 times the contractor day rate.”

My constituent makes the important point that those large companies are much more likely to have sophisticated tax and legal expertise at their disposal than small businesses such as his.

What my constituent says about being treated as an employee for tax purposes while not enjoying the same employment rights is crucial. I know that the Government are aware of that point, and I would be grateful if the Minister would update us on their current thinking. I am sure that the Minister will recognise many of the concerns that my constituent has highlighted, as they reflect much of what has been raised by private sector interest groups and in Government consultations.

As I said before, the aims of the IR35 rules are right, but the prospect of their implementation has fostered a very bleak view indeed. The substance of this implementation must therefore be better, as the rules will be wholly self-defeating if, by their very nature and complexity, they force contractors out of the market or encourage more sophisticated forms of tax avoidance. I am sure all of us here would agree that the aim is to allow flexibility where needed, while ensuring that revenue and rights are not lost where a contractor effectively becomes an employee.

I have asked the Minister for quite a lot of things. When he is summing up, I hope he can provide a further update on the use of the IR35 rules in the public sector, particularly around compliance with the rules, uptake and concerns that companies are exiting the public sector market because of those rules. I hope he will summarise the key lessons the Government have learned from the public sector roll-out and how they are being adjusted to suit the different nature of the private sector. Will he clarify whether the Government have any ambitions or plans to further roll out the IR35 rules to small businesses in the private sector? Will he also give an update on how the IR35 rules sit in the Government’s wider consideration of the recommendations of the Taylor review?

14:34

[Ruth Cadbury (Brentford and Isleworth) (Lab)]

It is a pleasure to serve under your chairmanship, Mr Gapes. As hon. Members may know, I am vice-chair of the all-party parliamentary loan charge group. I was approached by an agency that employs doctors, nurses and healthcare assistants purely for the NHS, because there is an interconnection with the loan charge—the unintended consequences of IR35’s creation are why we have the whole problem with the loan charge.

Loan schemes were set up as a way of enabling people who are self-employed and freelancers not to be disbenefited and not to have to pay more tax than if they had gone through pay-as-you-earn. For many people, it was intended to remove the administrative burden of setting up their own companies. As the debate going on now in the main Chamber will show, many hon. Members from both sides of the House have lots of examples of the many distressing consequences of the way the loan charge has been handled by HMRC, particularly in the last three or four years.

I want to relay the concerns of the managing director, owner and founder of what was a significant recruiter of NHS workers, whose business has declined by more than 60% in recent years. The particular issue he has concerns about—I hope I can express it clearly, and I apologise if I do not get this entirely right—is the confusion in the NHS about whether freelance workers are PAYE or not. There is mixed communication, which is causing him difficulty in his business, but it is also causing difficulties for the workers concerned. These are low-paid, or medium-paid, people—some earn less than £30,000, and most less than £50,000 per annum.

Because of the inflexibility of NHS employment, those people choose to work on a freelance basis, day by day. London-based people could be sent to Southampton one day, Bath the next day and maybe somewhere in London the day after. They incur travel expenses. For long days, they incur costs that they would normally be able to claim against the company. However, if they are PAYE, they cannot claim those costs. They therefore make themselves unavailable to the NHS.

I also learned that this situation is one of the major causes—in addition to Brexit—of chronic shortages of clinicians, medical staff, nurses and nursing assistants in the NHS. For people who need to work flexibly, the work is just not worthwhile when they are being forced to go through PAYE. They are therefore working in the private health sector, where there is more flexibility and the restrictions do not apply, they are leaving the country, or they are leaving health and working in another, more flexible, sector, where they are better off.

I have been told that 99% of the firm’s agency workers are being unlawfully blanket-assessed in IR35 and forced into unlawful employment, without a fair assessment—approved NHS framework operators are enforcing the blanket assessment. NHS Improvement has stated that a fair and individual IR35 assessment must be carried out, but that is not happening; blanket assessments are not compliant with the legislation.

Under the new rules, the fee payer, which is the agency or third party paying the worker’s personal service company, is not allowed to carry out an IR35 status assessment to determine the proper IR35 status of the worker—I apologise for reading this out, but I will get it wrong if I do not. The fee payer is the closest party in the contractual chain to the worker’s personal service company. This is despite HMRC guidance that states that, where a public authority, agency or third party makes a payment to a worker’s intermediary on or after 6 April 2017, it decides if the rules apply and then deducts tax and primary NICs from the payment it makes and pays the employer’s NICs, and that is included in calculating the apprenticeship levy.

The HMRC check employment status for tax tool that is used to assess workers assumes mutuality of obligation, which is one of the main tests that has to be assessed in all engagements via IR35 determination. As a result of the assumption, the CEST tool is flawed. The importance of mutuality of obligation is demonstrated by the recent tribunal case of Dr R Narayan v. Community Based Care Health Ltd—I can make the details available. In the supply of people to NHS trusts, there appears to be no mutuality of obligation. The worker can cancel a shift at any time and will not be paid, which is key to that case. The NHS trust can cancel a shift at any time, and the worker will not be paid, as confirmed in the contracts of the agency I mentioned. However, 99% of the agency workers are blanket-assessed inside IR35 and forced into unlawful employment.

It appears that HMRC does not understand the IR35 rules. Apparently, it recently lost a tax case against Lorraine Kelly. If HMRC has lost approximately 50% of IR35 tax cases that it has brought against contractors, how can it implement an online tool to get a correct IR35 result? HMRC gets that right only 50% of the time when it goes to court, which has to be worrying.

I am very concerned about what I have heard from this agency, which is trying to do the right thing. Incidentally, it warns all its staff about the loan charge. It is an umbrella company but does not use the loan charge. I am absolutely convinced that the company is trying to do the right thing, but it is really concerned about the impact that the confusion between HMRC and the NHS is having on the ability to supply appropriately qualified staff to the NHS, as and when needed.

14:42

[Susan Elan Jones (Clwyd South) (Lab)]

It is a pleasure to serve under your chairmanship, Mr Gapes, and to follow my hon. Friends the Members for Rutherglen and Hamilton West (Ged Killen) and for Brentford and Isleworth (Ruth Cadbury).

From discussing the issue with constituents, trying to read up on it and coming here today, the thing that really strikes me is how complicated it is. It is clearly complicated for most of us, as well as for the people who have to deal with it on a day-to-day basis. Obviously, nobody likes tax loopholes. My hon. Friend the Member for Rutherglen and Hamilton West gave an example of one that is clearly unethical and wrong. What made me realise more about all this is that a lot of the people who are affected by this want flexible working relationships. They have to respond to peaks and troughs in their businesses, and we need a system that works for them.

My hon. Friend the Member for Rutherglen and Hamilton West brought up concerns about the implementation of IR35 legislation in the public sector, and raised the CBI’s concerns about its implementation in the private sector. He also mentioned the clarification that can be provided by the recommendations of the Taylor review. We would all welcome clarification on this issue. I do not know whether I speak for other hon. Members, but the more I tried to read about it, the more complicated it became.

I want to raise a couple of issues from my constituency, which have been raised by people who have to deal with the system and who have very real concerns. Let me refer to the case of Kaye Edwards from Acrefair. Kaye is a freelancer and runs a consultancy business in Liverpool that has secured assignments for many other freelancers during the last 10 years. She has serious concerns about the off-payroll IR35 tax legislation in the public sector, and believes it would dramatically damage the UK if it were extended to the private sector. She believes her personal assignments and her company will be severely impacted by the proposed legislation. She states that her company is small and struggled through the credit crunch. She is of the opinion that companies like hers helped to bolster the economy during that period and are now battling uncertainty, which is not helped by the issues surrounding Brexit.

Kaye believes that the administration and lack of clarity on off-payroll legislation will make it either very difficult or untenable to continue her business. She believes that there are real concerns about the responses from HMRC and the Treasury. I am drawn to think of what my hon. Friend the Member for Rutherglen and Hamilton West said about HMRC and its lack of success rate in the cases that have brought against it.

Kaye Edwards claims that there have been many recent surveys on what would happen if IR35 were applied to the private sector. She thinks the widespread theme is that UK businesses will be subject to major disruption on all fronts. Increasing costs, shrinking talent pools, reduced flexibility, and legal challenges to status assessments are among the hurdles that firms are expected to have to navigate. She is fearful that the costs of doing business will rise, and claims that any current and future projects that are already planned for, costed, in progress and/or are funded by investment will be affected. She is especially fearful of how this will affect people working in IT, and feels that it could make some projects on low margins unprofitable, leading to cancellations and job losses. She is someone who has to deal with the situation on a day-to-day basis.

I have heard from another constituent on this issue. He runs a small company that is trying to develop its supply chain. Owing to the nature of the business, my constituent engages only in contract work, which involves travelling across the country. As such, he claims expenses for travel, accommodation, food and so forth. HMRC allows contractors working in the private sector to claim back 5% of the income that is generated through a contract to offset the admin costs of running a business. However, my constituent says other expenses will not be claimable. He argues that recent changes to travel and subsistence allowance mean that the contractors working under the rules of IR35 will not be able to claim on everyday expenses, such as travel, hotels, meals and so on. He believes that HMRC will reclassify those earnings as liable to tax and national insurance contributions if they do not meet its test. My constituent claims that this is notoriously difficult to do; in many cases, contractors’ expenses will not meet the test, causing a significant loss of income.

I apologise for reading that word-for-word; with the complexities involved, I am rather fearful of not doing so. Can the Minister clarify some of those concerns? My constituents are committed to the business work that they do, and these sorts of workers are very important in my local area. However, they are clearly worried about the proposed changes. I hope the Minister reassures us in some way and deals with the situation—it is causing great concern to my constituents who are likely to be affected by it.

14:49

[Mr Paul Sweeney (Glasgow North East) (Lab/Co-op)]

It is a pleasure to serve under your chairmanship, Mr Gapes. I commend my hon. Friend the Member for Rutherglen and Hamilton West (Ged Killen) for securing the debate and pulling together the necessary support from the Backbench Business Committee. This debate is a good example of the constituency MP in action and effectively representing constituents—the sentiments expressed so far by my hon. Friends indicate that.

I had never heard of IR35 until a constituent came to see me about it and asked me, “What do you know about IR35?” I had to confess: “Nothing. I have never heard of it.” I was in for a quick education, however, as he iterated his deep concerns about the changes. I must confess, having never before seen, heard of or understood IR35, I share his alarm. It is only right that the Minister recognises the deep and genuine concern about the issue, which is shared not only by constituents, but by hon. Members who have been made aware of it.

My hon. Friend encapsulated that concern—the changes to IR35 are akin to using a sledgehammer to crack a nut. I am heartened to see Labour MPs standing up for freelance workers and raising concerns about the policies that the Conservative Government have proposed, which could damage entrepreneurship, workers’ rights and private sector businesses. That is quite curious, as the narrative is usually the other way around.

I am aware that the original IR35 legislation was introduced by the previous Government some time before I entered the House, but I refer hon. Members to what the current Chancellor said in November 2001, at the time of its introduction:

“One reason why the Government’s IR35 initiative has been so damaging and destructive is the fact that it has hit at the most flexible part of the economy.”—[Official Report, 6 November 2001; Vol. 374, c. 16WH.]

It would be interesting to see if the Minister can explain how the reforms are no longer as damaging and destructive as his boss previously thought.

In February, I submitted a written question to the Financial Secretary to the Treasury. In his answer, he said:

“The reform does not change the amount of tax payable by the firm engaging the worker.”

I am afraid that that is factually incorrect. Before the reform, the firm that engaged the worker did not expect to pay employer national insurance contributions. The person of significant control did that, and deducted it from the amount received from the engager. After the reform, the engager will pay employer national insurance contributions on top of the amount paid to the person of significant control.

The figures produced by the Office for Budget Responsibility have the highest uncertainty rating possible, with no data available on the behavioural effects. My hon. Friend the Member for Rutherglen and Hamilton West indicated that the potential effects could be devastating for firms, which may have to contend with cumbersome administration burdens and face considerably increased costs both to retain and to hire contingent workers, particularly those that require overnight stays to complete the work. As extra costs to business are inevitable, firms clearly need more notice so that they can plan accordingly. They face hard choices to decide whether to increase costs or cancel or delay existing projects.

Of course, some firms will no doubt be in a position to pass any extra costs on to the contingent workers whom they hire by reducing the amount that they pay. Sadly, those in weaker bargaining positions and with lower earnings will be most affected. Those given a Hobson’s choice will end up classed as employees for tax only, but will not have any of the associated employment rights. That seems entirely contrary to the Government’s good work plan.

There are clear concerns about the complexity of employment status assessments, which HMRC’s check employment status for tax tool, or CEST tool, has been unable to overcome. It is worrying that HMRC promotes the use of a tool that gives incorrect results, as evidenced by the Lorraine Kelly case, which has been mentioned. Given that HMRC loses the vast majority of IR35 cases in court, how can it adequately educate and prepare the entire private sector to accurately assess the status of the contingent workforce? Should a teacher who consistently fails their own exams be the one chosen to teach the lessons? We must reflect on the complexity and incompetence that pervade the system.

Putting the financial implications to one side, the logistical challenges for the private sector are enormous. An estimated 600,000 self-employed freelancers work in the UK, and they and their firms will be affected by the reforms. Every single engagement needs to have a status assessment completed, and I am told that each assessment takes approximately one and a half hours, so over 1,000 status experts would be required to complete the next six months. There are simply not that many available, and even if there were, the level of inconsistency across them would create more uncertainty.

Firms that think they have correctly assessed genuinely self-employed people will themselves have no certainty, because HMRC can challenge the situation at a later date and go back six years if it considers that the firm has been careless. Every firm will have to prepare for the reforms within 12 months, but where are the warnings and support from HMRC and the Treasury?

In the light of the very subjective nature of the tests, HMRC will always be able to take an angle, which could mean that a firm will have to battle for many years to defend itself, at considerable cost to its business. The level of possible tax risk and penalties for firms could be crippling. Cambridge University estimated a tax risk equal to 56% of the original cost of hiring the self-employed worker. That risk will accumulate every year for each worker hired, and put an uncertain risk on the balance sheet of every UK business that is engaged in the practice.

That kind of risk will need to be evaluated during any potential company sale, which could reduce the attractiveness, value and shareholder value of the firm. Will firms still consider the UK as a base for operations when that kind of uncertain financial environment is the newly laid foundation of the British economy? If a growing company needs to hire contingent workers, will it choose the UK as its base?

The new proposals also introduce a new tax. It is based on a subjective assessment by the client, which could be wrong, yet there is no route to appeal. HMRC has suggested that firms should manage the appeal process themselves, but asking the perpetrator to judge their own situation is hardly a valid appeal and does not enable a taxpayer to seek natural justice through the courts. The new proposals effectively bestow on firms powers to make tax judgments that affect someone else’s wellbeing without there being any proper way to appeal. If HMRC cannot get the assessment decisions right, is it fair to put them into the hands of firms that have a vested interest—to avoid tax risk—in wrongly claiming that the worker is caught by the legislation? That will clearly require some sort of independent arbitration service, but the assessments need to be completed before the work begins. How is that possible when the service would need to deal with around 600,000 assessments a year?

I sympathise with the Treasury’s challenge. It is concerned about the projected decrease in employer’s national insurance contributions, as the modern workforce changes and more people move to flexible self-employment. The Treasury wants to take the same sized slice of tax from everyone who provides labour, irrespective of their employment status. Unfortunately, the tax system has not kept up with the modern way of working, and employer’s national insurance is now seen as an unnecessary cost by firms that can much more easily obtain the services that they need from the contingent workforce, particularly with platform-based or gig-based working.

The employer’s national insurance of 13.8% is, in all but name, a payroll tax, which firms that hire contractors do not have to pay. It is the £60-billion elephant in the room. Contractors, because of various changes over the years, pay largely proportional taxes to those on a salary, and any historical tax advantages are small compared to the chunk of employer’s national insurance that firms do not have to pay when they hire the self-employed. If the tax differential was closed, none of us would be standing here today and there would be no such thing as “deemed employees” or IR35.

If the Government are concerned about falling revenues because of the self-employed, they should ditch the introduction of a new complex tax that is based on the already failed IR35, and instead just introduce a new off-payroll tax that applies to all firms that hire freelancers who are off-payroll. A small but simple tax would be far preferable to the large and uncertain one. To re-class those people as “deemed employees”, without giving them employment rights, is not the answer and never has been. The concept is ideologically flawed and will damage the flexibility of the British economy as the UK attempts to find its feet in these particularly uncertain times for the economy and its prospects for growth.

I shall close by asking the Minister some direct questions. If, as HMRC has claimed, a third of workers are probably “deemed employees”, how come HMRC keeps losing IR35 cases in court? In the light of the inaccuracy of HMRC’s CEST tool, and the lack of evidence about testing and accuracy, can the Minister assure us that the tool will undergo formal independent scrutiny to ascertain its worthiness, before any future enhancements are released to the wider sector? What studies has the Treasury conducted to consider the impact of the reforms on the self-employed?

14:58

[Drew Hendry (Inverness, Nairn, Badenoch and Strathspey) (SNP)]

It is a pleasure to serve under your chairmanship, Mr Gapes, even though it looks as though that will be brief. I congratulate the hon. Member for Rutherglen and Hamilton West (Ged Killen) on securing the debate. Those of us in the Chamber today share common ground on the problems of IR35. The hon. Gentleman said that we all wanted to see what was due to be collected in taxes being collected to pay for the services from which we all benefit. That is an important point to bear in mind, and we share that view, but that is not to take away from the difficulties that have been presented in the Chamber so eloquently today.

The hon. Gentleman referred to the Taylor review and the need to get the recommendations in play with some speed, and to the conflict between agencies and contractors. He also made a good point, on which we need to reflect, about our future relationship with the EU—the crisis that we currently face over EU membership. That should be food for thought for Ministers in relation to a possible delay to the further roll-out of IR35. The hon. Gentleman talked about his constituent and mentioned that large companies often have sophisticated tax systems and resources that are not available to those who are often affected.

[Sir David Amess in the Chair]

The hon. Member for Brentford and Isleworth (Ruth Cadbury) talked about the unintended consequences of IR35, moving on to the loan charge, which I will touch on in a few moments, and in particular the confusion in the NHS and other public bodies. She mentioned those working flexibly with the NHS to meets its needs. Another point that I agreed with was that the effect of rolling IR35 into Brexit is to increase the unattractiveness of going into such jobs and accelerate chronic staff shortages by trying to force into the PAYE system people who do not want to be in it.

The hon. Member for Clwyd South (Susan Elan Jones) also talked about public sector damage, but she reflected on it in terms of IR35 being applied to the private sector. She expressed concerns that this was the wrong time, given Brexit as well as IR35. She quoted her constituents’ worries about additional costs, shrinking talent pools, legal challenges, investment losses and the expenses incurred. She mentioned the impact on IT businesses specifically, which is to make some unviable or unable to operate at all.

The hon. Member for Glasgow North East (Mr Sweeney) talked about how, when IR35 was introduced, the issues around it became relevant and very present, showing up as a genuine concern for many people. He highlighted the real extra costs to businesses and, as was said earlier, the number of IR35 court cases lost by HMRC. The Government must reflect on that when they look at this. The hon. Gentleman also rightly talked about the lack of advice, warning or assistance from HMRC, moving on to the risk of the penalties incurred and of further extension of IR35 making it even less attractive to do business throughout the UK, especially in current circumstances.

The SNP has expressed concerns about the extension of IR35 since it was proposed in 2017. The UK Government must pay close attention to their own technical review and rule out extending IR35 rules until contractors’ concerns have been addressed. HMRC has been described as using a hammer to crack a nut, but this UK Government have had to be dragged kicking and screaming into tackling major, systematic tax avoidance and evasion. The extension was proposed through the Finance Act 2017, and since then the SNP concern has been about the key effect on contractors supplying public sector bodies. It is only right for such contractors to pay their fair share of tax, but they have been left with an unfairly high level of bureaucracy, making it even more difficult for them to play their flexible role within the economy, as those in the sector have confirmed. Experts have expressed concerns that IR35 does not even achieve its stated aim of equalising tax between those in its scope and employees.

IR35 has also made things more difficult for public sector organisations in rural communities, something I know a lot about, being a highland MP. In rural areas, we often rely on contractors to fill vacancies and to employ key staff—teachers, doctors, nurses and such key people in our communities—so we have great concerns about the further impact on contractors if IR35 is extended for the private sector in April 2020, as proposed.

We have expressed such concerns repeatedly. Indeed, my hon. Friend the Member for Aberdeen North (Kirsty Blackman) first warned the Chancellor about the risks of the expansion of IR35 during the April 2017 finance debate. The UK Government failed to listen then and, when we raised it again, later in 2017 and in 2018. Here we are in 2019, once again asking the Minister to listen. Will this be the day when ears are unblocked? I hope so. Will this be the day when the message gets through? Let us hope that as well. The UK Government should use the 2019 Budget and Finance Bill to address IR35’s negative impact on contracted staff and our public services.

Earlier today, in the main Chamber, the loan charge was being debated. That is distinct from IR35, but some tax advisers have reportedly informed clients that IR35 required them to utilise tax vehicles now being tackled by the loan charge. For tax professionals to advise clients to use such loopholes is plainly wrong. People should of course pay their fair share of tax to support public services, but the UK Government must now pursue organisations that facilitated such loans. For those caught up in loan charge issues, there is great concern that HMRC has failed to work constructively with those seeking a loan charge repayment.

[Ruth Cadbury]

I thank the hon. Gentleman for giving way, and my hon. Friend the Member for Rutherglen and Hamilton West (Ged Killen) for securing the debate—I am sorry, I should have done that earlier. I was in the loan charge debate, which has been suspended because rain is penetrating the main Chamber, so I came over to this debate. I want to add something now that I said in the other debate. Until the past three or four years, many of the early adopters of the loan charge were doing so with the strong advice of chartered accountants. In my earlier speech, I included at least two pieces of evidence to show that there was no uncertainty about the loan charge—it was legitimate. One was a memo written by an HMRC staff member in 2006 about loan arrangements being legitimate, fine and approved; the other was the Rangers case.

[Sir David Amess (in the Chair)]

Order. I am not sure whether the hon. Lady is making an intervention or a separate speech.

[Ruth Cadbury]

I hope that the hon. Member for Inverness, Nairn, Badenoch and Strathspey (Drew Hendry) will have a look at some of the contributions made during the other debate. Having done so, he will be able to agree with me that there is a lot of confusion and that people were not behaving illegally.

[Drew Hendry]

I thank the hon. Lady for that intervention, which allows me to agree with her—I too attended the early part of the main Chamber debate before coming here—and to say what a pleasure it is to serve under your chairmanship as well, Sir David. It is a particular problem that the companies that gave such advice are not being pursued, and the Minister must do something. As a final comment on the hon. Lady’s intervention, given the state of politics in this place, it is hardly surprising that the roof has fallen in on Westminster.

Among those caught up in the loan charge issues, there is great and heartfelt concern that HMRC has failed. It has failed to work constructively with those seeking a loan charge repayment plan to pay the taxes demanded. Often, that is bundled up with fines and additional costs. It cannot be right that people are pushed into desperation, or face the threat of losing their family home or of bankruptcy when a more thoughtful, flexible and fair approach should and must be taken. My hon. Friend the Member for Aberdeen North tabled early-day motion 2241, and I encourage Members to sign it. We hope that the UK Government and the Minister will force HMRC to change tack and work constructively with those seeking reasonable treatment of people due to pay fair tax payments for unpaid amounts and to remove the threat of bankruptcy and homelessness.

In conclusion, IR35 is not in a state to be further expanded at the moment. That has been clear throughout, in the comments by Members in this debate and from what we have heard about those who have experienced the effects, such as contractors and the people trying to deal with IR35 in our public services. It cannot be right for the Government to steam ahead without taking that into consideration.

15:09

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

It is a pleasure to serve under your chairmanship, Sir David. I congratulate my hon. Friend the Member for Rutherglen and Hamilton West (Ged Killen) on securing this debate. It is also a pleasure to sit opposite the Minister. I had withdrawal symptoms after the end of the no-deal statutory instruments. I am afraid this subject has a similar level of complexity as the subjects we discussed in relation to no-deal preparations.

As many hon. Friends and Members have mentioned, IR35 arrangements are designed to operate in relation to workers involved in so-called off-payroll working. They cover situations where people work for a client through their own intermediary, often a personal service company. We have heard many examples in the debate. If people were providing their services directly, they would be classified as an employee. However, as a result of the arrangements, IR35 workers pay income tax and national insurance contributions in a different way to an employee. Individuals who work in such a manner benefit from increased flexibility and reduced tax liability, but the IR35 rules are intended to ensure that they pay broadly the same tax and national insurance contributions as an employee.

As we have discussed, the rules have applied to public sector bodies since 2017, and the Government confirmed at the 2018 Budget that they would extend the change to the private sector. The Government have just launched a technical consultation about the new arrangements.

Self-employment and contractual arrangements are 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. However, there are real concerns that workers are being forced into self-employment by unscrupulous employers to avoid costs and their duties to workers. Both the law and the Exchequer are struggling to keep up on this issue—a point that has been made by various speakers today. HMRC estimates that it loses about £3 billion a year because of self-employment in name only.

There is a problem, but at the root of it is the gap between how work is characterised for tax purposes and how it is characterised for the purposes of employment legislation. The Taylor review was meant to clarify at least the latter, as was mentioned by my hon. Friend the Member for Clwyd South (Susan Elan Jones) in a speech that was characteristic of all the speeches today when she spelled out the experiences of her constituents, and appropriately so. The Taylor review had many flaws. I will not go into all of them now, but it suggested that, for example, sick pay could be traded for a weakening of minimum wage rules—certainly not something that I would support—and that came at the same time as the courts were recognising that many alleged self-employed workers were anything but.

However, the review did offer a number of recommendations that the Government have sadly been extremely slow to consider. The lack of clarity over the implementation of Taylor where it is warranted is leading to a huge number of problems, including the ones we have talked about, for genuinely self-employed contractors and for what we might call bogusly self-employed contractors, as well as for their employers, as they adapt to coverage by IR35, knowing that even the IR35 rules may be subject to change because of future alterations to employment law in the wake of the Taylor review.

It looks as though we will not see an immediate change, so HMRC is engaging in a process of what I call bricolage to try to bridge the gap, and the consequences are complicated and very confusing. The confusion was described appropriately by my hon. Friend the Member for Brentford and Isleworth (Ruth Cadbury), who talked about a constituency case. She was kind enough to share the details of the case with me before the debate. She was absolutely right to raise the concerns of her constituent.

[Ruth Cadbury]

May I clarify that it was not a constituency case? The case was raised with me as a result of the work that I did on the loan charge.

[Anneliese Dodds]

I am grateful for that clarification. Regardless of where the individual was based in the country, the case was revelatory. In theory, with a levelling of the playing field upwards when the private sector is covered by IR35, some of the concerns about the leakage of highly skilled contractor staff from the public sector could be removed by the extension. However, the other problems that hon. Friends and Members have rightly referred to are still there, not least the problems that arise for small, often one-man or one-woman-band contractor companies that are trying to provide specialist skills on this basis, who may well end up being disadvantaged in relation to much larger providers of those specialist services. Surely we do not want that; surely we want to continue to have the innovation that exists in the complex ecology of different firms and freelancers offering such services.

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. In the absence of that, we have the issues that we have been talking about today, and employers themselves are trying to find a third way through all of this, as we have seen with the GMB-Hermes deal recently, where a new employment classification has been created in the absence of any other way to improve the situation.

We do not have a coherent approach. It is unfortunate that, as Members have mentioned, the lessons have not been learned from the roll-out of IR35 to the public sector before it is rolled out to the private sector. I will not go through all of them now, as they were appropriately described by my hon. Friends, but one that I want to underline again is the concern about the finance and time that has to be spent by the self-employed who face uncertainty because of the new rules.

The kind of experience that individuals have had with the HMRC online tool, which has already been explained, is a common one. The tool is not based on all of the case law, and the case law itself is not very clear in how it directs us to determining the status of many different contractors, so it does not resolve the situation for many users. It puts an additional strain on contractors, including many individuals who, as has been mentioned, might be on quite low incomes and cannot absorb additional costs. The Government need to look at the issue at a legislative level, rather than the onus being on HMRC to try to deal with it in a technical and procedural manner. It simply cannot. A different approach needs to be taken. As we established in our previous general election manifesto, the burden of proof should be with the employer, so that the law assumes a worker is an employee unless the employer can prove otherwise. We need to be clear on that.

Concerns about the appeals process have been mentioned. I will not go into them in detail, but I will underline the questions asked by hon. Members. How can we be sure that the process will be fair when it is led by those who employ contractors effectively marking their own homework, in the memorable words of one hon. Friend?

The Institute of Chartered Accountants has stated that tax and benefit differentials between different types of work need to be addressed. There needs to be further consultation on what, if any, tax incentives are offered to the self-employed. That is one view from industry and it coincides with what was outlined in the Taylor report:

“Over the long term, in the interests of innovation, fair competition and sound public finances we need to make the taxation of labour more consistent across employment forms while at the same time improving the rights and entitlements of self-employed people.”

That brings me back to the fundamental issue that I will close with, Sir David.

It is a fact that the tax and legal status of work is not aligned, not certain and not comprehensible. It is impossible for many of those caught up in it to understand the right way forward. My party has said that we need a proper commission to look at it in detail, to modernise the law around employment status and to look at how it interrelates with tax status. We have presented a 20-point plan for security and equality at work. We need to build on that through a consultation that includes the voices of the people affected. We have heard so many of them in the short time that we have had today.

[Mr Sweeney]

My hon. Friend is making important points about the flaws in current thinking. With the consultation on expansion due to start in the next month or so, there is an urgent risk. Does she think we need to pause and reassess the roll-out before we blunder into it and cause much damage?

[Anneliese Dodds]

I am very concerned that the consultation is going ahead and that the whole process is continuing, because the consultation does not focus on the problems with the public sector roll-out. I would have anticipated that any consultation to expand the approach would take those issues on board. I hope the Minister will address that in his response, specifically why there has not been the necessary change of direction.

We may need legislative change, as I suggested, because of the lack of clarity, but we should not treat individual contractors as guinea pigs while it all gets sorted out, given the impact it could have on them. I look forward to the Minister’s response.

[Sir David Amess (in the Chair)]

Colleagues will have noticed that the House has adjourned because of a water leak. However, that does not affect these proceedings, which can continue until 4.30 pm. I call the Minister.

15:19

[The Economic Secretary to the Treasury (John Glen)]

It is a pleasure to serve under your chairmanship, Sir David, in this very dry Chamber. I acknowledge the six excellent speeches that I have listened to carefully. I hope I will be able to respond to the whole range of concerns that have been raised, and specifically on the way in which IR35 has been implemented, as well as on the implications of the Taylor review.

First, I congratulate the hon. Member for Rutherglen and Hamilton West (Ged Killen) on securing this debate, and I thank everyone who has contributed. The Financial Secretary wanted to be here today—I suppose he could now come over and see how we are getting on—but the debate on disguised remuneration and the loan charge in the main Chamber meant he was unable to attend, so I am here in his place. I am conscious that disguised remuneration and the loan charge were mentioned by the hon. Member for Inverness, Nairn, Badenoch and Strathspey (Drew Hendry), and I will come to that issue shortly.

The Government have a responsibility to ensure that everyone pays their fair share of tax—I am sure that feeling is shared across the House. We want to help people to pay the correct taxes on time by ensuring the system works as it is meant to. Some serious points have been made about the effectiveness of the system, which I will get to.

[Jim Shannon (Strangford) (DUP)]

If the leak in the House had happened yesterday at 5 o’clock, there would have been conspiracy theories, but that is by the way. For small businesses and the self-employed who pay tax, we need a tax system that is simple to follow. Will there be changes in the tax system to make it simple to follow for small and medium businesses and the self-employed?

[John Glen]

I certainly agree with the hon. Gentleman’s instinct that tax simplification is how all Governments should seek to develop tax reforms. I will make some observations about that later.

As we have heard, the Government have set about extending the reform of the rules that govern off-payroll working. Those rules, known as IR35, were introduced in 2000—in fact, in the previous year’s Budget—to ensure that people working through their own company, who but for the existence of that company would be taxed as employees, pay broadly the same tax and national insurance as other employees. The rules do not affect the genuinely self-employed, and the Government recognise the massive contribution that contractors make to business and public services across the country. Our aim is simply to ensure that contractors who work through their own company pay the right tax.

However, evidence suggests that the rules have frequently been misapplied, meaning that contractors acting as employees were incorrectly paying less tax than if they had been employed in the usual manner. In April 2017, the Government introduced reforms for public sector organisations that take on contractors through their own companies. The reforms mean that public sector organisations are now responsible for deciding whether the contractor is acting as an employee and is therefore within the rules, as well as for ensuring that the right amount of tax is paid.

HMRC estimates that the reform has raised an additional £550 million in income tax and national insurance contributions over the first 12 months.

[Ged Killen]

Does the Minister know—I am not claiming that I do—how much of that £550 million is the result of the public sector incorrectly sweeping up contractors into the IR35 rules?

[John Glen]

I am not aware of any distribution analysis, but I will check with officials, and if I can give clarification on that, I will do so by letter.

Non-compliance in the private sector remains a persistent and growing problem that, if left unchecked, will cost the taxpayer as much as £1.3 billion by 2023-24, according to the Government’s estimates. In last year’s Budget, the Government announced that we will extend the reform of off-payroll working rules to all sectors, including the private and voluntary sectors. That will help to address the issue of non-compliance and to ensure there is a level playing field for the public sector and other sectors when hiring contractors.

The Government have listened to the views of individuals and businesses and have decided that the reform will apply only to medium and large organisations. It will not extend to the smallest 1.5 million businesses. In addition, it will take effect from April 2020, to give businesses and other organisations time to prepare. The Government are consulting on the detailed design of the planned reform, and we are listening carefully to the representations made. Our aim is to provide the individuals and organisations concerned with greater certainty about how the off-payroll working rules will operate from April 2020 in all sectors, including about the actions they can take to prepare for the changes.

Hon. Members talked about HMRC’s check employment status for tax—CEST—tool and raised some questions about its effectiveness. CEST was developed in consultation with stakeholders, including tax specialists and contractors, to assist individuals and public authorities in making the correct determinations. HMRC will stand by the result of CEST, provided the information entered is accurate and in line with HMRC guidance. It gives an answer in 85% of cases, and where it does not, more detailed guidance and support are available through a telephone number for individuals.

To support organisations in applying the rules, HMRC will continue to review and improve CEST. HMRC has already held user research sessions, and will continue to work with stakeholders over the coming months to ensure that the tool and the wider guidance suit the needs of all sectors, and to address specific points raised during the consultation. Enhancements will be tested and rolled out before the reforms are introduced in 2020. I asked officials for greater clarity on what that is likely to mean, and we are talking about improved guidance, better phraseology and improved language that gives greater certainty to individuals who make inquiries.

The hon. Member for Brentford and Isleworth (Ruth Cadbury) mentioned the issue of blanket decisions in the example she gave. Members have expressed concern that businesses might take a blanket approach to applying the off-payroll working rules to contractors without looking at the facts of individual cases. Independent research suggests that has not generally been the case in the public sector, where the reform has been in place since April 2017. I cannot account for every case, but research was done to evaluate the issue because it was a legitimate area of concern. The vast majority of public bodies are making assessments on a case-by-case basis. I have looked into how that research was done— HMRC commissioned an external independent organisation to speak to central Government Departments, the NHS and local government departments to ascertain that.

Having listened to people’s concerns, we included proposals in our recently published consultation to help to ensure that processes are put in place for individuals to resolve disputes with their engagers directly and in real time. The proposals would put a legal requirement on engagers to have a status disagreement process in place, and would require them to consider evidence provided by an individual contractor and review their status determinations accordingly. HMRC is committed to working with organisations to ensure they make the correct status determinations, and will publish detailed support and guidance to help organisations prepare well ahead of April 2020.

[Ruth Cadbury]

I thank the Minister for his response. We look forward to that research. I hope he checks it with bodies such as the NHS and ensures that the different levels and layers of the NHS are looked at. I have been given evidence that different trusts are doing different things and that NHS Improvement and the framework providers in the NHS are providing conflicting advice, which of course causes a problem for agencies and for workers themselves.

[John Glen]

I am very happy to look into that and to see that that work is forensic enough to give a reliable read-out on actual behaviour.

Members also questioned whether there might be an additional burden on businesses that hire contractors, and raised concerns about introducing the reform at this time of uncertainty. As I mentioned, the reform simply enforces legislation that was introduced in 2000. Fundamentally, I believe it is fair that two people who work in a similar way pay broadly the same tax, and the businesses that hire individuals are best placed to determine whether these rules apply. Medium-sized and large organisations will have until April 2020 to implement the changes, and we will keep the existing rules for the smallest organisations, minimising administrative burdens for the vast majority of businesses and other organisations.

I turn now to employment rights, which the hon. Member for Oxford East (Anneliese Dodds) mentioned. I, too, have missed our exchanges in Delegated Legislation Committees, but it is good to be talking about another topic. Falling within the off-payroll working tax rules does not currently change an individual’s status for employment rights, as there is currently no direct link between employment taxes and those rights.

The Matthew Taylor review took place in summer 2017, and the good work plan was published in December 2018. As set out in that plan, the Government agree that reducing the differences between the tax and rights frameworks for employment status to a minimum is the right ambition. We will bring forward detailed proposals this year—I recognise the need for this to happen quickly—for how those frameworks could be aligned. In the meantime, it is right that the Government take action to improve compliance with existing rules. Those who wish to challenge their employment status for rights can take their case to an employment tribunal, regardless of their tax status.

Members suggested that there is a link between the off-payroll working rules and disguised remuneration schemes. Disguised remuneration arrangements have nothing to do with the off-payroll working rules; individuals are able to comply with those rules without entering into contrived avoidance. Trying to get around rules that are designed to ensure that everyone pays their fair share is not an excuse to use a tax avoidance scheme.

There was mention of some celebrated court cases. It is not appropriate for me to comment on individual cases. Obviously, many of those cases are very complex; only the very complicated cases make it to court. HMRC will work with businesses to ensure they are equipped to make the right determinations.

I want to be clear that this reform does not introduce a new tax but seeks to strengthen compliance with existing tax rules. The Government value immensely the contribution of the self-employed and flexible workers—various Members have made the point that they make up a much larger proportion of the UK workforce—and intend to protect them, but there are many legitimate commercial reasons for people to work through limited companies and for businesses to engage those companies, and that should not need to change. The off-payroll working rules exist to ensure that those individuals pay a fair amount of tax, and the Government believe it is right that we address non-compliance through these reforms.

I hope I have addressed the points that were raised. If there are any points I have not dealt with, I would be very happy to take on board the final remarks by the hon. Member for Rutherglen and Hamilton West and to write to any Member in lieu of responding appropriately.

15:34

[Ged Killen]

I thank the Minister for his response and hon. Members for attending the debate. This is a very complicated issue, and it is not necessarily one that sets pulses racing. However, for the people affected, their livelihoods are at stake, so I am pleased that Members have had the opportunity to raise their constituents’ concerns.

My hon. Friend the Member for Brentford and Isleworth (Ruth Cadbury) spoke about what is going on in the NHS, and the hon. Member for Inverness, Nairn, Badenoch and Strathspey (Drew Hendry) pointed out how many public services in rural communities are dealt with in this manner. We have not yet got this right in the public sector. That is the crucial point: if we cannot get it right in the public sector, these issues will only be amplified in the private sector. We have to consider that carefully.

As my hon. Friend the Member for Clwyd South (Susan Elan Jones) said, people’s livelihoods and incomes are at risk because, for example, expenses will be treated as earnings. For a lot of small businesses, having expenses treated differently could be the difference between success and failure. Small decisions in this respect may have major impacts.

My hon. Friend the Member for Glasgow North East (Mr Sweeney) mentioned the CEST tool, which I touched on in my opening remarks. I am not comforted by what the Minister said about that tool, purely because I have experience of it in a previous life and I know just how inconclusive it can be.

[John Glen]

I am happy to meet the hon. Gentleman to engage further on that and discuss his concerns in detail. I am not paying lip service to the consultation; I want it to be effective, and I want the tool to be as effective as possible.

[Ged Killen]

I thank the Minister for that. I appreciate that we can have a constructive approach. I do not think any of us disagrees about the principles; this is about getting it right.

HMRC’s idea of working with people to assist them is different across the board. I point out gently to the Minister that it can be daunting for people to have HMRC assisting them, because it provides guidance but it is also the enforcer. People are therefore keen to get things right on their own, so we need a fair and transparent system that everyone can understand and use fairly. If we can get a tool that works, that is great, but let us make sure we have one before we come down too hard on people.

I did not hear the Minister confirm whether the changes will eventually be rolled out to small businesses in the private sector. I appreciate that he might not be in a position to answer that today. If the Government are considering that, I urge real caution. They have not suggested that yet, but, having come from a small business background, I can say that that would be a very difficult prospect.

[Mr Sweeney]

My hon. Friend makes an important point about the roll-out being restricted to larger businesses, which the Minister referred to. The changes will inevitably also impact small businesses, which are contractors with areas of expertise. For example, a large bank such as Barclays might commission a software expert to come in and build a product or tool, and that expert might in turn employ staff to support that project. If we classify the person who runs that small business as an employee of the bank, how are they meant to pay their staff?

That is the fankle that this reform will result in. It will draw us into situations where thriving, dynamic businesses that are responsive to the needs of large businesses—small businesses that can, for example, plug into a large financial institution to deliver a bespoke project and detach again —are not able to function in that way because their people will be pulled in as payroll staff members. Does my hon. Friend agree that those will be some of the inevitable negative impacts for small businesses if the Government do not get their act together with these changes?

[Ged Killen]

I absolutely agree. Small businesses will be affected by these changes anyway. People will be operating in a two-tier system, because many will work for small businesses as well as for large businesses in the private sector, and different rules will apply in those situations. I am not saying that is an argument for equalisation, because I still think it would be difficult for small businesses to act as the judge of whether someone falls under the scheme.

I am not in any way opposed to the principle of preventing tax avoidance. We all want to ensure that we boost tax revenues as much as possible, but that must be done fairly and transparently, and we must not destroy flexible working in the economy or self-employed people and small businesses in the process.

Question put and agreed to.

Resolved,

That this House has considered IR35 tax reforms.

15:39

Sitting adjourned.