Personal Service Companies (Select Committee Report)

Baroness Morgan of Huyton Excerpts

Tuesday 17th June 2014 Lords Chamber

[Baroness Morgan of Huyton (Lab)]

My Lords, I, too, served as a member of this committee, and I confess that this was not an area about which I knew a great deal at the start. So I, too, pay tribute to the able chairmanship of the noble Baroness, Lady Noakes, who focused our attention for a short and concentrated period on the key issues and allowed us to understand the serious concerns that noble Lords have heard about and, I hope, to produce some practical recommendations. As other members of the committee have said, these recommendations have, sadly, not been taken seriously so far by the Government. I hope that we will hear more this evening. I also pay tribute to the team who worked with us.

It became clear during the course of our work that there has been a massive explosion in the number of personal service companies over the past 10 years or so, although there is no definitive number of them or an explanation of why this has happened. There is a somewhat fuzzy definition, because the personal service company is not defined in law: rather, its definition is understood and some of what we were trying to pin down was elusive.

There is a whole new industry, a sort of job creation in action, around servicing IR35 and personal service companies. There are companies and advisers on the details of tax: they produce publications, they do marketing, they run member bodies and campaign bodies seeking reform, and so on. There has been an absolute explosion. Beyond the fact that that presumably provides some jobs to some people, it only underlined our concern about the confusion in this area of taxation.

It was disappointing—in fact, incomprehensible—that evidence from HMRC was inconsistent and that HMT refused even to contribute at either ministerial or official level. Their explanations were unconvincing at best, and I hope that we hear a better reason from the Minister about the failure to appear and contribute. There appeared to be a general lack of rigour and focus by HMRC on the functioning and validity of personal service companies or on the overall functioning of IR35. There seemed to be insufficient resources focusing on compliance, and a lack of clarity about whether HMRC was really trying to enforce compliance or whether it was just trying to do a bit of deterrent work around the edges.

In fact, during the investigation we found a decreasing number of compliance investigations, which we felt sent a signal in itself. Bizarrely, as we have heard, HMRC asked questions, for example on the personal tax return SA100, that are not compulsory. We have been told that there is going to be a review of this in the Government’s response. I hope tonight that we feel it will be a worthwhile review that leads to change rather than just a review. Probably many of us have been part of reviews of that sort in the past.

It is clear that in some industries—we had strong evidence from the oil and gas industry in particular—the use of personal service companies is really extensive and is considered useful and understandable. Contracts in those areas were time-limited and specialist. It served those industries well to encourage the use of personal service companies. In other industries and sectors it is fair to say that it was less clear. We struggled to persuade some businesses to give evidence at all, particularly in the financial services and banking sectors, where I think it is fair to say that people wished to stay somewhat in the shadows and not appear before us. We received a lot of generic evidence, for example from the CBI and the LGA, but when we pursued details they immediately told us that they could not represent those details in detail. All they could do was talk in generalities. Their individual members on the whole chose not to appear before us.

What was apparent in the evidence we received was that highly skilled workers—often highly paid—were capable of seeking, paying for and receiving the necessary advice about the advantages and disadvantages of personal service companies. Whatever the shortage of information, lack of clarity and low-level obscurity of the issues surrounding IR35 and the use of personal service companies, it seemed clear through the evidence we received that those at the top end of the income scale were at least in control of their own destinies and made decisions accordingly. In many cases, it was the individuals rather than those hiring them who were insistent that they wanted to operate via personal service companies.

In very sharp contrast, it seemed to us, were those at the other end of the skill and income level. Collectively we were surprised and shocked by the evidence we received that showed the widespread use of personal service companies across a range of poorly paid jobs, including healthcare workers and cleaners but many others too. This was confirmed by HMRC, which said that personal service companies now exist across all income ranges and all key sectors. The warm words used to explain the widespread use of personal service companies, umbrella companies and agencies emphasised the importance to UK plc of the flexible workforce.

Obviously the specifics vary depending on the vehicle used. For individuals using a personal service company, the drawbacks include lack of holiday pay, sick pay, maternity pay and a package of rights. Workplace pensions would not be offered.

Umbrella companies are obviously different, as there is a contract of employment. There are rights and entitlements, but these are usually less than for a conventional employment arrangement. There are also additional dangers for the individual. For example, they can be encouraged to make inflated tax-deductible expenses, for which they would be personally liable if investigated and found to be in error. Gaps in national insurance records and employers’ national insurance being deducted from gross were also cited, together with charging of fees that were automatically debited from the individual.

We also heard about the working of agencies that offered workers through various routes, including personal service companies. Often the agencies worked alongside umbrella companies as well to deliver flexible workers—or, perhaps more accurately, workers whom the employer wanted to be on flexible contracts. It is clear that workers in this low-paid flexible workforce generally had lower entitlements overall than those in permanent employment.

Crucially, we were concerned about the awareness by individuals of their rights and benefits or reduced packages. We also received evidence that the pressure to conform to the non-traditional form of employment was mainly from employment agencies. The Low Incomes Tax Reform Group talked about the specific targeting of migrant workers at the most exploitative end of the market. Workers were aware of what they had signed up to only when they tried to access benefits or exercise rights to which they thought they were entitled. Put simply, many low-paid workers think they are working for the company that runs their place of work. Why would they not?

There is much heralding of the UK’s flexible labour market, especially when compared to other countries in the EU. We know that much of that is true. There are workers at the lower end of the income scale who are perfectly happy to work in a flexible package because it suits them for a time, particularly when connected to family patterns. However, we should not be proud of people being pressured into flexible working and non-traditional employment contracts without realising what is happening to them. The Government must do more to inform and to expose. The abuse of flexible working damages the overall reputation of this broad policy approach.

The Government can decide to include issues in the annual remit of the Low Pay Commission. They might be reluctant to do so, but it seems essential that this whole issue is looked at calmly and comprehensively. Hotlines and publications will not suffice; I for one felt the Government’s response tended to err towards hotlines and publications. I hope tonight that we will hear a commitment to look seriously at taking this to the Low Pay Commission.

In summary, it seemed to us that there were two worlds. The higher paid tend to choose to use personal service companies, know what they are and why they are doing so, and seek the necessary advice and professional help. There are questions for HMRC and wider government and society about whether enough is done to ensure that there is necessarily tax compliance for these people. The other world tends to be low paid and often relatively poorly educated, not aware of the repercussions of their employment status and indeed may be not even aware of that status. They are pushed into non-traditional employment contracts rather than opting for them. Again, government action is needed but of a very different form. These are people who are working hard but, bluntly, not being treated fairly. They need better protection. I hope that we will hear tonight a more positive reply from the Government than we have heard so far.