Personal Service Companies (Select Committee Report)

Lord Higgins Excerpts

Tuesday 17th June 2014 Lords Chamber

[Lord Higgins (Con)]

My Lords, I join those who expressed appreciation for the chairman of our committee, my noble friend Lady Noakes, who was an outstanding chairman and succeeded in producing a report in a very short timescale. That report deals with an extremely complex and difficult subject, as the committee discovered from its inquiry, but my noble friend put forward the problems very clearly in her speech this afternoon.

The response—indeed, the whole process—has been remarkably fast. As my noble friend pointed out, the committee was set up in November. We are only in June but we have already taken evidence, produced our report, received a reply and now had a debate. That is probably a record for any Select Committee report. However, as was made clear by previous speakers, the problem is that the Government’s response is very inadequate indeed and does not solve the problems to which we drew attention.

We are concerned about the Government’s attitude to this matter, as was said in previous speeches. I regret having to draw the following comments to the attention of the House and, I hope, to the Liaison Committee, which is ultimately responsible for these matters. Our report states:

“We were surprised by the lack of co-operation from the Government. The Exchequer Secretary to the Treasury, who has responsibility for tax matters within Her Majesty’s Treasury (HMT), refused to attend an oral evidence session citing that our enquiry was concerned with HMRC’s application of the legislation. He also refused to allow Treasury officials to appear on the same grounds”.

That is a quite absurd explanation of why he did not attend. We could not conceivably have looked into the way in which the tax collection system operated without also considering the legislation. Although the first of those matters is the responsibility of HMRC, the second is clearly the responsibility of the Treasury.

We investigated and raised a number of Treasury issues with other witnesses but were unable to get a reply from the Treasury itself until this evening. I hope that my noble friend Lord Newby will be able to give us a better explanation of why the Treasury was so unco-operative in this matter, because it is of concern to the House. Having been chairman of the Liaison Committee in the other place, I am more familiar with the problems that one has in getting witnesses there and am less clear what the situation is in this House. However, this example raises serious questions about the way in which the Government respond to Select Committees. Like the noble Lord, Lord Myners, I would have found it inconceivable not to respond to a request to appear in front of a committee, and even more inconceivable to refuse to allow Treasury officials to do so. This is a very unsatisfactory situation.

There is no doubt at all that the IR35 issue, which we looked into in considerable depth, is extremely unpopular. Indeed, as has been pointed out, a whole industry has grown up to deal with the problems that it presents for those who are subject to it. While it is clear that people may incorporate a company for good reasons of limited liability and so on, there are also serious tax and national insurance implications. The Office of Tax Simplification suggested that perhaps IR35 should be abolished or at least put on hold. Contrary to what my noble friend on the Liberal Benches said, the committee did not take the view that it should be abolished and went along with the view that it should continue, but clearly a great deal has to be done to improve the present situation.

The Revenue is concerned that if it were abolished there would be mass migration from PAYE to personal service companies, and estimates a loss of revenue of £550 million. As my noble friend Lady Noakes pointed out, however, we have serious doubts about how valid that estimate is. While the Revenue has produced a slightly more sophisticated version in response to our report, it does not add anything significant to the earlier assurances that we were given on this subject.

The other matter that has been pointed out is that it seems clear that the Revenue is not pursuing individual IR35 cases with enormous enthusiasm. One of the other issues discussed was whether the merger of national insurance and income tax should take place. The response suggests, “We might do that eventually but not now”. I realise the complexities of such an operation; we should not hold our breath and suppose that that is suddenly going to take place.

More important is that implementation of the legislation by the Revenue has not been at all satisfactory. I was astonished to find that we have a self-assessment declaration form with a specific question on personal service companies that, it turns out, many people do not answer at all. Nothing seems to have happened as a result. We raised this question and received a response from the Government; it would seem that they are going to try to tighten this up. However, it is their attitude to the non-completion of the questionnaire that gives cause for concern.

The use of personal service companies is very widespread and produces, for those who operate them, considerable benefit to the economy of the country. That is not in dispute but there are, none the less, a number of issues here. Particular concern was expressed about the use of personal service companies in the BBC, for example, and in the public sector in particular. This needs to be dealt with seriously, and while the Government have taken some action, the committee was not satisfied that this problem had been solved—still less in parts of the public sector in which it appears that no action at all has been taken, even though it is the Government’s policy that personal service companies should not be used to mitigate tax and national insurance charges in the public sector. Something more needs to be done about that.

The area that perhaps gave us most cause for concern was the following: it is clear that many personal service companies are set up not at the instigation of the individuals concerned but at the instigation of their clients. This is particularly so for those on low pay, and it seemed to us that there was most appalling ignorance among those people about what they might be losing as a result of their use of personal service companies. Again, this issue is important. The Government’s response on it was somewhat better in terms of the Low Pay Unit and so on. However, again the matter brings out a real difficulty.

I believe that our report has been useful. It has been produced at very considerable speed and raises some difficult issues. In effect, we have turned over a stone and what is underneath is fairly unpleasant. The question that arises is this: we need some sort of comeback. It is fine having a debate; the Minister will reply and so on. If we are going to set up these ad hoc, high-speed committees, and they produce reports that result in unsatisfactory responses, the case for reconstituting the committee—which is familiar with the issues in the first place—in order for it to look at what has happened as a result of its recommendations, is worth while. I hope that the Liaison Committee will consider whether some form of post-report scrutiny can be carried out by the original body.

--- Later in debate ---

[Lord Higgins]

Where is the money to pay the fine coming from? Is this simply a transfer from one part of the Government to another? Is it an appropriate sanction? Should someone not be fired?

[Lord Newby]

Well, it is a transfer of money from one part of the Government to another, but this is hardly surprising since it is one part of the Government that has transgressed a rule set by another part of the Government. As for firing senior civil servants for not having kept this properly under review, I am rather tempted by the suggestion—but if it were a principle, we would rapidly find that there was a depletion of civil servants, not specifically in this area but from a whole raft of other areas where there may have been the odd transgression that was not stamped down on quickly enough.

The noble Lord, Lord Davidson, asked an extremely interesting question about the Scottish situation and the relationship between the UK and Scotland, and asked whether there had been discussions with the Scottish Administration on this issue. I am not absolutely sure but I am almost sure; I suspect that there have not been.

This debate has confirmed that personal service companies play a vital role in the UK economy. However, there are those who seek to exploit such arrangements to gain a tax advantage. Because of this, in our view there is still a clear need for IR35. However, there is still more to be done in improving its administration, and HMRC, in partnership with the IR35 Forum, is working very hard on this. We welcome the committee’s recommendations, which will help with this very important work.