PARLIAMENTARY DEBATE
Finance Bill (Ways and Means) - 19 May 2020 (Commons/Commons Chamber)

I beg to move,

That (notwithstanding anything to the contrary in the practice of the House relating to the matters that may be included in Finance Bills) provision taking effect in a future year may be made amending Chapters 8 and 10 of Part 2 of the Income Tax (Earnings and Pensions) Act 2003.

This ways and means motion enables the Government to amend the current Finance Bill in order to implement reforms to the existing off-payroll working rules. We are presenting it separately because we wanted to extend the date at which it comes into force by one year to April 2021 in recognition of the effects of the coronavirus pandemic. The off-payroll working rules have been in place for 20 years. They are designed to ensure that people working like employees but through their own companies pay broadly the same income tax and national insurance contributions as people who are directly employed.

In April 2017, the Government reformed the way in which the rules operate in the public sector by transferring the responsibility for determining whether the rules apply from individual contractors to the public bodies that engage them. Unfortunately, in the private sector, non-compliance with these rules remains widespread, and it is forecast to cost the Exchequer over £1.3 billion a year by 2023-24 if not addressed. This is not a sustainable position. It costs the taxpayer a great deal of revenue that is needed for our public services, it perpetuates an unfairness between individuals working in the same way but paying different levels of tax, and it prolongs the disparity with the public sector, where the rules have been in place now for three years.

At Budget 2018, the Government announced that the reform would be extended to medium and large-sized organisations in the private and voluntary sectors, but it would not apply to engagements with the 1.5 million smallest businesses. It is important to be clear that this is not a new tax. The off-payroll working rules have been on the statute book since 2000. This reform is focused on improving compliance with the rules that are already in place.

Let me turn to the amendment tabled by my right hon. Friend the Member for Haltemprice and Howden (Mr Davis). I understand that it will not be moved today, but it is important to be clear about the Government’s position on it. To help businesses and individuals deal with the economic impacts of the coronavirus, on 17 March the Government announced that the reform to the off-payroll working rules would be delayed by one year from 6 April 2020 until 6 April 2021. The amendment would delay the introduction of reform by a further two years to April 2023, but it is hard to see any genuine rationale for this further delay.

The current measure was first introduced at Budget 2018. Since then, the Government have carried out two consultations on the detail of the reform. Her Majesty’s Revenue and Customs has worked extensively to support businesses in preparing for the change. Draft legislation and guidance has been published. There was a further review earlier this year that resulted in several additional improvements. By delaying until 2021, the Government have already ensured that businesses and contractors will not need to make final preparations for this reform until next year. There is therefore no need for further delay. Moreover, such a delay would have very significant drawbacks. It would not address the intrinsic unfairness of taxing two people differently for the same work, it would extend the disparity between the private and public sectors, and it would come at a significant fiscal cost that other taxpayers up and down the country would have to make up.

I turn now to the substance of the measure. I want to address a number of further concerns that have been pressed by colleagues, including, in particular, my hon. Friends the Members for North East Bedfordshire (Richard Fuller), for Barrow and Furness (Simon Fell), for Workington (Mark Jenkinson) and for Watford (Dean Russell). The first of these is that organisations will no longer engage with personal service companies as a result of this reform, reducing the number of contracts available in the labour market. It is important to recognise that the Government are fully aware of the importance of the flexibility for individuals and businesses to agree working arrangements that suit their needs. We know that that has been one of the pillars of the success of the UK labour market in recent years.

In 2017, soon after the implementation of the public sector off-payroll working reform, the Government commissioned independent research to assess its effect on the labour market. It found that the Government and independent researchers had not seen any evidence of an overall change in the demand for the services and skills of contractors.

Some organisations have clearly decided to change the balance of their employees and their contractors. That can be for many reasons—for example, where that better suits the evolving business model of that organisation—but many organisations will still choose to engage contractors using personal service companies where that is appropriate to their business.

Nevertheless, the Government remain keen to ensure the long-term flexibility and success of the labour market. We will therefore use the additional time given by this one-year delay to commission further independent and robust research into the long-term effects of the 2017 reform on the public sector. We want that research to be available before the reform comes into effect in other sectors in April 2021, and I can tell the House that the Government will give careful consideration to the results of that further research and thereafter will continue to monitor the effect of the reform on the labour markets of those sectors, including by commissioning independent research six months after this private and voluntary sector reform has taken effect.

Secondly, colleagues have concerns that organisations might take a blanket approach to status determinations, categorising all engagements as employment, regardless of the facts. The Government have been very clear that determinations must be based on an individual’s contractual terms and actual working arrangements. Many businesses and public sector organisations have described processes that they have put in place to ensure that determinations are correct, based on the actual working practices of the individuals concerned. There is a vigorous contractor lobby, which has also shown itself willing and able to highlight cases where it feels that the rules are not being followed. The reforms themselves include a client-led status disagreement process, where contractors can lodge a complaint if they disagree with how they have been categorised.

Thirdly, HMRC is continuing to help businesses to get their employment status determinations right by ensuring that they have access to a wide programme of education and support. The independent research that we are announcing post implementation next year will also evaluate from an external perspective whether decisions are being made properly.

Finally, HMRC has committed to a light-touch approach to penalties in the first year of the reform and has stated in terms that the reform will not result in new compliance checks being opened into previous tax years unless there is reason to suppose or suspect fraud or criminal behaviour, and the same is true for penalties for inaccuracies.

The Government very much value the important role that contractors play in the labour market and want businesses to be able to design their workforces in a way that makes sense for them. That should not mean, however, that contractors pay less tax than employees where their engagement meets the test of an employment relationship. The legislation is designed to remedy that unfairness and to support the tax base needed to fund our public services, and I commend it to the House.

I now call Dan Carden, shadow Minister, who is asked to speak for no more than five minutes.

I am delighted to contribute to this debate as shadow Financial Secretary. May I start by acknowledging the significant interest and the strong feelings of people across the country on this issue? We are considering a technical change to our tax system, reforming compliance on IR35 rules for the private sector, but for many people watching us, there is genuine concern that this technical change—this attempt to strengthen the system against tax avoidance—may affect their incomes and their livelihoods. I and the Labour party approach this matter with the seriousness and the consideration that it merits.

The ambition of IR35 rules and the associated difficulties have been a long-running saga over three decades, and it is a near impossible task to do the issue justice in the five minutes I have to contribute today.

Provisions were introduced by the last Labour Government in 2000 for HMRC to investigate and identify the relationship between businesses and contractors and to ensure that, where individuals actually perform the role of employees, they were contracted as such, to pay the correct tax and benefit from the correct employment protections, two issues that remain at the heart of the difficulty around IR35.

The nature of today’s economy, with the weakening of workers’ rights and employment protections and with zero-hours contracts, demands a radical overhaul. We need a progressive tax system, and we need to rebalance the relationship between those at the top and those at the bottom. In the meantime, what we have are piecemeal attempts to stop some, perhaps the more blatant, tax avoidance arrangements utilised by some companies. The challenge for tax authorities and for us is to understand, and differentiate between, fair and correct contractual relationships for the genuinely self-employed who are providing a crucial service to business and those who are all too often forced into bogus self-employment by unscrupulous employers, a practice that has become all too common and is designed to cheat the tax system and to deprive working people of their rights and even their entitlement to a minimum wage and fair pay. HMRC estimates such bogus self-employment schemes cost around £3 billion a year in lost tax revenue, and the February 2020 Treasury review put the cost of non-compliance with IR35 at £1.3 billion a year by 2023-24.

Having taken effect in the public sector in April 2017, these measures were initially meant to be rolled out to the private sector last month, but that is being delayed by a year due to the current pandemic, and the Labour party broadly supports the decision to delay. We have raised concerns about the implementation of this reform and have called for a proper and thorough review before the roll-out to the private sector, and, as the Financial Secretary recognised, the additional time now available gives him an opportunity to get to grips with these concerns, but we do need reform.

The Labour party is committed to modernising the law around employment status, including new statutory definitions of employment status, and the Government’s own Taylor review was right to conclude that the nature of the tax system acts as an incentive for practices such as bogus claiming of self-employed status, both by businesses and individuals. It called on the Government 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. I would also add—as we consider these changes in the midst of the coronavirus pandemic that has forced 2 million people on to universal credit and millions to rely on the Government’s furlough scheme, unsure of their future—that we need a social security system fit for the modern era that can protect all of our people in one of the wealthiest countries on the planet.

I would just like to finish with a few points that I hope the Financial Secretary can respond to when he winds up. Can he explain how reforms will only affect people working like employees through a company, and does he agree that there can be no space in our economy for zero-rights employment? Will he respond to concerns most recently set out by the House of Lords Economic Affairs Finance Bill Sub-Committee that lessons have not been learned from the roll-out to the public sector, and will he look again at serious problems highlighted with the “check employment status for tax” online tool?

We need a joined-up approach in the consideration of tax regulations and employment law. We need better protections for the self-employed, and we need to tackle tax avoidance, and the Labour party will work constructively to achieve that end.

I now call David Davis, who is asked to speak for no more than four minutes.

In the light of the impact that coronavirus is having across all sectors of the economy, the Government have rightly committed, in the motion, to postponing the planned reforms to IR35, but only until next April. The effects of the pandemic are going to be felt for considerably longer than one year. On this basis, in April next year self-employed contractors will be hit with unnecessary costs, confusion and uncertainty, just as many of them are getting back on their feet after the coronavirus has wreaked havoc across the economy. It is the self-employed and small businesses that make up the beating heart of our economy, and they will power the recovery of our economy out of this crisis.

The IR35 rules, as the Minister said, have long applied to the public sector. This is about applying them across the private sector. In that light, they were studied by the House of Lords Economic Affairs Committee in a report referred to by the shadow Financial Secretary to the Treasury. The report stated that the rules

“have never worked satisfactorily, throughout the whole of their 20-year history. We therefore conclude that this framework is flawed.”

The report found a system riddled with unfairness and unintended consequences and called for a wide-scale independent review—not just a few research reports, Financial Secretary—focused on how the reforms would affect the wider labour market and the costs that would be forced on businesses. The Lords Committee said that IR35 had the effect of reducing contractors to

“an undesirable ‘halfway house’: they do not enjoy the rights that come with employment, yet they are considerably employees for tax purposes. In short, they are ‘zero-rights employees’”.

That is, zero-rights employees effectively created by the state.

The Lords recommended that the Government adopt the Taylor review proposals, which we as a Government promised to do years ago, as they offer the best long-term alternative solution to the off-payroll rules and provide an opportunity to consider tax, rights and risk together, as they should be. Despite what the Financial Secretary said, however, the Treasury has neither the time nor the capacity for a wholesale review right now. Therefore, the only sensible course of action is to pause these reforms and take the time to properly review the impact they will have on the self-employed. So, I will vote for this motion today, if we have the opportunity, but only in the expectation that we will be back here in nine months’ time to do all this again.

I call Alison Thewliss, who is asked to speak for no more than five minutes.

It is a strange day indeed when I end up agreeing with the House of Lords and the right hon. Member for Haltemprice and Howden (Mr Davis), but I very much support a review, as does the SNP, as we had this in our manifesto. Concerns about IR35 have been well raised by myself, my colleagues and colleagues of all parties. I mention in particular my predecessor in this role, my hon. Friend the Member for Aberdeen North (Kirsty Blackman), who in 2018 raised the impact on rural communities where teachers, doctors and nurses may be employed through intermediaries. My hon. Friends the Members for Aberdeen South (Stephen Flynn) and for Gordon (Richard Thomson) and the hon. Member for West Aberdeenshire and Kincardine (Andrew Bowie) have also raised concerns about the impact of these reforms on people working in the oil and gas industry, which is also under significant pressure at this time.

In my constituency, many people working in IT are already finding that their contracts are not being renewed. This is having an impact on their industry because of the ongoing uncertainty with this policy. I should also like to mention the possibility of an equality impact assessment. Many of those people have come here to work from other countries because of their expertise, and if they are not able to work, that could have an impact on their immigration status and their ability to stay in this country, where they have made their home. I ask the Minister to consider that.

The House of Lords Economic Affairs Committee has set out very well the issues with IR35. Its report states that the Government should reassess the flawed IR35 framework and give serious consideration to the fairer alternatives to the off-payroll working rules. The report sets out a number of options that the Government may wish to pick up. In the Chancellor’s earlier statements on support for self-employed people, he hinted about the support the Government are offering to some of them—not all of them; there are still big gaps in the scheme—but there is an inconsistency in contributions between the self-employed and the employed, with a bit of uncertainty as to what exactly that means when we come out of coronavirus. What will people be expected to contribute? Any clarity that the Government can give on this would be extremely useful. The House of Lords also makes it clear in no uncertain terms that IR35 is not a good base to build on. Yes, it has been in place for 20 years, but for 20 years it has been plagued with these types of problems and by bolting more on to it and trying to reform it, the Government are building a house on the sand. We cannot rely on that house standing any longer.

The Taylor review that the Government carried out made it very clear that there are options open to the Government. The Financial Secretary spoke of reviews past and reviews yet to come, but there is a real lack of proper assessment and understanding of the impact this has already had in the public sector and there is a need to understand how this will work fully when it comes to the private sector. Further, the House of Lords Committee points out that shifting responsibility on to business for a scheme that is not fit for purpose is the Government and HMRC ducking a degree of responsibility.

I want to raise this with the Minister because we, and many in the industry, have concerns about the future of contracting because we do not know what the impact will be. As I have said, this ongoing uncertainty has led to people not having their contracts renewed. A deferral for a year gives the Government and HMRC some time, but they must use it wisely. Although some research has been carried out already, other people have looked at this and the industry understands what they need and what the norm is in their sectors, the outcome is still very unclear. The Government have said that they will use this year, but can the Financial Secretary say when that review will be completed and when it will actually be available for people to see and reflect on? Coming to this in nine months’ time will be too late for lots of people to make those changes; it needs to be much sooner than that. If the Government can say categorically that it will be six months, that is different—it provides a bit more time—but I am not quite convinced yet that the Government know what they want from this and what they are going to achieve.

Overwhelmingly, we are concerned about employment rights. I have seen from my casework, as we all have, people who are uncertain about what they are able to do, what their rights are, and what they are obliged to do by their contracts and by their employers. I think the Government need to reflect carefully on the situation that many have ended up in during the period of coronavirus, when some people have very little at all on which to survive.

The time limit for speeches is four minutes, and I advise hon. Members who are speaking virtually to have a timing device visible.

Self-employment is a vital part of our economy. People who are genuinely self-employed deserve to be properly supported while ensuring that everyone pays the right amount of tax. While we welcome the extension to 2021, it is crucial that we ensure that there is levelling up and protection of people’s rights, whether they are in the public or the private sector. That is why a joined-up approach is required in bringing together consideration of tax and employment law and protection for the self- employed.

I want to turn to my wider concerns about the Finance Bill. With every passing day, it is clear that we are entering a severe recession, which is going to lead to more poverty, inequality and greater unemployment if the Government are not bold in their response. The Office for Budgetary Responsibility has already said that the economy could shrink by 35%, with unemployment soaring to 2 million. Youth unemployment is likely to reach 1 million, with an additional 640,000 young people being made unemployed. We desperately need to support them so that they have hope for the future and we do not lose another generation. They need job guarantees, training, and mentoring and support from wider society.

We also need to make sure in relation to the Finance Bill—it could do so much more, given that it was conceived before the crisis—that Ministers look at the areas where the Government’s programmes following covid do not go far enough, leaving many out. The first is the job retention scheme, and while I welcome the extension to October, many employers are not clear about what their contribution to the furloughed salaries needs to be. That needs to be clarified, and I hope the Minister will do that. Research by the New Starter Justice campaign has found that 83% of its members received no universal credit for April. How do the Government expect them to survive for eight months with no income or welfare? Those in the hospitality sector also face huge challenges because they do not qualify for support. Between 350,000 and 500,000 remain unable to be furloughed, despite the extension of the job retention scheme.



When the Chief Secretary to the Treasury was asked about those issues at the Treasury Committee, he talked about “trade-offs” and “hard edges” to avoid the risk of fraud, but these are not people who are committing fraud. These are hard-working people—hundreds of thousands of them—who are getting no support from this Government. That is wrong, and it must be corrected. I hope the Minister will say something about that, because they desperately need our support.

The Institute for Fiscal Studies estimates that 2 million freelancers in sectors such as arts and entertainment and the creative industries who have some self-employment income are not covered by the scheme, while 675,000 people who get over half their income from self-employment will not be covered. The Government need to act to help them.

Finally, limited company directors are also left out. Local government need support from the Government. Only £3.2 billion of emergency funding has been provided, but there is a shortfall of £10 billion. They desperately need the Government to act now, so that they can cope with the crisis. My local authority has lost £35 million of income and will have to spend an extra £25 million to address the coronavirus crisis. The Government need to make sure that they are prepared for tough times. The Bill does not do that, and this particular change does not address the bigger crisis that is looming ahead of us.

I think it is fair to say that covid-19 has shone a light on the different ways of working. Whether it be freelance work through personal service companies, which are often set up to deal with insurance and liability, or freelance work via short-term pay-as-you-earn contracts, many of these people are falling through the net. That does not even begin to embrace those who are in insecure, zero-hours work. Many in my constituency work four jobs over seven days just to make ends meet, while others earn enough to work a four-day week and can live quite comfortably.

Hackney South and Shoreditch is a microcosm of all the different ways of working, some of which the Chancellor has supported in his package, and some of which he has not. It is also a hub of innovation, particularly in the tech area in Shoreditch, in the creative industries. We are proud to be the home of many disruptor businesses that start off trying to change the way things work.

This motion brings to the fore a number of issues. Contractors providing a flexible, agile workforce allow many of the businesses in my constituency to buy in the skills they need when they need them. Those are typically high-cost skills that a business could not put on the payroll, especially at the start-up stage. Businesses have been in touch with me about this measure for that reason in particular. They would not be able to create a full-time job. They do not need this expertise full time, long term on the payroll. They need to be able to hire someone quickly, and if the company does not succeed, there is no direct impact on the careers of the people they have hired for that short contract because they go on to the next contract. It allows start-ups to get the help, support and technical skills they need as a fledgling business.

Since the Government announced the extension of IR35 to the private sector, many companies in my constituency have already taken the view that they need to move overseas, and many of the individual contractors are moving overseas. They often work in different countries anyway, so where they are physically based is less of an issue than it may seem.

Many of the companies that are employing those contractors are taking a very risk-averse approach, designating all contractors as needing to go under the IR35 umbrella. That is having a negative impact on those technically skilled individuals who would be available for work but will end up being employed for tax purposes only, with none of the perks. In pursuing the national insurance contributions of employers, the Government are in danger of throwing out the baby with the bathwater. No one wants to see tax avoidance on a huge scale, but this system has grown up and helped to generate a whole business sector that relies on this flexibility, and the employees caught up in this will have none of the benefits of employees but will be working alongside people who do.

The issue of national insurance contributions is really important in terms of the Government’s review. We need to know exactly what the timetable is for that review, who will do it and how they will calculate the tax take. Many businesses are presented with evidence, which I am happy to share with the Minister, about why the tax take will not actually increase for HMRC by going down this route. It is really important that we get those fundamental numbers right. Is the research commissioned yet? How will people be able to contribute, and will it look at the overall tax rate? The delay of a year is welcome, but I completely agree with the right hon. Member for Haltemprice and Howden (Mr Davis) that we are going into an economic contraction, the likes of which this country has never seen before, and a year is not long enough. We need to delay this further or we will lose these skills, and businesses will not replace these roles as employees, so we will have a double whammy in the economy.

The covid-19 crisis has had a dramatic impact on the UK’s economy. A small state, low taxes and pure free market economics have failed to prepare the UK for the public health crisis and the ever-present climate emergency.

The public health crisis has forced the Government to postpone this failed style of governance, in favour of an interventionist, corporate welfare policy, aimed at protecting the needs of capital, with the hope that benefits will trickle down to workers through business-first schemes. The post-covid-19 economy must have fair taxation and strong workers’ rights at its centre. Self-employed workers will be pivotal in our economic rebuild, and people who are genuinely self-employed deserve fair support while also paying their taxes.

The Opposition are fundamentally committed to promoting and advancing workers’ rights, so we are deeply concerned that IR35 reduces the rights of the worker and the responsibilities of the employer. It is essential that, during the review of IR35, the Government recognise the overlap between employment law and tax status, and do not see them as exclusive entities. An initial recognition of their interrelation provides the basis for levelling up self-employment protection and ending forms of self-employment that are used as cover for tax avoidance.

I am aware that some workers are forced into self-employment by employers trying to cut costs and reduce their obligations. That was directly referenced by the Taylor review, which stated, based on evidence submitted to it, that

“the nature of the tax system acts as an incentive for practices such as bogus claiming of self-employed status, by both businesses or individuals.”

This highlights the importance of not assessing tax law in isolation. A joined-up approach that brings together tax and employment law can ensure that everyone pays their fair share of tax and that no one is exploited by holes in the system. It is vital that the Government recognise the relationship between poor employment practice, exploitative working arrangements and the tax system. Do the Government intend to introduce any additional measures to tackle the enablers of tax avoidance schemes, including those who exploit gaps relating to tax and employment law?

The precarious nature of certain forms of self-employment has made it difficult for many to access the coronavirus self-employment income support scheme. A large number of my constituents, including those working in the creative industries, cannot access SEISS as they receive less than 50% of their income from self-employment. Will the Minister consider introducing additional support that can be offered to those who receive less than half their income from self-employment, and who may also have been using short-term pay-as-you-earn contracts?

The covid-19 crisis has created a critical juncture in our country’s economy. I urge the Government to ingrain workers’ rights and fair taxation into the post-covid economy.

I thank all Members who have contributed to this brief but very lively debate. I thank the hon. Member for Liverpool, Walton (Dan Carden) and the Labour party for their support for this measure and their agreement not merely to the substance of the proposal but to the need for a delay. I think that is absolutely right. They should be congratulated on their bipartisan approach to this important public issue. The hon. Gentleman mentioned the Taylor review, which was picked up by several other Members. The Government whole- heartedly agree: the Taylor review made 53 recommendations, the vast majority of which we accepted, and several have already been put in place.

I covered the question of a delay in my speech. I encourage all Members who would like a further delay to reflect on the points that I made about the intrinsic unfairness of taxing two people differently for the same work, the disparity that it would continue between the private and public sectors, and the significant fiscal cost that would be involved in doing so.

The hon. Member for Glasgow Central (Alison Thewliss) spoke of a review. She should be perfectly clear that I have at no point discussed a further review. We had a review earlier this year, contrary to what the right hon. Member for Kingston and Surbiton (Sir Edward Davey) said. It was a perfectly good-faith discharge of a commitment made during the general election. It involved a wide range of parties discussing how the reforms could be effectively implemented, and several important changes were made as a result of it. Of course, it followed two processes of consultation, draft legislation and a full pre-legislative history.

We are not talking about a further review. We are talking about two pieces of research. The first, later in the year to come before April 2021, will look at the long-term effects on the public sector. It is entirely appropriate to look at the public sector reform, because that is the major case in which the reform has been put in place, and it has led to a significant improvement in the fiscal position relative to those involved and that is all to the good from the taxpayer standpoint. The second piece of research, which I mentioned earlier, will come at the end, after the reform has been introduced. It will be an early take on the effects on the private sector in the first six to 12 months of its introduction.

The hon. Member for Bethnal Green and Bow (Rushanara Ali) raised the issue of whether we could not go further. The Government have gone much, much further. We have essentially had three Budgets already this year, given the astonishing measures that have been taken by the Treasury and across Government to support businesses, people and families during the coronavirus crisis. This resolution and the Finance Bill are designed to bring into law the Budget that we had in March, and that is what they do.

Finally, I remind the House that the measure will not merely improve the fairness and equity of the system, but allow us to fund our public services better—the services on which all of us, across parties and across the country, deeply rely.

I announced to the House earlier this afternoon the provisional determination that a remote Division would not take place on the Question now before the House. That is also Mr Speaker’s final determination.

Question put and agreed to.

Resolved,

That (notwithstanding anything to the contrary in the practice of the House relating to the matters that may be included in Finance Bills) provision taking effect in a future year may be made amending Chapters 8 and 10 of Part 2 of the Income Tax (Earnings and Pensions) Act 2003.