Finance Bill (Ways and Means)

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.

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 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.

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.

I am beginning to fear that this Government do not understand the self-employed. I fear that, yes, because of the IR35 proposals in front of us, but also because of the loan charge and the way that a large group of the self-employed have been kept out of the support programmes during the coronavirus crisis—I am talking about the people who are newly self-employed and the people whose self-employment operates through a limited company, all of whom have had no help. I am afraid that the evidence is mounting up. That is why there should be a review, not just of IR35, but of how self-employment is viewed—the way we tax it and the benefits that people get—so that we can get a proper balance, rather than the piecemeal approach that we have.

I am really struck by the Government’s approach, which is, as the right hon. Member for Haltemprice and Howden (Mr Davis) said, creating zero-rights employment —employees without employment rights. That is not acceptable and it is why there needs to be a review before this goes any further. I had expected a review because the former Chancellor of the Exchequer said so during the last general election campaign. On Paul Lewis’s “Money Box” programme on BBC Radio 4, he made it clear, and he tweeted afterwards that there would be a review of IR35, but there has not been a review. The Liberal Democrats argued for one in the election, as did others, but there has been no such review. That is a breach of a promise to people, which has made them very angry.

The Minister today is promising a review once the legislation is on the statute book. That is not a review—that is trying to make good once the stable door has closed. Any review must take place ahead of any legislation, if it is to be done in good faith. I am afraid that the way that the Government are treating the self-employed, breaking their promise at the election and now proposing to have a review after the legislation is in place is a breach of good faith to the 5 million self-employed people in our country. That is just not acceptable.