Colin Ben-Nathan and Kevin Green gave evidence.

Q 32

We will now hear evidence from Colin Ben-Nathan, employment taxes sub-committee chairman, Chartered Institute of Taxation and Kevin Green, chief executive, Recruitment and Employment Confederation. May I welcome both of our witnesses? I suggest that you say your name and a sentence on your background. To be fair on this, I will ask Mr Ben-Nathan to start. We have until 10.45 am for this session, but we may finish earlier.

Colin Ben-Nathan: My name is Colin Ben-Nathan. I am the chairman of the employment taxes sub-committee of the Chartered Institute of Taxation. My day job is at KPMG, but I am here to give evidence in relation to the CIOT.

Thank you for that. I am afraid that I am going to have to ask everyone to speak up again. This room is difficult with the acoustics and this Member is definitely struggling to hear.

Kevin Green: My name is Kevin Green. I am the chief executive of the Recruitment and Employment Confederation, which is the professional body for private sector recruiters in the UK. We have about 83% of the market by value in membership.

Thank you. I call Shabana Mahmood to start our questioning.

Q 33

Thank you, Mrs Brooke. I welcome both witnesses to the Committee—thank you for coming to give evidence to us. Mr Green, I want to put some questions to you on the targeted anti-avoidance rule in the Bill. The Government have said that they are introducing the TAAR because of the speed with which people are coming up with ways of avoiding tax. Do you think that the TAAR will be effective? What has been the experience so far of the people you represent?

Kevin Green: We do not think that it will be effective. One of the things that we think about the way the Bill is constructed is that it does not recognise the reality of the supply chain. For us, one of the key issues that we think is clearly happening—we have made this representation to HMRC on many occasions since the Finance Act was put into place—is that, in reality, a lot of the activity is being driven by the end user, the client.

Therefore, if you think about supply-chain activity in, let us say, infrastructure projects or house building, you will have civil engineering companies that, if this were put in place along with the changes to income tax, would potentially have an increase in their wages bill of about 20%. If you think about the worker, potentially  because of the changes to the construction industry scheme in terms of this Bill, they could be 25% out of pocket.

What we have seen already, since the Finance Act was put in place in the summer, is huge numbers of different models being created, which for us means that what you are doing is putting all the liability on the intermediary, while in reality the power in the relationships is driven by large companies, because it is affecting their supply base, and obviously you will get collusion from workers who will potentially be out of pocket. Again, we have seen models such as the elective deduction model and employers taking workers on directly to avoid this. We think that the way it is constructed at the moment, without any liability being placed on the end user, means that you will end up with a proliferation of schemes, potentially more false employment and certainly the Exchequer not getting the tax take that it is potentially looking for from this and the other Bill.

Q 34

I am just going to follow that up. This is clearly an area where we need to see some action in terms of revenues to the Exchequer. You said that you think the liability should rest with the end—

Kevin Green: I think liability should be along the supply chain.

Q 35

All along the supply chain?

Kevin Green: Yes, so in terms of the reporting that is recommended, we think that if you put a responsibility on end users to think about their supply chain and report against it then you would certainly get a growth in terms of large organisations taking an interest in this. At the moment, we see large organisations that are being very specific to our members and other intermediaries in the marketplace about what model they want to work.

I have examples. One of our members has lost 60% of their business. They used to have 360 to 400 workers per week out on site. They want to comply with the regulations as defined. They are now down to 150 workers per week. This is because the workers refused to engage in going on to PAYE because of the loss of earnings to them. The civil engineering firm took on the workers directly on the understanding that the way that the legislation is constructed, that would not be covered. We would also have to say that the workers are then excluded from agency workers regulations as well. That is just one example of where the end user is going to end up with a cost increase for the business and the worker is going to end up with a wages reduction, so they are colluding along the supply chain because all the onus has been put on to the middle party, the intermediary.

Q 36

Just to help me understand that example of the civil engineering firm, why do you think the TAAR specifically would be defective?

Kevin Green: Because it puts the onus on the liability of the intermediary. If you cut the intermediary out of the supply chain, then the regulations do not apply. It is a classic example of where you have put the onus on one party in the supply chain. The power in the relationship is often driven by the end user.

It is exactly the same as the anti-slavery activity. We gave evidence to the Select Committee on that. We said that if you put the onus on the intermediary, you have to put the onus on the end user to drive the activity down the supply chain. They own the supply chain. We think that there are some issues here.

There are other things that I would like to raise at a later date about the retrospective nature and also some of the activity in relation to guidance. We think there needs to be much greater guidance if this goes forward.

Q 37

Why don’t you raise those now?

Kevin Green: One of the things that we think about the retrospective nature is that it could be quite punitive. To some extent, they have changed the rules with a lack of guidance and then taken enforcement back to April of this year. We are great believers that you give people the chance to comply and the chance to do the right thing. You put the guidance out in advance and then bring the changes in, perhaps as of April 2015. We are really concerned. The way that the tax regime works, particularly in certain parts of the labour market, affects the ability for the regulation to be all-encompassing. If we get incremental changes, we have the ability for good tax advice and for some organisations to think about how they manage their supply chain. They are always in advance of the regulation. That is why we think that, if you are really serious about increasing the tax take and tackling false employment, you really need to think about that whole supply chain.

Q 38

Do you think that HMRC has the ability and sufficient resources to ensure that people comply with these new systems?

Kevin Green: No, we don’t. We can give you examples of what has happened since the summer. We have been raising lots of issues about the EDM model, for example. We have written on numerous occasions. We have had meetings. We have seen no action. There is an opportunity for HMRC to address the travel and subsistence issues that we have raised consistently for the past two or three years, which are about creating a level playing field. We have seen a lack of action around enforcement. There has been some progress recently and there is now a consultation, which we are delighted about, but we do question that this is going to take huge amounts of resource to be able to enforce. We question the resources that HMRC currently has available for enforcement activity, going by previous performance.

For us, the answer is no, we do not believe there is adequate resource. One absolutely important thing is that, whatever changes you make in relation to this, one thing that we have consistently asked Government is to ensure that, before you change regulation, you are enforcing what is already there. For us, that is critical. If you are going to put legislation in place, you really must ensure that the people who will try to get around it are going to be addressed; otherwise, the compliant people are at a disadvantage. We have seen that time and again for businesses that are compliant around travel and subsistence. Lots of our members will not do that model. They are under huge commercial pressure from their customers to undertake that activity because of the benefits to them.

The issue for us is clarity about exactly what is happening, fairness on the implementation time scale and, if you really want to make this work, you have to think slightly more broadly and strategically about how the supply chains really work.

Q 39

To pursue that further, you are basically saying that you can see the provisions being not terribly effective when introduced. You have mentioned clarity and the time scale—what would be your solution to make the Bill work better?

Kevin Green: It would be to make everyone in the supply chain report openly about how they are undertaking the changes and make them accountable for looking at the compliance of their supply chain. That way, end users—I am not going to name any companies, but let us say large supermarkets, large civil engineering companies—will have accountability to ensure that their supply chain is compliant with HMRC regulations. That is the way to change this once and for all, rather than putting in elements of legislation that the market will find ways to avoid.

Q 40

You mentioned a few times earlier on—you seemed to be talking about the construction industry more than anything else—that some companies are taking people on directly. Does that not have some advantages in that people get more security at work? Regulations are easier to enforce if people are employed directly.

Kevin Green: One of the models that we have seen grow since the legislation is the EDM model. It is quite a clever wheeze where the worker is employed for tax purposes but self-employed for all other purposes. That is a clever way of getting the financial benefits without ending up with the employment responsibilities. We can see, and have seen, employers being absolutely explicit that that is the model that they want their intermediaries to use. I can point to organisations that have lost large, million-pound contracts because they will not engage in that activity but other companies will. That is a classic example of where you end up with creative activity to avoid attempts to do what we are trying to do, which is to tackle false employment—we are very supportive of that—and increase the tax take, and to do so in a way that is consistent across the labour market.

Q 41

Is that split model in which people are directly employed but are not really directly employed quite a recent development?

Kevin Green: It is a recent development. It was to do with the original piece of regulation in the summer, the Finance Act, which dealt with income tax. It was a clear response to that and it is growing; it is pervasive now. You can start to see them doing exactly the same with income tax, where these models are just going to grow. For me, it is quite a fundamental issue: it is not about the wording of the regulation but about how we tackle the fundamental issue we are trying to get at, which is false employment and non-payment of tax that is due. How do you do that? We are being clear that you need a different approach. That would be our suggestion, but we understand that that is quite significant at this stage.

Q 42

Would Mr Ben-Nathan like to make a few general comments? We will then return to questions.

Colin Ben-Nathan: The issue of agency workers is clearly not new, although when I read the original consultative document that was issued I was intrigued to note that the amount of perceived avoidance in relation to agency workers from a pay-as-you-earn and national insurance perspective was estimated to be in the order of £2.5 billion over the next four or five years. It is clearly on the Government’s mind and agenda, so it is unsurprising that they would want to take action in this area.

The legislation on agency workers has been around for many years. The Finance Act tightened that legislation in a number of areas, but as Kevin has pointed out, the legislation in the Finance Act is tax legislation. Similar legislation was enacted for national insurance but it is not employment law legislation. One can obviously see two strands here: the tax collection and whether someone has the rights of a worker or, more particularly, an employee.

The structure of the legislation from a tax point of view and the question of whether it is effective—we are going back to the tax rules that are modelled for national insurance purposes—is governed by supervision, direction and control. That is a different test from the general test we use for tax purposes, which is geared to employment more generally.

Whether that model is effective for dealing with agency workers, it is difficult in that you have three words: supervision, direction and control. That is admirably succinct but if you look at the guidance that has been prepared in relation to those three words, it extends to about 18 pages, with numbers of examples. It terms of whether it is easy or difficult to apply, it will not always be straightforward. The CIOT has sympathy with the objective, which is to deal with false self-employment.

The next point that is raised is where the liability should arise in the supply chain. Should it be everybody, the end user, the intermediary? Again, as Kevin points out, there are many different arrangements that we see in the construction industry or otherwise for how people are paid and by whom. I suspect that the reason that the intermediary, the agency, is focused on is that typically it will be the agency that makes a payment to the workers. I suspect that HMRC and the Government were looking at that aspect to say, “Who can we therefore pin the liability on? We need somewhere to go.” Indeed, that is what they have done in the tax rules, and that was what was modelled in regulations for national insurance purposes.

The matter we are looking at in this Bill is plugging any gaps that arise in moving targets, different models and so on. It also looks at whether, if a particular structure is not precisely covered by the national insurance rules, there should be a targeted anti-avoidance rule that deals with that position. I heard mention of the general anti-abuse rule that raises the bar and test a little higher. The targeted anti-avoidance rule I suspect HMRC may choose to deploy if it sees such an arrangement more typically. That is the broad perspective. The question is whether the measures will be effective. Kevin has expressed his view.

The other point I would make is that there are provisions both in the income tax rules and the national insurance rules that seek to address the question of collusion, particularly in the case of the provision of  fraudulent documentation, where the liability can move away from the agency to other parties, for example, the end user.

It is a difficult area and certainly the CIOT was sensitive to the question of the time frame for when the measures should be enacted. With £2.5 billion on the table, presumably HMRC and the Government took the view that they needed to act sooner rather than later.

Thank you. We will return to our questioning.

Q 43

We had some discussion of the GAAR and the TAAR in the previous round of evidence. If an arrangement is not caught by the TAAR as envisaged in the Bill, would an arrangement of the type that Mr Green described be caught by the GAAR, which would plug any gaps?

Colin Ben-Nathan: My understanding of how the GAAR operates—although I have not seen any cases as such, just the examples given—is that it is a general anti-abuse rule as opposed to a targeted anti-avoidance rule. On anti-abuse, my understanding is that the level and threshold for triggering the GAAR would be somewhat higher than in relation to the TAAR. Let me give you an example. It is something that the CIOT has been a little concerned about. There will be arrangements involving agency workers and end users where the individual, instead of making themselves available personally, do so through their personal service company. That is quite typical: many individuals have personal service companies. Indeed, that is typically a model for provision of services generally, not just in the construction industry but for technology and other IT implementations for large organisations.

If you look at a personal service company, that is effectively a third party; it is not the individual. To give credit to the Revenue, it has gone to some lengths to make its position clear that the agency rules are not intended to apply in a situation where we have a personal service company in normal circumstances, because we have rules that deal with personal service companies of which the Committee may be aware—the IR35 rules, for example. The Revenue wrote a technical paper on that, which was commendably clear. That was in relation to the specific measures enacted in the Finance Act and which have been enacted already by regulation for national insurance purposes. The question that we might look at now, which the CIOT has raised, is, “So you are not technically caught by the rules; we know that and the Revenue has confirmed it. However, we now have a targeted anti-avoidance rule”. So the question for all these people who are potentially affected is, where do they stand in relation to proffering their services through the vehicle they have always used, which is a personal service company? The Revenue has commented on that and you will probably hear from it later. It has said that it would not intend to apply a TAAR where the motive for establishing the personal service company was not tax avoidance but, for example, limitation of liability or some other commercial rationale. That is fine. On the other hand, if it clearly was tax avoidance then it would potentially deploy the TAAR.

As with all measures to do with anti-avoidance, the problem is that it is rarely black and white. The reality is that it is often somewhere in between. For example, if  one contracts individually—if one were permitted to do so, because typically there is insistence on using a personal service company, for other reasons—and one was a higher-rate or additional rate taxpayer, one would be paying tax at 40% or 45% in the first instance. However, if one was using a personal service company the reality is that one would not be paying income tax. The payments would be paid to the company and therefore one would be paying a corporate tax rate that is significantly less. That may not be the sole motivation but it may be a consideration.

By the way, we have sympathy with all this. We have suggested that at the very least it would be helpful for HMRC to elaborate on the guidance it has issued on that matter, which is good guidance, and comment on the grey area and on where it would go and where it would not. That is an example of where the TAAR could bite, but perhaps it would be unfortunate if thousands were caught—as I am sure is not intended by the TAAR—or were uncertain.

Q 44

Can I take up the point mentioned by Mr Green? I understood his concern about having a situation with people who are employed seeking to avoid making the appropriate national insurance contributions, in collusion with their employers. I did not quite understand why it would not be caught by this targeted anti-avoidance provision here. Mr Ben-Nathan has just been talking about the impact in relation to taxation that there has already been through the Finance Act. In the context of the position concerning national insurance contributions it seems to me that the agency workers directive, requiring as it does the same level of pay whether you are employed or in an agency arrangement, might act as an incentive for people to try to find a way around making the appropriate tax and national insurance contributions. In that context, surely the TAAR would be applied to the mechanisms that you are saying proliferate since the passing of the Finance Act?

Kevin Green: The first thing to say is that if you take out the intermediary, the agency workers do not apply, so if the end user is a civil engineering company which has an in-house team and takes on the workers directly, my understanding is that the provision in the Bill and the other Bill do not apply, and certainly agency workers do not apply. Agency workers regulations only apply where there is a tripartite system. What we see on the ground is that a tripartite system is not being used. What is happening, because of the ability to mitigate tax and national insurance, is that end users are going directly to the workers. They know the workers, they understand them, many of them are in personal services companies, as Colin mentioned, so they will not be caught by this legislation. This legislation targets the intermediary and if there is no intermediary, how do you go about it? It is a significant point.

We can raise that matter with the Minister.

Q 45

You mentioned the elective deduction model as one of the key developments since the Finance Act was passed. Are there any other significant models of that order?

Kevin Green: Another that we picked up recently is a contractual restrictive model, where people are asked not to subject the worker to supervision, direction and control and to maintain eligibility for the construction  industry scheme. What the end user is doing is contractually trying to take out the mechanism in terms of clarity around employment status. We have also seen a growth in travel and subsistence. There is a consultation out at the moment being used, again, to get commercial benefit for the end user organisation and the intermediary, which we think is quite significant. So the travel and subsistence elective deduction model and the contractual restrictive model are the ones we are seeing starting to emerge.

If there are no further questions, I thank both witnesses. We now move on to the final session. The witnesses are welcome to stay and listen to the Minister and his officials.