Clause 5 - Categorisaton of earners etc: anti-avoidance

National Insurance Contributions Bill – in a Public Bill Committee am 2:45 pm ar 21 Hydref 2014.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Question proposed, That the clause stand part of the Bill.

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

Clause 5 will introduce a new targeted anti-avoidance rule to cover the payment of national insurance contributions, which sits alongside the provisions in this year’s Finance Act aimed at tackling the issue of employment intermediaries who falsely label workers as self-employed to reduce their tax liabilities.

For workers falsely badged as self-employed, particularly those who do not know that that is the case, the impact is that they are not eligible for many of the benefits available for employed earners, such as holiday and sickness pay. This year’s Finance Act amended legislation directly to address the issue in relation to the payment of income tax. A worker will now be designated as an employee if they are under the supervision, direction or control of someone else, and in that case they must be paid through PAYE, rather than as self-employed people. That is a change from the previous designation, under which a worker was deemed to be an employee if they provided their services personally. It was found that many intermediaries could exploit the test by claiming that there was no obligation for the worker to provide their services personally, and to get around that, a clause was often inserted into a worker’s contract stating that they could send someone else to do their work, even though the employee in reality wanted that specific worker.

The role of the targeted anti-avoidance rule in this Bill is to ensure that the new measures cannot be circumvented, and that workers who would be employed earners if it were not for the intermediary arrangements are treated as employed earners. The targeted anti-avoidance rule—the so-called TAAR— will allow HMRC to consider both the motive for setting up such an arrangement, including whether it was set up with the motive of avoiding NICs, and what was achieved, including whether it resulted in less NICs being paid. As such, during debates on the Finance Bill, we supported the new measures and the corresponding TAAR for income tax, and we will be supporting this measure in relation to NICs today.

The problem of bogus self-employment is widespread and complex. We heard about that complexity in the oral evidence session this morning, and it is not least because of the prevalence of the use of offshore intermediaries within the process. A Government review found that at least 100,000 individuals working in this country were employed through an intermediary company that had no presence, residence or place of business within the UK. In many cases, the employee was unaware that their payroll was located offshore and that tax was avoided on their earnings.

Recent legislative changes now mean that if an offshore intermediary directly supplies a UK-based client with a worker, the client is treated as the worker’s employer. If a UK-based intermediary is involved, they are treated as the worker’s employer. Onshore employment intermediaries have also been found to be engaged in the labelling of workers as self-employed using contrived contractual terms. In their consultation, the Government noted that the practice started in the construction industry but has now spread to a number of other sectors including driving, catering and the security industry. Intermediaries were successfully avoiding tax by exploiting the test that agency workers should provide their services personally. These proposals are designed to prevent that.

The Minister and I have had a number of debates on bogus self-employment. We have debated an alternative proposal that might make a difference in this difficult and complex area, which focuses on the criteria for workers in the construction industry, where there is a particular problem with avoidance and false employment. From the evidence given by Mr Green this morning, it is clear that this is a complex area. When we take action in one area, we only see problems move elsewhere. The Minister and I have debated the merits—or demerits, as he may say—of taking action sector by sector. I take on board his point that actions specific to the construction industry leave other sectors exposed. While there is a growing problem in other sectors, the construction industry has a particular problem and there is a case for considering specific and targeted action.

What Mr Green told the Committee this morning was worrying. Although we support the placing of liability on intermediaries—there was a specific problem with employment intermediaries and the Government needed to act—that has had the impact of shifting avoidance behaviour further down the supply chain. The Minister and his officials said that they are alive to some of the other ways in which avoidance activity is taking place in other parts of the supply chain. Will he give further reassurance that those gaps will be closed as they appear?

Taking action in this area is difficult and it often feels that we are simply playing catch-up with some of the rules. That is worrying and is an indication of the complexities we are dealing with. What thought have the Minister and his officials given to the extent to which—if at all—the general anti-abuse rule will be engaged? The thresholds for falling foul of the GAAR are quite high; that was deliberately done to provide certainty, so that people know exactly what they are dealing with. That argument has some merit, but what assessment has been done of the abusive practices we are seeing with false self-employment? Do they fall foul of the GAAR? Is that worth pursuing in terms of litigation?

Mr Green told us about some of the models being adopted by end users and clients to continue avoiding tax and treating workers as self-employed when that is not the case. Those sounded like cases where the GAAR could be engaged, but I do not have the details to make a judgment call on that. It would be helpful to hear about any assessment that has been done of the relationship between the GAAR and avoidance activity in false self-employment.

Specifically on the TAAR, will the Minister provide an update on the guidance that will be provided to ensure that the large numbers of people affected by the changes are aware of their new obligations and absolutely clear about the penalties for non-compliance? I note that advance notice of the legislative changes for employment intermediaries and of the required reports and record keeping has been published online, but the penalties for non-compliance are less clear. The online guidance states:

“You may get a penalty if your reports are late, incomplete or incorrect. HMRC will publish more information on these penalties soon.”

Will the Minister reassure us not only that the penalties will be published sooner rather than later, but also that  it will be made much clearer that people will be expected to comply and that action will be taken against those who choose to ignore the new arrangements?

Mr Ben-Nathan from the Chartered Institute of Taxation made an important point, which the Minister and I have debated previously, about the growing differences in the definitions used in different parts of our legislative framework for who is and who is not employed. The tests are different for working out whether someone is employed or self-employed for taxation law and for employment law, meaning that it is possible for workers to be treated as employed for tax purposes and self-employed for other purposes. That might not have an impact on taxation liabilities, but it will have an impact on workers’ rights, which they may not be in a position to know that they have been deprived of. Has the Minister held discussions with other Departments—I imagine that it would be the Department for Business, Innovation and Skills in relation to employment rights—to consider the potential unintended consequences of those different treatments? We should stick to the same definitions wherever possible, because even though the different areas of law can seem well-defined on paper, it is still just one legal system. We should not introduce different treatments if they can be avoided.

Finally, we had a lengthy discussion about the TAAR and the views of the Institute of Chartered Accountants in England and Wales and Chartered Institute of Taxation, which feel that including a TAAR in the legislation over-complicates things and is “superfluous”. Mr Hubbard and Mr Haskew suggested this morning that having both the GAAR and the TAAR and this particular TAAR might cause complexity or confusion that enables something to slip through the cracks. If the TAAR and GAAR are working as they ought to be, there should be no cracks for something to fall through. It would be helpful for the Minister to explain how he sees the two things sitting alongside each other and whether there is a risk that some of what the ICAEW and CIOT say is true. I would not have thought so, but it will be helpful to hear from the Minister.

Photo of David Gauke David Gauke The Financial Secretary to the Treasury 3:00, 21 Hydref 2014

Again, I thank the hon. Member for Birmingham, Ladywood for her questions. She rightly makes the point that the whole area is complex and that Governments of all parties have wrestled with it for some time. She made reference to the “deeming” approach that the previous Government considered. When we came to office, we concluded that it was not practicable to have a series of tests to define somebody, particularly within the construction industry, as either employed or self-employed. It would have led to a situation where for a bricklayer to be categorised as self-employed, he or she would have to supply their own bricks, which we felt was not practical. There are some difficulties in terms of making easy announcements in this area when there are some knock-on effects and not all of the proposals necessarily work as they should.

Let me address some of the points that the hon. Lady made about the clause. First, there was the point that came up this morning about what HMRC is doing about new schemes that appear to have been set up in  response to the measures introduced in the Finance Act. HMRC has opened inquiries and is establishing and testing the facts to ascertain whether the schemes successfully circumvent the legislation and therefore whether the TAAR would be appropriate to use in each instance. There is much work that needs to be done in these circumstances. First, there is the question whether the new arrangements work and reduce the tax or NICs bill under the existing legislation. If they do work, it is a question of evaluating the options to address the matter and seeing whether that can be done without significant unintended consequences. That is work that HMRC is pursuing at the moment.

On the whole issue of the interrelationship between the TAAR and the GAAR, the targeted anti-avoidance rule has been created to support the recent changes included in the Finance Act 2014 and National Insurance Contributions Act 2014 to tackle false self-employment facilitated by intermediaries and the off-shoring of payrolls used to pay UK-based workers working for UK-based businesses. During the consultation stage external interested parties, including intermediaries, were asked whether a TAAR was required. There was strong support for the TAAR as it would ensure that those complying with the legislation have further support to ensure that there is a level playing field in the sector.

When the general anti-abuse rule was introduced by the Government we made it clear that it is targeted at abusive avoidance schemes and that future anti-avoidance legislation may still be envisaged to tackle arrangements that do not fall within the scope of the GAAR. I agree with the point that the hon. Lady made about this not creating cracks that can be slipped through. One can make the point that this is belt and braces, but at least belt and braces tend to be effective in keeping trousers up. In that sense we are making sure that we are dealing with this issue.

The hon. Lady asked whether sufficient guidance would be in place to assist those affected by the changes. A considerable amount of such guidance has been produced. HMRC has worked closely with customer groups and has produced specific guidance for a range of different groups and will continue to add to this. Customer groups include accountants, intermediaries and agencies, workers and the end clients. Specifically on the point about guidance on penalties, penalties guidance is a work in progress and is due to be published in the near future following discussion with external interested parties.

The hon. Lady also asked about working with other Departments, particularly the Department for Business, Innovation and Skills. HMRC continues to explore with other Government Departments, including BIS, ways of providing clarity in the definitions produced across Government. Returning to the TAAR and GAAR issue, the GAAR is used against abusive schemes. The provisions of the TAAR provide support for compliant intermediaries to ensure that action can be taken against non-compliant intermediaries in a short period of time, when required. Therefore, it is not the case of the TAAR being overly complicated; the TAAR and the GAAR are two distinct things. I hope those points of clarification, and our session this morning, were helpful to the Committee, and that this clause can stand part of the Bill.

Question put and agreed to.

Clause 5 accordingly ordered to stand part of the Bill.

Clauses 6 to 8 ordered to stand part of the Bill.

Question proposed, That the Chair do report the Bill, as amended, to the House.

Photo of David Gauke David Gauke The Financial Secretary to the Treasury

On a point of order, Dr McCrea. It is customary when we debate matters relating to taxes—the hon. Member for Birmingham, Ladywood and I have been through this on a number of occasions—to stand and talk about the proceedings over the previous few weeks or months, as happened with the Finance Bill. Today, I want to briefly make a couple of points after a useful few hours of scrutiny of the Bill.

First, I thank you, Dr McCrea, for your chairmanship, and Mrs Brooke for hers this morning. She ran the evidence session very effectively in a room that was acoustically challenging. None the less, I hope that the Committee was able to learn much from it. I thank the Whips—my hon. Friend the Member for West Worcestershire, and the hon. Member for Houghton and Sunderland South. I thank my hon. Friend the Member for Harlow for stepping in to perform as Parliamentary Private Secretary this afternoon, and all hon. Members for their contributions, particularly the hon. Member for Birmingham, Ladywood for her searching questions. A number of hon. Members asked questions this morning in the evidence session, which elicited quite a lot of information and helped the Committee to scrutinise the Bill more effectively. I also thank the witnesses whom we saw this morning for everything they did, the Clerk of the Committee for dealing with a Bill that I hope has been less challenging than some he has had to deal with over the years, Hansard and, of course, the police and attendants for their support.

I look forward to returning to some of the issues that we debated this afternoon when the Bill returns for its remaining stages. No doubt a large amount of  parliamentary time will be allocated to that, and we look forward to filling it as appropriate. I conclude by thanking all members of the Committee for their assistance.

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

Further to that point of order, Dr McCrea. May I follow up what the Minister said by thanking you and Mrs Brooke for your chairmanship. I have to say, particularly to my hon. Friend the Member for Heywood and Middleton, that it is not usual for deliberations on a Treasury matter to be quite so efficient, but I hope that the efficiency of these proceedings encourages her to take part in future ones. I also add my thanks to the Whips and the other members of the Committee, particularly those who engaged in the oral evidence session this morning, which was genuinely very helpful. It showed that evidence sessions have a real role to play in helping Members understand the impact of legislation. I thank the Minister and his team, as well as the other witnesses, for coming to speak to us. The Minister was able to answer so many questions that my speeches were much shorter this afternoon than they might otherwise have been. I thank the Clerk and his team, Hansard, the police and the doorkeepers for looking after us in the usual way. With that, Dr McCrea, I thank you too.

Photo of William McCrea William McCrea Shadow Spokesperson (Justice), Shadow DUP Spokesperson (Home Affairs), Shadow DUP Leader of the House of Commons

I apologise for hastening on. I was about to deny the Minister his big moment of thanking everyone, but it has certainly ended well.

Question put and agreed to.

Bill, as amended, accordingly to be reported.

Committee rose.

 Written evidence reported to the House

NI 01 Low Incomes Tax Reform Group

NI 02 Chartered Institute of Taxation

NI 03 Chartered Institute of Taxation (supplementary)

NI 04 Office of Tax Simplification and Administrative Burdens Advisory Board

NI 05 Institute of Chartered Accountants in England and Wales

NI 06 Recruitment and Employment Confederation