Employment income provided through third parties

Finance Bill – in a Public Bill Committee am 2:30 pm ar 19 Hydref 2017.

Danfonwch hysbysiad imi am ddadleuon fel hyn

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

With this it will be convenient to discuss the following:

That schedule 11 be the Eleventh schedule to the Bill.

Clause 35 stand part.

That schedule 12 be the Twelfth schedule to the Bill.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

Clause 34 introduces schedule 11, which makes changes to ensure that businesses and individuals who have used disguised remuneration tax avoidance schemes pay their fair share of income tax and national insurance contributions. Clause 35 and schedule 12 follow on from clause 34 in tackling similar avoidance schemes used by the self-employed, introducing new rules to make those schemes ineffective and ensuring that individuals pay the tax they owe.

Disguised remuneration schemes claim to avoid tax and national insurance contributions by paying individuals through third parties in ways that promoters claim are not taxable, such as loans. These schemes are highly artificial, and it is the Government’s firm view that they have never worked. The coalition Government began tackling the schemes in 2011, introducing legislation to successfully stop the schemes that existed at that time. Since then, HMRC has collected more than £1.8 billion in settlements from scheme users.

However, not every scheme user settled, and since 2011 the tax avoidance industry has created and sold more than 70 new and different schemes aimed at sidestepping the 2011 legislation. These schemes are generally more contrived and aggressive than those that existed before and are growing in popularity, including with the self-employed. These schemes deprive the Exchequer of hundreds of millions of pounds each year and have been used by up to 65,000 companies and individuals. The Government’s firm view is that they do not work. We therefore need to take further action to tackle this avoidance and ensure that scheme users pay their fair share.

The Government introduced legislation in the Finance Act 2017 to put it beyond doubt that new employment income schemes are caught within the existing rules. Schedule 11 will tackle the existing use of schemes by introducing a new charge on loans outstanding from these arrangements on 5 April 2019. Affected scheme users can avoid the loan charge by repaying the loan and replacing it with a commercial loan, or by settling the tax due with HMRC. The Government will bring forward further measures in the coming year’s Finance Bill to ensure that the rules are appropriately targeted.

Clause 35 will put it beyond doubt that these schemes do not work for the self-employed. Where there is an arrangement of this type, the receipt will be taxed as a trading receipt, no matter what form it is received in by the self-employed individual. The clause applies from 6 April 2017 to protect Exchequer revenue and ensure that scheme users pay their fair share. Schedule 12 introduces a new charge on loans outstanding from self-employed schemes on 5 April 2019 in a similar way to schedule 11.

It is right that everyone should pay their fair share of tax and make a contribution to public services. These changes will ensure that users of disguised remuneration schemes pay the tax they owe and will help to bring in more than £3 billion by 2020-21.

Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury)

I will first address clause 34 and schedule 11 before moving on to clause 35, given that both were created at the same time. As I understand it, clause 34 and schedule 11 re-characterise loans as remuneration for tax purposes, but in some cases they would be doing so many years after the original transaction. The Opposition want to see change in this area, because abuses have been clearly documented.

However, this measure comes after a long period of relative inaction, at least in the areas where this legislation is focused. That has meant that many people believed the arrangements they entered into were legal and did not constitute tax avoidance. The April 2019 change in these circumstances could, some have opined to us, cause significant problems, for example to individuals whose situation has changed such that they no longer have the funds to meet the tax charge. How will the Minister ensure that this measure will not cause hardship or injustice to individuals who planned on the basis of previous arrangements, and how will that be balanced against the clear and pressing need to prevent the abuse, which the measure is targeted at?

Clause 35 and schedule 12 aim to tackle avoidance by the self-employed and those trading through a partnership, where their taxable income has been replaced by loans and other non-taxable amounts in order to avoid tax. The pertinent question is how to ensure that the measure is not overly wide-ranging. In particular, how will it be ensured that a transaction entered into in the ordinary course of business, and on commercial arm’s length terms, is not caught within the definition of remuneration? The scope of the measure appears to be relatively wide, particularly when compared with others—for example, the Income Tax (Earnings and Pensions) Act 2003, which discards remuneration—where certain transactions are excluded, but they are not here. It would be helpful to have more specification on that.

Finally, there is a broader question: how will the Minister ensure that these measures are genuinely achieving their objective of ensuring that the full earnings of self-employment remain part of the individual’s taxable income, subject to income tax and national insurance contributions, and that attempts to circumvent that position and still reward the individual are genuinely ignored?

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

I thank the hon. Lady for her typically thoughtful contribution and important questions. She raised the issue of the retrospection or otherwise of these measures. We will certainly be looking at individuals who may have entered into these kinds of arrangements as far back as 1999. Critically, they have until 2019 to clean those arrangements up, if they wish to. If the schemes are legitimate and above board, they have no reason to be concerned because those schemes will stand the tests that we have set.

Let us be clear about what we are looking at: clear tax avoidance. Put simply, an employer may decide that instead of paying an employee, an employee benefit trust or similar, they will make a supposed loan to the employee that they both know will never be repaid—perhaps the loan is not at a commercial rate of interest, or there are no payments of capital or interest throughout the time of the scheme. The net result is that the employee saves on their income tax and the employer saves on their national insurance payments. We need to be clear that clear abuse is wrong and we are stamping down on it.

The hon. Lady asked how we will meet our objectives and ensure that we are content. As with all significant revenue-raising measures, we will closely monitor the effect on behaviour as we follow these cases up. HMRC already has great experience of clamping down on these kind of activities. She asked how much might be raised and how we will know whether the measure is effective. She gave the example of people struggling to pay after being clamped down on. HMRC often confronts that circumstance in its line of work. People who are concerned about their ability to make a full payment of tax on time should contact HMRC at the earliest opportunity. It considers all requests for time to pay individually, based on the customer’s financial circumstances. I hope that those comments address her points.

Question put and agreed to.

Clause 34 accordingly ordered to stand part of the Bill.

Schedule 11 agreed to.

Clause 35 ordered to stand part of the Bill.

Schedule 12 agreed to.

Clauses 36 and 37 ordered to stand part of the Bill.

Clause 38