19 May 2020
Finance Bill

Jesse Norman moves a ways and means motion to enable the Government to amend the current Finance Bill in order to implement reforms to the existing off-payroll working rules. 

The Financial Secretary to the Treasury (Jesse Norman)

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 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) the hon. Member for Haltemprice and Howden. 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.