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Lord Jenkin of Roding: I added my name to the amendment almost with a sense of deja vu. Twenty years ago, when I was Secretary of State for Health and Social Services, my officials came to me with a proposal that there should be imposed a new control test to determine whether an independent contractor was an employee. The institutions they chose in order to test that out were the major London orchestras and professional choirs.That caused a good deal of disquiet in the arts establishment.

The matter was brought to my attention by a relation of mine, who is one such musician--I declare an interest, if such interest has to be declared--and I was warned that there might be serious problems. When my officials arrived, they sought to justify the argument that the musicians, who were instrumentalists or singers, were engaged in a contracted service with the organisation for which they were performing, because, they said, the musician has to obey every wave of the baton of the conductor.

I promise that this is true. They said, therefore, that, by the normal test of whether someone is an independent contractor or an employee, such singers, violinists, trumpeters and bassoon players were all

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employees, in which case the orchestra should pay employers' national insurance contributions and the employees should pay Class I contributions.

I said that that was totally unrealistic and that it was to fail to recognise the nature of that kind of professional occupation. After all, such a musician may be playing at a session of a recording company in the morning, may be singing at a memorial service in St Margaret's Church at lunch time, may be rehearsing for a concert all afternoon and performing that concert in the Barbican or the Albert Hall in the evening. In the course of the day, that musician would be working certainly for three and maybe for four different conductors. Is it to be argued that in the course of one day such a musician should have four separate employments?

I asked, "Do you really expect me to go to the House of Commons and advance such an argument? I shall not because I know that it is totally unrealistic as a member of my family is one such musician". They said, "We shall have to report this to the Chancellor of the Exchequer", who at that time was my noble and learned friend Lord Howe of Aberavon. I answered, "I don't think that will get you very far because he too has a daughter who does exactly the same thing".

That was almost the last I heard of the matter. The final word came from my private secretary, who, having ushered the posse of officials out of my room, returned to me and said, "Well, Secretary of State, that was the unacceptable face of bureaucracy"!

I am not surprised that this matter has surfaced again in a slightly different guise, but with the same fallacious argument about control. My anxiety about the clause centres on the fact that it takes this test of control as the guideline as to whether or not, when the contract is made through an intermediary, the client controls the work. To my mind, that is wholly misconceived.

A great many people, such as the musicians I have described, will meticulously obey the requirements of the client because that is the nature of the work that is being performed, but that does not change the status of the worker from being a self-employed professional person who has contracts with a range of people. Some contracts may be arranged directly and some may be arranged through intermediaries. There is a profession known as fixing. Fixers are firms that undertake to find musicians to perform particular pieces of work for conductors.

I understand that later amendments refer to information technology, but there are many other walks of life where this kind of relationship has built up because it is the most convenient and effective way of conducting business. It provides complete flexibility for the client--I shall continue to call him that because it is what the Inland Revenue calls him--to call up the particular services that he needs for as long as he needs them. He can them terminate the arrangement in accordance with the contract. The individuals who do the work then work for other clients. That, as it were, is the hallmark of the individual who is self-employed.

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It has been the policy of successive governments to help people into precisely that kind of activity. The present Government are no exception. They have introduced measures to encourage unemployed people to become independent and, in many cases, to set up in business. Out of small acorns great oaks can grow. There are examples in recent years.

I find the clause totally misconceived. By saying that the relationship was one which, if there were no intermediary, would create the status of employed worker, the Government's purpose would be met. Like my noble friend Lord Higgins, I am not seeking to defend tax avoidance. What I am very concerned about is that the method that the Government have chosen is sweeping into their net tens of thousands, or perhaps even hundreds of thousands, of individuals who by no stretch of the imagination are engaged in tax avoidance. They are conducting their affairs in a thoroughly efficient, commercial and effective way in a modern, flexible economy. Whether it is the unacceptable face of bureaucracy or a misconceived zeal to try to find tax avoidance where there is none, I find the clause very unsatisfactory.

The Inland Revenue has been kind enough to provide a number of examples of cases that might be within and outside the clause. There are several pages of them. Perhaps I may read just one. I hope that it will perhaps illustrate the folly that I have been trying to describe. It is the Inland Revenue discussion document, 18th May, page 6. It states:

    "A vet in partnership spends every Monday working at the local zoo attending various animals as required by their keepers, and undertaking other duties (e.g. performing post-mortems, preparing animals for transit, supervising inseminations and providing training on various animals health matters) as directed by the head keeper. The zoo pays the partnership an annual fee for the vets attendance each Monday. This engagement should be caught by the new rules. However, members of the partnership are sometimes requested to attend animals at other times, for example, when one injures itself in the middle of the night. Such visits are outside the terms of the annual contract and a fee is charged appropriate to the work done. On these occasions the zoo has no right of direction or control over what is done or how it is done".

Except, I add in parenthesis, to say, "Look, there is a sick animal, go and do something about it." Presumably, the zoo owner does that.

    "The zoo may reject the advice given or refuse the treatment recommended but that would not amount to a right of direction or control. In these cases the new rules would not apply".

For a moment let us consider the folly that that would cause. Let us consider the position of a partnership. This case concerns a vet in partnership with others like the firm with which we all became so familiar and learnt to love in the series "All Creatures Great and Small." Let us just imagine Robert Hardy, the actor who played the senior partner, having to treat himself as an employee for half of Monday each week and then being his self-employed professional self for the rest of the week. How on earth does a partnership expect to operate in those terms? Why should he be regarded as an employee, simply because of the way this clause is introduced, through an intermediary?

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I find the clause totally unacceptable. As was said in The Times the other day about the Chancellor:

    "Does he really think that it makes sense for a free-lance television producer who may work for a dozen different companies during the course of a year, to have to be treated by each as an employee? Or the IT consultant, who moves from project to project, to be forced to give up his independent status and join the company payroll, no matter how brief his stay with the new employer may be?".

I have a sheaf of similar press cuttings but at this hour of the night I shall not weary the Committee with them.

This clause is misconceived in the form in which it comes before us. As my noble friend from the Front Bench said, the Government undertook to consult. But they introduced the clause in the other place before they even started consultation. I dare say that the noble Lord, Lord McIntosh, will have something to tell us about the process of consultation, and perhaps the progress. But I hope that the Government have begun to get the message that the clause cannot be allowed to go through as it stands.

It is not sufficient to say that the consultation will be about the regulations, because the heart of the new system is in this clause. The detail will be in the regulations. It is the new clause itself which is misconceived.

Lord Goodhart: I am all too conscious that it is relatively late at night, and also that I am the third speaker in this debate. Nevertheless, Clause 70 presents problems which are extremely difficult and complex and in order to do justice to it I fear that I shall have to take a little more time than I would wish and no doubt than the Committee would like.

It is essential to understand the background to this matter. The background is a distinction between the status of an employee who works under what lawyers call a "contract of service" and a self-employed, independent contractor who works under what a lawyer would call a "contract for services." For the worker there are some tax advantages in being self-employed. A self-employed person is taxed under Schedule D; an employee under Schedule E. Schedule D presents some advantages in tax flow--you pay tax only twice yearly instead of week by week under PAYE--and some business expenses are deductible under Schedule D which are not deductible under Schedule E. But a much more important difference is national insurance contributions.

A self-employed person receives almost the same benefits as an employee--everything except jobseeker's allowance and SERPS. But the contributions paid by a self-employed person are far smaller than those by or on behalf of an employee. The client of a self-employed worker pays nothing in NICs. An employer of an employee pays 12.2 per cent in NICs on everything above £83 a week. A self-employed person pays in most cases less than the employee by way of NICs, let alone the combined liability of the employee and the employer.

There are, of course, some drawbacks for the self-employed person. They do not receive employment protection rights, statutory sick pay, a right to paid

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holidays and so forth. But the distinction between self-employment and employment is well established by law. As already pointed out, there is a great deal of case law.

Let us assume that an expert in information technology is hired by a company to do a job, and let us assume that the terms on which he is hired are such as to make the expert under established law, prima facie, an employee of the client. But in this case there is no contract between the expert and the client. Instead, there is a contract between the client and the expert's personal company; all the shares are owned by the expert. The client pays a fee to the expert's company. The company pays part of that to the expert, perhaps a bit to the expert's wife, and the company then pays the rest to the expert as a dividend. But under the present law the expert cannot be treated as an employee of the client because there is no contract between them. This arrangement gives enormous NIC advantages because, if there were a direct contract, the client would have to pay the employer's NICs on the whole of the wages above £83 at, as I said, 12.2 per cent.

Dividends are not liable to NICs. Therefore, the expert and his company can limit their NICs to whatever the company actually pays in wages. That is plain tax avoidance or, more accurately, NIC avoidance. It is worth pointing out--and this has not been concentrated on enough--that the main beneficiary is not the expert, but the client who employs the expert without paying a penny in NICs. That point has been ignored by the very high-pressure lobbying campaign we have had. Indeed, to some extent, I believe that the use of personal service companies is being forced upon workers, especially in the information technology world, by companies which are not prepared to take workers on as employees because the NIC consequences and the consequences for employment rights are something they prefer to avoid. Where that occurs, I believe that workers with personal service companies are the victims, not the beneficiaries, of this arrangement, although I suspect that they do not often realise it themselves.

I do not think that the use of one-person companies for avoidance purposes is acceptable. It is an abuse of the NIC system and should be stopped. So why not accept Clause 70 as it stands? We have had a very highly organised lobbying campaign on this matter. I do not accept all of the points made by the lobby. It argues that any change in the law would damage entrepreneurship and force many owners of personal service companies to emigrate. I find myself quite sceptical about that argument. I certainly do not accept that IT workers are in a special category. Therefore, I shall not be able to support Amendments Nos. 140ZA or 140A.

The critics of Clause 70, as it stands, include many very reputable organisations who are not part of the lobby. They include the Institute of Chartered Accountants in England and Wales and the Tax Law Review Committee of the Institute for Fiscal Studies, of which I am a member. The real problem is not the Government's objective but their proposed method. As it stands, Clause 70 will add to the complexity and uncertainty of the law because it gives power to the

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Treasury to decide who is, and who is not, to be treated as an employee of the client. Such power may be used to treat as an employee someone who would not be treated as an employee if he were providing services under a direct contract with the client. That is the Government's intention. The discussion paper says that they intend to apply a control test to determine who is to be treated as an employee. But under the existing law, control is merely one of the tests of the nature of the relationship, not a conclusive test.

There are other factors which can be taken into account. They include whether the worker supplies his own equipment; whether the worker is entitled to substitute others to do the work; and the degree of financial risk assumed by the individual worker. It will therefore follow that we will have two entirely separate tests--one in contracts to which Clause 70 applies and the other in straightforward contracts. I am afraid that the noble Lord, Lord Higgins, was wrong in saying that this will make the existing case law obsolete. It will not. The existing case law will continue to apply whenever there is a contract direct between the client and the expert or the worker. What we will have is a quite separate test in the special cases where there is an intervening company, and there alone. So that will increase the complexity of the law.

In summary, I cannot do better than quote from a letter sent by the Tax Law Review Committee to the Inland Revenue last month. It says:

    "The complexity of the classification issue is increasing as work patterns change and flexible forms of working become more common ... the test of supervision, direction and control proposed by the Inland Revenue for use in the context of personal service companies is no longer of primary importance in the case law, having been rejected many years ago as being unsuited to modern economic conditions. It may be one of a number of relevant factors now but will not be applied in isolation. One consequence of using an over-simplistic control test in the proposed personal services company legislation would be, therefore, that a worker who did display what the courts have defined as essential characteristics of self-employment could nevertheless be treated for tax and NI purposes as an employee under the new rules".

9.45 p.m.

Lord Higgins: I hope that I may interrupt the noble Lord for a moment to pursue the point he made a second ago. He is saying--quite rightly, I think--that the existing case law continues but we are going to have a further definition of what constitutes an employee. As far as that group is concerned, the existing case law, as I understand it, becomes obsolete.

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