Dawn Primarolo: I hope that I can reassure the hon. Gentleman that the clause will not do what he fears. He may then feel happy enough to withdraw the amendment.
The Government are keen on approved share schemes, which is why we give so much tax relieftaxpayers' moneyto encourage them. When the hon. Gentleman reads the record, he will see that we were disagreeing about whether some people should have complete relief on tax.
The amendment would remove paragraph (4) and leave section 144A of the 1988 Act as it stands. The hon. Gentleman concentrated first on whether greater value would be chargeable, and secondly on whether class 1A NICs would be liable. First, under section 144A, income tax is charged on certain amounts of employees' tax liability that have been met by the employer. Other employee benefits, such as payment of expenses or the provision of a company car, are treated as emoluments. Paragraph (4) brings benefits arising under section 144A into line with the legislation. There is only one consequence of that change: a section 144A benefit is currently left out of account in deciding whether an employee is earning £8,500 a year, although most employees with a section 144A tax charge are earning well above that figure. As the hon. Gentleman suggested, there is no way of bringing extra amounts into consideration.
Secondly, the paragraph does not change the national insurance position. There can be a class 1A charge only if there is no class 1 national insurance charge, and I am advised that there is a class 1 national insurance charge here.
In the case of an employee's tax paid by their employer, the Inland Revenue takes the view that the employee has received an advantage under sections 3 and 6 of the Social Security Contributions and Benefits Act 1992, and class 1 NICs are payable if a person does not reimburse their employer within the relevant period. That does not relate to class 1A as the hon. Member for Arundel and South Downs suggested. The position with regard to national insurance already applies and there will be no change to it. Re-labelling the benefit as an emolument would also not change it.
In the face of continuous, and very loud, calls from business to align the tax and national insurance rules where possible, I cannot see any reason not to align those particular benefits because that would not change tax or liability arising from class 1 national
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insurance and the situation for employers will remain the same. I hope that I have put the facts clearly on to the record, and that the hon. Gentleman and the Law Society, which seems to be troubled by that point, are reassured. The point is exactly as it seems and there will be no change to the national insurance provisions that are currently operating.
On that basis, I hope that the hon. Gentleman will withdraw his amendment and think about the point again.
Mr. Flight: I thank the Paymaster General for her response and her clear statement on class 1A NICs. Although I agree that there are not going to be many people earning £8,500 to whom these matters will apply, such a person would be brought into the regime of draconian penalties if they did not pay the PAYE on time. Other Members and I raised the point that although such people are in a minority, they are the people most likely not to know that they have such a liability. The Government should think about that.
Dawn Primarolo: Perhaps I did not put the point clearly. Section 144A applies to people who are on £8,500 or more, and by definition his concern about an attack on the low paid does not apply. Very, very, very few people, although I cannot say that there will not be any, who will be affected by section 144A would be considered to be low paidI have to say that on the basis that I can never say never or none because somebody is bound to discover one such case. I hope that that description will help the hon. Gentleman.
Mr. Flight: I thank the Paymaster General. The point that she confirmed was that the benefit would be included for the purposes of the £8,500 floor, which is a change from the past. I may be wrong, but a subtle change is going on here even though it may not affect more than a very small number of people. If my understanding is correct, it needs to be flagged up at the very least because self-evidently anyone of modest means who happens to get caught will be subject to an inappropriate degree of penalty out of ignorance. I take it that the Paymaster General is saying that the Government intend to communicate what this is all about so that the relevant employers will be absolutely clear. The issue is not major enough to press to a vote, so I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Schedule 6 agreed to.
Clause 39 ordered to stand part of the Bill.
Provision of services through an intermediary: minor amendments
Mr. Flight: I beg to move amendment No. 14, in page 24, line 35, leave out from 'payment)' to end of line 28 on page 25 and insert--
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'in step Three of paragraph 7 after ''by the worker out of those emoluments'' add ''and deduct also all allowances and the effect of all reliefs to which the worker would be entitled were he the employee of the client in employment assessable to income tax under Schedule E''.'.
Clause 38 applies to traders who have been penalised by the measure known as IR35, which the Government introduced in 2000. Among other things, this had the effect of taxing independent contractors as if they were employees and introduced a rather complicated method of calculating the tax due on their supposed salaries.
The clause somewhat grudgingly corrects some aspects of what was considered to be overkill in the IR35 approach. IR35 targets are given two exemptions that are available to ordinary full-time employees: mileage allowance and partnership expenses. We are pleased to see the provision, which is fair and reasonable, but the amendment would do the correct thing and provide automatic extension of all ordinary employees' tax benefits to IR35 targets. If IR35 individuals are to be treated as though they were employed, they should be covered by the same wider arrangements. Relevant areas include qualifying child care payments and personal incident expenses. The Government have been over-obsessed in principle with the IR35 territory and the amendment offers an opportunity to create a level playing field and provide IR35 individuals with the standard exemptions available to employed individuals.
Dawn Primarolo: The clause introduces three minor amendments to service company legislation. They are necessary to maintain fairness of treatment for employees and service company workers who work on terms similar to those of employees. We have published separately some amendments to deliver the same proposed changes for national insurance purposes.
Our three proposed amendments fall into broad categories. First, service company workers will get the same relief that conventional employees receive under the new mileage allowance regime for business travel, which came into effect on 6 April 2002. We are not correcting something; we are extending new arrangements. Secondly, partnership intermediaries who reimburse certain allowable expenses to a partner will be able to claim relief for those expenses in the same way as a service company intermediary. Thirdly, service company intermediaries who cease trading during the course of a year will be able to claim appropriate relief in their final corporation tax accounts for the deemed schedule B payment that they are required to calculate under the service company legislation.
Taken together, this small package of changes ensures the continued fairness of treatment that the Government sought to establish between employees and people working through an intermediary or on similar terms to an employee.
Amendment No. 14 would replace a large part of the clause with a short form of words apparently seeking to put those affected by the service company legislation
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and those who are directly employed on the same footing with regard to their entitlement to tax relief and allowances under schedule E.
I reassure the Committee and the hon. Gentleman that the amendment is not necessary. The service company legislation already entitles workers affected by it to the same tax reliefs and allowances under schedule E as those who are directly employed. The clause ensures that that remains the case and, as I have already explained, includes certain travel expenses, following the introduction of the new mileage allowance scheme. Therefore, the amendment would, at best, be unnecessary.
I must explain to the hon. Gentleman what the amendment would go on to do, in case he wants to press it to a vote. Contrary to its apparent intention, and I accept what the hon. Gentleman says, the amendment would undermine the treatment that it appears to try to guarantee. It does not need to guarantee it, because it is already there.
First, by stripping out the relevant cross-references to the mileage allowance rules, the amendment would deprive those affected by the service company legislation of the same entitlement to tax relief as a direct employee. It would strip away the parity that the clause puts in place. Secondly, by removing the section on reimbursed expenses, the amendment would prevent partnership intermediaries from being able to claim a deduction for expenses reimbursed to workers that a service company intermediary could claim. Therefore, not only is the proposed amendment unnecessary, but, unfortunately, it would impose on the intermediary companies an unfairness that it does not seek.
I accept what the hon. Gentleman said earlier: that the amendment was drafted to ensure parity. I have given him the undertaking that that is there. I have explained that on this occasion, in the best interests of saving the hon. Gentleman's reputation[Hon. Members: ''Oh!'']outside the House, I gently suggest to him that he should not press the amendment to a vote. He may wish to reconsider it, but if he presses it to a vote, he will damage the companies that he claims he is trying to help, and I am sure that he does not mean to do that.