Issue 23; 14 October 1999

House of Lords Debate | What Happens Now??

Just before midnight on October 13, after an hour-long heated exchange in the House of Lords, their Lordships walked through the lobbies and voted out the IR35 section of the Welfare Reform Bill (Clause 71-72) by 84 votes to 66.

The debate was effectively between the Government (Lord McIntosh) who felt that the proposals had already been significantly watered down - and Lords Higgins, Jenkin and Kintore who put forward the case for PCG.

McIntosh opened by getting his retaliation in first - mainly taking on board the PCG's objections and dealing with them before they could be raised. He supported the consultation process during the summer and explained the changes which had resulted including change of obligation on to the imtermediary; the use of the self-emplolyment tests; and the expense deduction.

He made a strong point of attacking the IT industry:

"Let us consider the case of two people sitting side by side in the computer department of a big company. One is an employee of the company, the other works for his own service company. They might have been there for the same length of time; they are both part of the same team and work under the same team leader, doing the same kind of work. It has been argued that because one worker has chosen to set up a service company, he is somehow an entrepreneur and deserves to pay less tax and NIC, and that because applying the normal rules to distinguish employees from self-employed would result in taxing both in the same way, there must be something wrong with those rules. I do not think his colleague at the next desk would agree."

He did not believe much of the PCG's case, although frequently (and with more annoyance) referred to PCG.

"We do not believe that the payment of a fair level of tax and NICs will wipe out the IT industry or that IT workers will leave the UK en masse as a result of those changes."

"If it is argued, as it has been argued by the IT industry, that that puts them at a disadvantage compared to the large and, in particular, foreign companies which provide consultancy, I can only say that that is based on a misconception. One company which is other than a one-person service company cannot use the loophole of paying its principals in dividends."

Having felt that he had dealt with the objections and dismissed PCG's case before it was raised, he seemed to look confident. That confidence diminished in direct proportion to his anger rising as a number of speakers took his arguments apart, and Civil Servants, sitting nearby sent hand-scribbled notes with more and more urgency.

Lord Goodhart was more circumspect than some of the later speakers as he acknowledged that:

"There has been a high-pressure lobbying campaign by some organisations, notably the PCG , to retain the status quo....At the same time, we accept some of the complaints from the PCG and others."

He went on the explain that the existing tests for self-employment need to be reassessed. He detailed his specific concerns and was highly critical of the Government's attitude to 'brushing off' the PCG with phoney consultations.

"The PCG plainly represents a large number of those people who have created personal service companies in the IT industry. It has a very strong view. As I have made clear, I do not, by any means, agree with everything it says but it is directly affected by this legislation and its voice needs to be heard by the Government."

The heavy guns then came out with Lord Higgins, opening his speech by describing the proposals as 'half-baked'. He made a case for the IT and oil and gas sectors; criticised the self-employment tests; said they would have an adverse effect on entrepreneurial companies; and concluded by attacking the Government and Revenue for the manner in which it had tried to introduce these clauses with no consultation with the people who mattered.

Lord Jenkin followed on, saying that the case had already been 'blown out of the water' and that the Government had underestimated the concern felt by the IT industry and others. He quoted extensively from letters from contractors which he had received.

He concluded by saying:

"This is one more example of the Government saying one thing - 'we want to encourage e-commerce; we want to encourage private enterprise and entrepreneurs' - and then doing something that seeks to destroy them both. We should not allow this clause to pass into the Bill."

The Earl of Kintore, who has been closely associated with the PCG, delivered a fine explanation of the damage this could do to the Aberdeen oil and gas sector. He was supported by Lord Campbell of Troy.

The Government started to retaliate. Lord Hughes of Woodside described the concerns about Aberdeen as 'bunkum'.

Lord McIntosh had the opportunity to wind-up the debate and address the issues which had been raised. He was clearly annoyed. First he dealt with the process, rejecting suggestions that it would have been possible to introduce amendments earlier; then he went on to defend the nature of the consultation - pointing out that PCG was the only group to object then, somewhat ontradicting himself - that PCG was content with the consultation; he dismissed any problems with the self-employment tests.

"These tests have been built up by the courts over many years. They are not new to anybody....nor to anybody like me who has run a small business."

Interestingly, he seemed to imply that if the clause was voted out it would not reappear...

"That would certainly be the effect if this clause was removed from the Bill. It would not be considered at Third Reading, and I am not sure that it would ever come back again. We would have to introduce it another way."

He then tried to draw comparisons with IT contractors and market researchers whom he had employed. By the time he concluded, his temper was running high:

"All this talk we have heard about the IT industry, the North Sea oil industry and all this emotional stuff is way outside the scope of the amendment. We really have no case to answer here. We are doing a simple thing to get rid of tax avoidance. We are doing it in a way which, after consultation, has received the approval of virtually everybody who has been consulted, and the idea that we should back down now on the arguments we have heard is simply not acceptable."

At this point the Division Bell rang and the House divided. The Opposition benches which had been gradually filling up throughout the debate filed into their lobby. The Government benches, which had about 12 people listening, suddenly filled as Lords and Ladies downed their drinks and left their meals to file into the Chamber.

The amendment was defeated by 84-66 votes.

What happens now?
There are a number of options:

1. The Government could try to reintroduce something when the Commons consider Lords amendments in a few weeks. If they do, the Lords have another opportunity to look at it; and there is a danger (to the Government) that time will run out;
2. 2. There could be a clause in next session's Finance Bill;
3. The Government could now have proper consultation with the PCG who are willing to help them achieve their objectives without damaging the enterprise sector.

The PCG executive team meet on Monday to consider our position and we will be putting a paper in front of members for consideration shortly thereafter.

Susie Hughes
Press officer
Professional Contractors Group. Link to Hansard, 13 October 1999 Link to Times article, 15 October 1999