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They signaled their intention to continue to challenge some of the issues in the legislation as it continues its passage through the House of Commons where there is the opportunity to table and vote on amendments.
Theresa Villiers, leading for the Conservatives as the Shadow Chief Secretary to the Treasury, had previously asked Shout99 readers and other interest parties for their contribution to the debate. She quoted widely from experiences of those in the market place, as she proposed that the MSC regulations be deferred until 'there has been time for a thorough consideration of the effects of the legislation'. (See: MSCs: Conservatives want to hear your views - Shout99, April 2007)
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She opened her speech by saying that 'she would like the report to dwell on the impact on freelance workers, contractors and small companies' and outlined the special contribution the one million freelancers make to the UK economy.
The Opposition claimed that the proposals (in Schedule 3 of the Finance Bill) are flawed, and that they need to be significantly revised if they are to achieve the Government’s stated goal of cracking down on abusive schemes without penalising legitimate freelance and self-employed workers. Although they did express support for moves to crack down on illegal tax evasion with respect to freelance and self-employed workers, and supported attempts to stop abusive tax schemes.
Ms Villiers complained that the proposals would 'place significant limits on the administrative functions that a genuine freelancer, in business on his or her own account, can outsource to advisers. It will force them to deal directly themselves with much more of the red tape that comes with incorporation, rather than delegating it to others.'
IR35
Ms Villiers claimed that the Conservatives would be happy to work with the Government on reforming IR35 and said that 'The first thing to note about schedule 3 is that the proposals are a clear acknowledgement that IR35 has failed. If the Government had got IR35 right, they would not need to bring further complex legislation before the House to attempt to police the borderline between the employed and the self-employed'.
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"Companies outside IR35 will be on one regime; companies inside IR35 will be on a second regime; and there will be a third regime for companies covered by schedule 3. Yet again, the Government have introduced highly complex and controversial legislation that is not properly thought through. They have found that it does not work properly, and to try to fix some of the problems that they created in their first round of tax law they are introducing more complex legislation that is not properly thought through either."
Employment protection
Ms Villiers attacked what she described as a 'myth' that these proposals are about employment protection. She said: "The proposals are not about employment protection. The impact of schedule 3 will be to change the tax status of individuals working through companies that fall within the definition of a managed service company. It will not change their employment status."
Collateral damage
She complained that the provisions could hit many genuine freelancers who operate entirely legitimately and are genuinely self-employed. She took issue with the fact that the consultation document asserts that the 'underlying nature' of the relationships established by workers in MSCs is 'almost invariably' one of employment, but no evidence is given to support this and it has been contested.
Outsourcing
She felt that freelancers were being penalised by not being permitted to the administration work to others. She said: "Outsourcing routine administrative work to allow the worker in question to concentrate on what he or she does best, whether it is IT, engineering and so on, could walk them straight into the clutches of schedule 3."...as any company involved with an MSC provider is caught by the provisions.
The Law Society has expressed concern that the test of involvement is 'enormously wide'. Ms Villiers said: "The question that every freelancer up and down the country must ask is whether her professional advisers could fall within the category of an MSC provider.... and it is not an easy question to answer."
She discussed in detail how wide ranging the exemption for accountants would be and quoted the Institute of Chartered Accountants who had expressed concern about the issue, and had said: “The legislation is ambiguous about whether firms of chartered accountants and tax and business advisers who as part of their other services advise clients about the best structure through which to trade and provide the necessary company secretarial services to enable them to do so, are within the definition of ‘an MSC provider’.”
She indicated that she would be tabling further amendments in later stages to attempt to clarify this position.
Complex
Shout99 and its readers, along with the Professional Contractors Group and other interested parties, has been contributing to the debate and Ms Villiers referred to these organisations frequently in her speech. She said: "The IR35 precedent is not a happy one. Susie Hughes, founder and editor of the specialist contractor website Shout99, said:
“It is clear that contacting is a very complex business, and the new legislation has caused a headache for many contractors, who are still unsure about how to comply with the new rules.
The majority of freelancers who visit Shout99 are very knowledgeable, but the last-minute changes in the Budget knocked many sideways.”
Twist in the tail
A further twist in the tail is that even if a freelancer is content that his or her relationship with a professional advise is compliant, they could still end up with MSC status if the accountant was providing non-compliant services to other companies. She said: "The accountant’s work for other companies would taint all their clients, and in assessing whether there is a risk of falling within the scope of schedule 3, a freelancer therefore has to look not only to their own relationship with their professional advisers, but at the services that they might be offering to other people."
Debt transfer
The debt transfer rules give the Treasury the power to introduce secondary legislation to impose liability for the tax debts of an MSC and levy them on third parties. The Law Society described this section as 'extremely wide' and stated that it 'could cover a wide number of people who do not actually benefit from the provision of the MSC services'.
These proposals 'pierce the corporate veil';, leaving directors, employees and payroll clerks in the firing line. She was concerned that these provisions could also involve considerable litigation risk, as companies might end up blaming one another for being dragged into the criteria.
Conclusion
She concluded with a plea to delay the implementation of the measures in order to fully consider their impact. She said: "In conclusion, this evening we call on the Government to think again about schedule 3. I know that the Financial Secretary is a reasonable person, and I appeal to him to listen to what we have had to say. There is a risk of collateral damage, with many legitimate, genuine freelancers and contractors and their professional advisers hit by the fallout caused by the Government’s attempt to shut down abusive schemes. We think that the Government should take time for further reflection, consultation and analysis on how the proposals should be amended to prevent that unfortunate consequence. People from firms that advise small service companies are already winding up their businesses and handing out P45s as a result of the Bill.
"Given the risks involved, we call on the Government to take time to get this right, to consider the alternatives, to work out and clarify what these complex provisions mean, to try to avoid the mistakes of IR35 and to ensure that the provisions do not end up clobbering genuine, hard-working freelance workers who are merely trying to make an honest living and are already struggling with rising inflation, falling living standards and rising mortgage rates."
The full debate can be read in Hansard.
Further information
For more information about the MSC provisions and its effects on freelancers, see Shout99's 'Political News' section.
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Susie Hughes © Shout99 2007
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