Last night I issued a heartfelt plea for the Labour Party to bring more tax expertise into the party. Today I can demonstrate why.

In his conference speech yesterday Ed Miliband promised extra spending on the NHS which would be funded in part from an extra £1bn yield from tax avoidance. Today some detail of where that £1bn would come from was given. £650m of that sum is to come, according to briefings and a Press Release, from “prevent[ing] so-called ‘Umbrella Companies’ being used to avoid tax and National Insurance by exploiting expenses rules.”

The way in which so-called umbrella companies “exploit” expenses rules is by seeking dispensations under section 65 of the Income Tax (Earnings and Pensions) Act 2003 from subjecting payments on account of expenses to tax. But they only get dispensations where HMRC agree the expenses are not subject to tax. In other words, where there is no exploitation of the expenses rules.

More likely, the £650m is the projected yield on a measure which has the effect of deeming many or most self employed workers in the construction industry to be employees. As I explain here, the effective rate of taxes on income for self-employed workers is materially lower than those for employed workers. So deeming some of those self-employed workers to be employees for tax purposes would produce a yield.

The measure referred to above was originally mooted by the last Labour Government in 2009. The cost to the exchequer in loss of tax and NICs from those workers (characterised as “falsely self-employed”) was estimated in 2010 to be £350m. But the measure fell away on the change in Government.

Then, in the Finance Act 2014, the present Government introduced measures to tackle false self employment in the construction industry. Those measures had a projected yield of some £520m in 2014/15.

So from a pool of expected cost to the fisc in 2010 of £350m pa the Conservatives propose drawing a projected yield of £520m pa (a figure I said at the time I did not believe would be achieved) and now Labour proposes drawing from that same pool a FURTHER £650m pa: a total of £1.17bn pa. Of course, that pool might have grown – but then again one never yields all of the ‘pool’.

You do the math.

Postscript. The Financial Secretary to the Treasury, commenting on this blog, has pointed out, correctly, here that the Conservatives were dipping into a pool bigger than the construction industry. In line with my policy of correcting my errors, I should state that I had forgotten that fact. But it is worth considering the consequences.

The Summary of Impacts for the Finance Act 2014 measures states that the impact is “expected to be focused on the construction sector” and then goes on to give a figure of 200,000 of 250,000 workers expected to be caught. One might, assuming equal distribution of impacts in the construction and non-construction sectors, reduce the Conservative ‘dip’ from the £350m pool by 20% to £416m. That would mean Labour was assuming an aggregate dip from a £350m pool of £1.066b rather than £1.17b. In other words, the adjustment makes Labour’s projected dip slightly less unrealistic.

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