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National Insurance

Volume 170: debated on Wednesday 28 March 1990

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Motion made, and Question proposed, That this House do now adjourn. — [Mr. Patnick.]

1.17 am

This Adjournment debate arose from the fact that some time last year I received one of those brown envelopes from a whistleblower. That letter asked me to raise the matter of the mighty scandal of employers across the country not paying into the Inland Revenue the amount of money that they have taken from employees.

As a result of that letter, I raised the issue on the Floor of the House with the Chairman of the Public Accounts Committee. He was able to reveal that that was the case and that the Comptroller and Auditor General thought that the position was so bad that he was inclined to look at it as well.

As a result of my questions, the matter was reported in the press and a great deal of publicity arose in many parts of Great Britain. I am indebted to the northern regional low pay unit, the west midlands regional low pay unit and many others who wrote to me saying that I had raised an issue of scandalous proportions in which employers in large and small firms are breaking the law, but the Government are doing nothing about it.

The whistleblower wrote:
"Dear Mr. Skinner,
I am the legal adviser to a large … organisation which is why, to my shame, I am remaining anonymous.
Over the past eight years the publications emanating from the Government's Departments"—
that is,Employment News
"have gradually ceased to give (as they used) basic facts and statistics and become a mere vehicle for Government propaganda. There is no other word for it. The enclosed publication used to give facts … The centre pages mark the lowest it has yet reached."
The centre pages referred to fraud squad snoopers who turned into a potato field in Lincoln and managed to find a few people who were getting unemployment benefit. It got the proper tabloid treatment, as we expect. The writer went on to say:
"The unholy glee exhibited by whoever wrote the article is unpleasant.£1 million a day 365 days a year is the estimate of monies deducted by employers from the wages of employees in Tax and Social Security contributions which are never paid over. That is a hell of a lot more than the £62·55 million the article boasts of."
That was about the potato pickers, the social security claimants. The letter goes on:
"It says nothing of the alleged 'frauds' which were successfully fought by the beneficiaries.
Last year 157 people died on building sites. Over the past 8 years there has been a 20 per cent. cut in the numbers of safety inspectors—there are 12 for London and 90 for the rest of the country. Employment News never mentions that."
That is the scale of the fraud. As people have said, it is a licence to steal from the lowest-paid in Britain. That is usually the case because of the way in which people have to scramble for jobs. According to the northern regional low pay unit, it all arose from the change in the law instituted by the right hon. Member for Sutton Coldfield (Sir N. Fowler), who has now left to look after his family. He was the Secretary of State for Social Services, and in 1984 he changed the rules to allow employers off the hook. He said:
"I have examined carefully the special power contained in section 152(4) of the Social Security Act 1975, under which directors can become personally liable for the national insurance contribution debts of their company if they knew or should have known that the contributions were not being paid.
From the date of this announcement, I propose to take no further action in any case in which my Department is currently involved."—[Official Report, 12 November 1984; Vol. 67, c. 139.]
That prompted a person called Mr. Justice Harman no less to say that contributions that were being held by employers in a quasi-trust fund had been stolen from the employees when employers did not pass them on. He said:
"But the thieves are not prosecuted, as they are no longer held personally liable for payment of the contributions, and all too frequently remain in business, or set up new companies should the first go into liquidation. Meanwhile, the taxpayers meet the cost of the fraudulent practices, and the individual ex-employees suffer weeks of anxiety and trouble until benefit is restored."
Of course, some of them have to suffer even more than that.

In 1980 the amount not collected by the Inland Revenue was estimated at £40 million. By 1987, after the Act had been changed and employers were let off the hook, the amount of fraud had risen to £264 million. The estimate now is that it is approaching £400 million. In the same time those who commit social security fraud—we are talking about people on low pay. one-parent families and such people— have been prosecuted 400 times more than employers who are defrauding their employees and the tax system.

The Government talk to us about the rule of law and the poll tax and the millions of people who refuse to pay it, yet they allow employers to get off the hook. Employers cheat in an incredible number of ways. First, there is creative accounting, which is very handy. Employers deduct contributions from the wages of employees and keep the money in the company account. The second fiddle is not to provide pay slips, and where there is high unemployment people are frightened to ask for a pay slip. By and large there are no unions in the small places and people are frightened to say anything. The employers say, "Everything is okay. You don't need a pay slip and here is money in the hand." They are not paying over the insurance and tax.

The third fiddle is to list full-time workers as part-time workers. If they earn less than £46 a week, as from April of this year, they do not have to pay insurance. If the workers earn more than that, the employers pocket the money and make a fine killing. No stamps are needed, and many of these people are paid as little as £2 an hour.

Another gimmick is to cut the hours of employees who earn more than £46 a week. Two and a half million women fall into the category of people I am talking about; they are affected more than men. As I have said, this information comes from the northern regional low pay unit.

Not only small companies are involved; multinationals are, too. They use an old gimmick: they falsify the numbers of people working for them in the Common Market. Also, they sometimes pay enhanced wages in the Common Market and tell the Inland Revenue here in Britain that those people are on lower wages. They make small fortunes in that way; they declare phantom wages to the Inland Revenue.

Another fiddle is used when a firm is in trouble. Let us say that a company realises that it faces bankruptcy. If it is not already pocketing the money, that is the moment when it begins to do so. Insolvency stares a firm in the face, so for six, nine or even 12 months such a firm can pocket all its employees' national insurance and tax contributions. Then, when it is declared insolvent, the money is not claimed back from the firm. Throughout the Thatcher years there have been 20,000 bankruptcies or insolvencies a year, so we can imagine how many casualties there must be.

Then there are what I call the phoenix companies which rise from the ashes. A company is set up in one area and seems to flourish for a while. It then goes into liquidation, only to emerge somewhere else with the same machines and sometimes with the same work force. Then the pattern is repeated. Each time, many people are thrown out of work. Debts are left unpaid and company directors pick up the profits and go on to set up somewhere else.

A certain northern firm was set up originally by a couple and an accountant with a Department of Trade and Industry grant. It went bust in 1983, with £310,000 debts, and £195,000 of unpaid VAT, pay-as-you-earn and national insurance contributions, including those deducted from workers' pay. The directors were not prosecuted. The Inland Revenue said that it would "bear with the company". Due to the change effected by the Secretary of State in 1984, the directors were saved from paying £90,000 in PAYE and national insurance.

The name of the company was changed, but it crashed again in January 1985, with £20,000 taken from workers' pay in income tax and national insurance contributions. Again, the Revenue said that it would bear with the directors. The company changed its name again, and went bust again in August 1985, owing £26,679 in income tax and national insurance that had not been passed on, and £16,000 in unpaid workers' wages.

By August 1988, the court had disqualified the first director from holding company directorships. The law finally caught up with him after all those years, and he was not allowed to be a director for three years. He had to pay the small sum of £500 costs. But the bent accountant got off scot free. The other director started another company with another DTI grant—that is what happens in the Government's entrepreneurial society.

This second director set up two more clothing firms, which went bust owing thousands to the Inland Revenue. Altogether, this man, his co-director wife and the bent accountant had started up four companies with debts totalling £500,000. They have not paid back a single penny, or been fined, or been imprisoned for a single day. Those phoenix companies are being set up on a large scale.

That case and others were so outrageous that the official receiver in the north-east said:
"It is common place to find that firms run for 2 years with no intention to pay their debts to the Crown. It is licensed theft."

Yes, my hon. Friend is right.

The Government talk about the rule of law and how we have a law in Britian that is equal for everybody, yet these employers are running rings round the Inland Revenue. They are not the casualties. The real casualties are the people who go for their unemployment benefit and the DSS says, "Sorry, you haven't got enough stamps. We can't pay you." People go for sick pay. Women go for maternity benefit. All my hon. Friends present know of constituents who have found that they have insufficient contributions. Then there is the person who wants his old-age pension. Thousands of people go through life working for these companies and end up finding out that they have lost three, four and, sometimes, 10 years of contributions, and their retirement benefit is reduced as a result.

Why does that happen? It is partly because of the changes in the law in 1984, but also because the Inland Revenue does not have enough inspectors to do the job. It is different for social security fraud inspectors checking on people on £40 a week. In 1979 when the Government came to office, there were 2,311 full-time equivalent posts for detecting fraudulent social security claims. By 1989 there were 413 more. Those people deal with one-parent families, those who are supposedly co-habiting and potato pickers in East Anglia. In the same period the Inland Revenue lost 18,000 posts. That is how the Government allow their friends, the bosses, to get away with breaking the law.

What needs doing? We want an increase in the number of Inland Revenue inspectors to follow up employers who are breaking the law. We want the 1984 legislation changed back so that employers can be prosecuted for these debts. We want the Labour Government, because this one will not do it, to ensure that local authorities, regional development agencies and the Department of Trade and Industry fully investigate all companies that apply for grants. [HON. MEMBERS: "The Minister for Social Security is sleeping."] He will drop to sleep because he has just voted against the veterans.

We want local authorities to be able to use their purchasing power so that the companies from which they buy materials have to conform to proper employment regulations. We want all employees, whatever their hours, to have a proper documented pay slip. We want stronger employment laws and a return to the right to a tribunal. Instead of having to wait two years, we want to return to the pre-1979 position. We want protection against unfair dismissal.

We say to employees: demand and keep pay slips. Ask employers to see the records. Is national insurance being paid? Is tax being paid? If unsure, contact the DSS and have the records checked regularly. Contact the Inland Revenue to make sure that it is receiving the tax. Join a trade union. Every union has a legal department that can help with cases. Too many people think that trade unionism is just about conditions and getting extra money each year. Although they are important, it is also about having a protective armoury so that that legal protection can be used in cases against employers.

The Government should introduce this legislation and stop this business. The Minister should tell the Prime Minister and every other Minister that we are fed up to the back teeth with trade unionists being slagged off because they fight for their rights, such as the ambulance workers and workers who have been described as the enemy within. We do not want that when we know that employers are getting away with blue murder and making money hand over fist. It is time that the bosses were brought into line and got off the workers' backs.

1.35 am

The Parliamentary Under-Secretary of State for Social Security
(Mrs. Gillian Shephard)

I am delighted to have the opportunity to respond to the important points made by the hon. Member for Bolsover (Mr. Skinner) and to reassure him that the Government share his concern. I should also like to take the opportunity to trail a little advance publicity for a launch of the new contributions unit and agency which is to be made on Monday. The hon. Gentleman's timing could hardly be more impeccable. I am deeply grateful to him, as will be the whole Government.

I should like to explain the current arrangements. Of course we know that fraud exists, but I shall reassure the hon. Gentleman about the checks that are made. As he knows, it is the employer's responsibility to ensure that the appropriate employee contributions are deducted when earnings are paid, that full and proper records are maintained and that contributions are paid over regularly, together with the appropriate secondary or employer's contributions.

Most class 1 contributions are collected by the Inland Revenue. To emphasise the scale of the operation, at the moment, there are some 1·5 million annual returns from employers, covering well over 20 million contributors and nearly £30 billion of contributions. Although the hon. Gentleman was right to express concern, in the huge majority of cases these arrangements work smoothly with the correct contributions being deducted and paid over to the national insurance fund.

It is not correct to say that checks are not done. When, at the end of every tax year, an employer submits his PAYE return for each of his employees, it is subject to a series of detailed checks within the department. They ensure that the money paid over by the employer corresponds with the amounts recorded on the individual employees' returns. Further checks ensure that individual national insurance records are accurately maintained and that benefit entitlement is properly recorded. That is done by checking the feasibility of every individual contribution received. The checks can also help to identify failures by employers to deduct and pay the correct contributions. Those errors are generally referred to our teams of specialist contributions staff and inspectors for investigation and correction. Many thousands of queries are investigated each year and, as a result, contribution records are amended and arrears of contributions are collected or refunds made.

Although some contribution errors arise from deliberate fraud, it is fair to say that they do not typically arise from it but are the result of genuine mistakes, misunderstandings or even—[HON. MEMBERS: "Oh!"] I have accepted that some are the result of fraud, but others result from simple errors in the computer software used to control payrolls. Most employers are more than happy to correct errors that my Department finds, but where arrears cannot be collected legal proceedings have to be, and are, taken. In the past five years, an average of about 1,300 cases annually have been brought by the Department against employers in respect of arrears amounting to over £20 million. That is in addition to the action taken by the Inland Revenue, which also takes enforcement action against employers who default in their periodic payments of NICs and PAYE income tax.

Complaints from employees about failure by employers properly to pay NICs are not widespread and the majority of my Department's investigations arise from our chasing mechanism. If the hon. Gentleman has information about failures by employers, I should be glad to have details. I shall ensure that those instances are vigorously investigated.

In addition to the regular and routine checking procedures that I have described, national insurance inspectors also co-operate with the Inland Revenue to conduct surveys of employers' premises—a series of co-ordinated visits to employers aimed at uncovering tax and/or contribution irregularities.

The hon. Gentleman referred to people working in fields in East Anglia. I represent a constituency in East Anglia that is full of fields and the people who work in them are subject to visits of that kind, as are employers. The present system of survey has been in operation since the beginning of the 1986–87 tax year and in its first three years DSS inspectors conducted 270,000 survey visits and, as a result, an additional £37 million of contributions were recovered. The surveys also corrected many thousands of minor errors by employers.

As one would expect with any system as large and complex as the national insurance scheme, we take stock regularly of how well our procedures are operating and whether there are any improvements to be made. In the last two years there have been two internal departmental studies into contributions work which have examined every aspect of the work that is done.

Those studies have concluded that there is undercollection of national insurance contributions. That is not surprising, given the large number of employers and employees who are required to make contributions and the large sums of money involved. No collection system can be 100 per cent. effective or perfect. There will always be a small proportion of employers who try to avoid their responsibilities, and mistakes are bound to happen. We have taken the reports very seriously indeed. We have reviewed our existing arrangements for collection and compliance and we have concluded that improvements can and should be made.

I must thank the hon. Gentleman for raising this matter, because the results of that work will be seen shortly. With effect from Monday 2 April, a new contributions unit will be established to take responsibility for all operational aspects of the national insurance scheme. The unit's HQ will be at Newcastle and the network of locally based staff responsible for collection and compliance work will no longer be under the general control of local social security office managers but will come instead under a central management structure which will be dedicated exclusively to this important part of the Department's work of contributions and compliance.

The unit will place a high priority on compliance. There will be better training for national insurance inspectors and in the first instance there will be 100 more of them to perform that task, with rising numbers year on year. They will be trained better so that they can keep up to date with changing business practice. Their existing jobs will be reorganised so that they can spend more time visiting employers and investigating national insurance irregularities.

Will the unit be more successful than the last special unit that was set up, which managed to find only £6·8 million? How many additional inspectors will be employed to hound employers who are fiddling? How much additional money does she expect to rope in as a result of these efforts?

I did not think the hon. Gentleman was listening. I said that 100 more inspectors would be employed instantly and that the numbers would increase year on year in the unit, rising to more than 2,000 inspectors in all.

Our reorganisation will not stop there. From April of next year, the unit will be given agency status and there will be increased management accountability and flexibility to allow the development of a more professional approach to contributions work—[Interruption.]

I fear that, from a sedentary position, the hon. Gentleman displays his misunderstanding of the meaning of agency status, but I ask him to watch the press after the launch of the contributions unit and agency, which I am sure will be reported fully on Tuesday. That will extend his understanding.

We have taken careful note of the promise made by the Comptroller and Auditor General on the national insurance fund account, in which he drew attention to departmental studies that cited deliberate evasion by a minority of employers. Of course we recognise and share his concern. We shall continue to do all that we can to prevent this form of abuse and to ensure that the correct amounts of contribution are recovered. We also share his concern about the level of resources mentioned in the internal studies, and, as I have said already, we plan to increase the number of inspectors during the coming year.

However, it is obvious that additional resources are not the only answer. It is quite clear that the work of the inspectors must be prioritised—and it will be. The inspectors will be working in a unit dedicated to compliance and contribution work. It is clear also that their training needs to be improved. That, too, will be achieved by the existence of the unit. It is the job of the Department to provide more resources for this very important work, but it is extremely important that staff —an existing resource—be well trained and experienced in the sort of work that modern business practice will oblige them to do.

I hope that the hon. Gentleman is reassured by all of that.

Perhaps not, if he is not listening.

The Government are taking very careful note not only of internal studies of the problem, which I have described, but of the NAO report, which the hon. Gentleman has prayed in aid. It is unfortunate that in his contribution. which, as usual, was colourful, he displayed such animosity towards employers. Employers do, after all, provide employment. Our experience in the Department is that it is a minority of employers who cheat the system in this way, and we are absolutely determined that they will be pursued.

The problem of underconection came to light as a result of investigations initiated by the Department and aimed at improving the service that we provide. Since receiving these reports, we certainly have not allowed the grass to grow under our feet. Instead, we have urgently examined the findings and have decided to embark on a major reorganisation of our contributions work. That is the proper response of a Government determined to improve the efficiency and effectiveness of public administration.

Once again I thank the hon. Gentleman most sincerely for giving me the opportunity to point this out.

Question put and agreed to.

Adjourned accordingly at thirteen minutes to Two o'clock.