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National Insurance Contributions Bill

Volume 750: debated on Tuesday 7 January 2014

Second Reading

Moved by

My Lords, it is a pleasure to open this debate on the National Insurance Contributions Bill. Before I describe the main measures in the Bill in detail, I should like to mention two which in particular are aimed at supporting jobs and economic growth.

First, by introducing the employment allowance, employer national insurance contributions will be cut for up to 1.25 million employers, taking 450,000 out of employer NICs altogether and making it less expensive for businesses to take on new staff. Secondly, as announced in the Autumn Statement, from 6 April 2015 onwards, employer class 1 NICs will be abolished on the earnings of employees aged under 21, up to a limit of £813 a week. This is a Bill that will help jobs and job creation.

In addition to the two measures just mentioned, the Bill contains three principal other measures. First, it gives effect to the general anti-abuse rule, or GAAR, for NICs. Secondly, it amends existing powers in the Social Security Contributions and Benefits Act 1992 to allow regulations to be made for the certification of non-UK employers of oil and gas workers. Thirdly, it makes changes in connection with two elements of HMRC’s partnerships review. I should now like to explain each of the main measures in a little more detail, starting with the employment allowance.

As part of the Government’s efforts to grow the economy and increase employment, the Chancellor announced in his 2013 Budget the creation of an employment allowance, which will come into effect from 6 April this year. The intention is that businesses, charities and community amateur sports clubs in the UK will be entitled to an allowance of up to £2,000 towards their employer NICs liability. The objective of the allowance will be to support businesses with the cost of employing their staff by reducing their employer class 1 NICs bill each year. It will support thousands of small businesses which are aspiring to grow, perhaps by hiring their first employee or expanding their workforce, as well as those already employing others or facing temporary cash-flow problems.

Up to 1.25 million employers will benefit from the allowance, with around 450,000 employers—around one-third of all employers in the country—being taken out of the requirement to pay employer NICs altogether. The benefits of the policy will be most keenly felt by small businesses, with more than 90% of the benefit of the allowance going to businesses with fewer than 50 employees. The allowance will be a permanent feature of the national insurance scheme. It will be simple to administer, delivered through standard payroll software and HMRC’s real-time information system. The cost of the allowance is estimated to be £1.255 billion in 2014-15, rising to £1.725 billion in 2017-18. The allowance has been warmly welcomed by the business community and, as I mentioned earlier, it will not just be businesses that are eligible; charities and community amateur sports clubs will benefit too.

The second main element of the Bill implements the announcement by the Chancellor of the Exchequer in the Autumn Statement that employer class 1 NICs will be abolished for employees under the age of 21 from 1 April 2015. This is brought into effect by introducing a zero rate of secondary class 1 NICs for all employers on the earnings of those employees under the age of 21. As the Chancellor made clear, the Government believe that this measure will help to support young people and make sure that no one is left behind as the economy recovers. The measure will apply both to new and existing employees aged under 21 and is not time-limited.

There are two important features of the new clause which I should like to explain to the House. First, there are regulation-making powers to add an age group to those in respect of whom a reduced rate of secondary class 1 NICs applies and to specify what that reduced rate is; and to reduce the rate of secondary class 1 NICs for a previously specified age group. For example, the Government could in the future allow for an increase in the age bracket of employees falling into the zero-rate band of secondary class 1 NICs. This power is capable only of placing an employee in a lower percentage bracket, so will be a relieving power only.

Secondly, there is a regulation-making power to ensure that the benefit of the zero rate, or a reduced rate of secondary class 1 NICs, can be enjoyed only in respect of earnings below a certain level. This will initially be set at the level of the upper earnings limit, expected to be the equivalent of around £42,000 a year in 2015-16. In the year that it is introduced, 2015-16, the abolition of employer class 1 NICs for under-21s will cost £465 million. This effective abolition of employer NICs for employers of those under 21 years of age has been warmly welcomed by the business community.

I now turn to the other main measures in the Bill, starting with the general anti-abuse rule, or GAAR. Noble Lords will be aware that the Government announced in the 2012 Budget that they had accepted the recommendations of the Aaronson report to introduce a GAAR targeted at abusive tax-avoidance schemes. The GAAR was introduced by Part 5 of the Finance Act 2013 and has been in force since July last year. Provisions in the Bill apply the GAAR to NICs. The Government have always been clear that the GAAR should apply to NICs and the clauses in the Bill are the earliest opportunity for this to be effected.

The GAAR is designed specifically to target those arrangements which are regarded as abusive by considering whether the arrangement can be regarded as a reasonable course of action. The rule, once it is applied to NICs by the Bill, is estimated to increase combined receipts of tax and NICs by £60 million in 2014-15, rising to £85 million in 2017-18. However, the main purpose is not to raise revenue but to deter abusive avoidance practices in the first place.

The Government have made it clear on numerous occasions that they will take a robust line in tackling tax avoidance. It is simply not acceptable that a small, but persistent, minority try to find ways around our tax laws to avoid paying their fair share, especially at a time when the public finances are under considerable pressure. The GAAR is one new weapon in our armoury.

I turn now to the provisions in the Bill concerning oil and gas workers on the UK continental shelf. Noble Lords may recall that in last year’s Budget the Chancellor announced that the Government would strengthen legislation in respect of offshore employment intermediaries. The measure in the Bill is specifically intended to address the non-payment of employer’s national insurance in the oil and gas industry involving the placement of the employer of oil and gas workers who work on the UK continental shelf outside the UK. This measure was subject to consultation last autumn.

The Government intend to address these offshore employment schemes largely by using existing powers contained in social security legislation. This Bill supplements those with a new certification provision for the oil and gas industry. This provision will apply where the national insurance obligations are fulfilled by someone on behalf of the person deemed to be the employer for national insurance purposes.

This clause is part of a measure that, as a whole, is expected to bring in the region of £100 million per year to the Exchequer without having a significant economic impact on the oil and gas industry. Staff costs for businesses will increase only if they have not previously been accounting properly for all tax and NICs. This proposal has been broadly welcomed by a range of bodies, including the Oil Taxation Action Committee, the RMT and the Association of Chartered Certified Accountants.

Finally, I should like to refer to the provisions in the Bill that flow from HMRC’s partnership review conducted between May and August last year. Clause 13 addresses a tax issue arising under existing partnership tax rules where the immediate entitlement to partnership profits is restricted by the alternative investment fund managers directive. The majority of fund managers will not be affected—only those who operate through a partnership. Under existing partnership tax rules, tax is charged to profits as they are earned, rather than when they are received. An unfunded tax charge can therefore arise on profits that are allocated to an individual partner of an AIFM partnership and which are then deferred in line with the regulatory requirements of the AIFMD. This is because the partner cannot access the deferred profits before the tax becomes due and payable.

The new mechanism that the Government propose will allow the partnership itself to pay tax at the additional rate of profits which are deferred in line with the regulatory requirements. It is designed in such a way that it will also meet the government objective of the partnerships review to achieve fairer taxation by stopping tax-motivated allocation of profits in mixed membership partnerships that typically include individual and corporate members.

The new power introduced under Clause 13 will support the introduction of the mechanism and will be used to change the relevant NICs legislation by regulation once the related Finance Bill 2014 legislation becomes law. It will also allow the NICs legislation to be amended in the future to reflect any subsequent changes in the income tax legislation in this area so as to maintain symmetry between the tax and NICs positions.

Clause 14 provides an express power to treat LLP members who meet certain conditions as employed earners for NICs purposes. The conditions will be set out in regulations and will follow the income tax legislation to be introduced under the Finance Bill 2014. Broadly, this will be that the individual member of the LLP is wholly, or almost wholly, rewarded by a fixed salary and has neither significant influence over the affairs of the LLP nor capital at risk. These conditions will be based on proposals on which HMRC has consulted. It has been advised that, in response to these proposals, structures with only corporate members were being promoted as a way around the proposed legislation. The schemes involve the individual establishing a personal service company or other intermediary, and that intermediary becoming a member of the LLP in place of the individual in order to avoid these provisions.

Clause 14 provides a power to make regulations to achieve the policy objective of the measure and to counteract the artificial interposition of a company or intermediary to avoid the impact. The regulations will follow the new income tax legislation included in the Finance Bill 2014. This power will enable the reclassification, by regulations, of certain LLP members as employed earners for NICs purposes, even when they hide behind a company or intermediary. The treatment of members of LLPs as self-employed was designed to replicate the position of traditional partnerships. This clause ensures that those tax rules are not used to create a tax advantage and creates a level playing field between those partnerships that have not sought to misuse the tax rules for LLPs and those that have. These tax and NICs changes are expected to bring in approximately £3.27 billion to the Exchequer over the period to 2018-19.

This is an important and necessary Bill. It will allow us to support businesses with the cost of employing their staff and it will support small businesses aspiring to grow. It also includes an important package of measures aimed at activity that attempts to reduce the amount of NICs payable to the Exchequer. In short, this Bill is good for growth, it is good for jobs and I commend it to the House.

My Lords, I should start by saying, for the record, that this is the first time in my 17 years in your Lordships’ House in a Second Reading debate that two-thirds of the speeches have been delivered by Liberal Democrats. It goes without saying that we on these Benches support the Bill very strongly. The Bill ought to be put into the context of the package of measures that the coalition Government have introduced to support the so-called SMEs in recent years, which were very much supported by the Liberal Democrat members of the coalition—and often, dare I say it, provoked by them.

I will briefly list them. We have corporation tax down from 28% to 23% and heading for 20% by 2015. We have the proposed creation of the new business bank and the various lending schemes designed to assist SMEs. We have the establishment of the regional growth fund and the increase in capital allowances, very much sponsored by my friend in another place, the Member of Parliament for Burnley. We have the “one in, two out” policy on deregulation, and, of course, the small business rate relief, spread over two and a half years.

We very much welcome the creation of the employment allowance system, allowing a grant of £2,000 a year to employers in relation to their employees’ class 1 NICs, and the Government’s confirmation that HMRC will engage with the representative bodies of businesses and others to ensure that the system works as simply as possible, so as to minimise its impact. I think the Minister reported the Treasury calculation that up to 1.25 million businesses will benefit from the scheme, with around 450,000 being taken out of paying employer’s NICs altogether. That is about one-third of all employers. It is clearly a significant figure. The other issue here that we very much welcome from these Benches is the effect of including charities. It is calculated that up to 35,000 charities with employees will benefit, reducing their tax burden, it is calculated, by around £45 million in total.

At this time of night, far be it from me to comment on Labour’s alternative policy, which undoubtedly the noble Lord, Lord Davies, will touch on, but I do not think that there is any disagreement across the Floor of your Lordships’ House that something must be done to help SMEs. The Labour proposals of which I am aware would freeze business rates for two years from 2015. It is calculated that this would save small businesses an average of £450 over two years. Of course, the employment allowance scheme created by this Bill would see those businesses save £4,000 over the same period.

From these Benches, we also very much welcome the inclusion of NICs in the so-called GAAR—the general anti-avoidance rule. They were originally excluded. I am particularly conscious of the effect that this will have on offshore employment payroll companies, preventing them doing what they have so often done to allow employers to avoid paying NICs. We also welcome the fact that the Bill removes the presumption that limited liability partnership members are to be treated as self-employed, which can be used as a tax loophole. It is important that these changes will only target those NIC arrangements that are regarded as abusive. As the Minister indicated, as with all other measures under the GAAR, the NIC arrangements will be subject to the double-reasonableness test, which will consider whether the arrangements used by a company can be reasonably regarded as a reasonable course of action.

The Minister indicated the overall welcome for these proposals from a number of representative bodies. The Federation of Small Businesses stated:

“The NICs Employment Allowance is a measure our members have warmly welcomed. It will have a positive impact on small firms and the economy when it comes into force next spring. Our members have said they’ll spend the savings on their business, either through investing in the business, increasing wages or taking on staff”.

The CBI director-general said:

“The surprise £2,000 National Insurance rebate in the Budget will give smaller firms the confidence to take on extra staff. Extending the General Anti Avoidance Rule is sensible. No one can condone abusive avoidance schemes which serve no commercial purpose other than the minimisation of tax—even if they are legal”.

Finally, the chief executive of the Small Charities Coalition said:

“For a lot of the smallest charities, having one paid member of staff is a big step forward … having this allowance now helps them to do that, so it is a very positive thing”.

It just remains to be seen whether this proposal has the effect desired by the Government of helping create new jobs.

My Lords, it is a happy occasion when I can congratulate the Minister on his opening speech and on the accuracy with which he presented the Bill. As the noble Lord, Lord Razzall, noted, there has been a 100% contribution by the Liberal Democrats on his side of the House. He put it as two-thirds of the speakers in the debate; perhaps he should have put it as 0% Conservative speakers. After all, this is a fairly worthwhile measure, so he should not be surprised if the Opposition look on certain elements of the Bill with considerable favour.

The judgment of the House appears to be that this is a fairly uncontentious Bill. As I look around, I notice that I have not got too much support from Labour Back-Benchers on the matter. They are totally reliant on me being able to deliver exactly what is necessary in criticism of the Bill—and to express support where we see the merits of it.

The Minister will be delighted to hear that we approve of the five main provisions in the Bill, although there are areas on which we will seek additional clarification in Committee. In at least two sections there are proposals with regard to regulations and other actions of the Government where it is not entirely clear how they will be phrased in future. I want to press the Government on these matters at that time.

I turn to the real issues. The main issue is the employment allowance, which we welcome, although we note the comment of the director of the Institute for Fiscal Studies, Paul Johnson, who said:

“Whether it will actually have any measurable effect on the creation of jobs we don’t know”.

Given that there is no pilot for this measure and that it is extremely difficult to measure its effects, we may never know its real effectiveness.

Nevertheless, one must welcome a step in the right direction by the Government, particularly when we look at the next major issue of the Bill. We of course approve of the abolition of national insurance contributions on the earnings of employees under 21, although we are concerned about the introduction of the measure. The Minister clearly indicated that it is significant and important, but we will not get it for another year. The Minister may be content with that rate of progress. I must say that this Government are undistinguished in their rate of progress on the issue of national insurance contributions. I do not think that the Minister was in that role when we considered the previous efforts by the Government to introduce some stimulus to job creation by legislation or national insurance contributions, but I was certainly in my place when that Bill was introduced. It was a complete disaster in its conception and absolutely absurd in its execution.

The Government argued that there should be some regional dimension to the provision on the grounds that some regions were less well favoured than others. It was quite difficult to accept because the Government bracketed with London and the south-east, which one might recognise as being different from the rest of the country and in less need of job creation, the eastern region, as if East Anglia were a high-wage, high-employment area—but the Government were convinced of the rectitude of their position at the time. What was the result? We were told that 400,000 businesses would benefit, with the possible creation of 800,000 jobs. In fact, after three years, just over 25,000 businesses, rather than 400,000, took advantage of the scheme, so it is not surprising that it was jettisoned and that the Government, after three wasted years, addressed themselves to a more realistic approach to the issue.

We welcome the second attempt. It is infinitely better than the previous effort, but the price is three wasted years on the matter when the Government have only five years of constructive activity, even assuming that the long run-in to the general election, which is based on the concept of a fixed date for the election, allows them to be constructive in their last few months, rather than just defensive about their record. We shall see.

We express general approval for the other aspects of the legislation. We shall seek to press the Minister in Committee on the effectiveness of the measures. They depend on other legislation or secondary legislation related to NICs—in fact, NICs are only a bit player in the strategy that the Government propose. The Minister will therefore not be at all surprised if he is pressed to identify just how significant this particular legislation is, so dependent is it on other, more significant activities by the Chancellor in conducting the economy.

The scheme for offshore employees—oil and gas workers—is unexceptional, but of course many aspects of the reforms in this area are to be delivered outside the Bill, so the Minister must expect that we will press him on greater clarification there.

The Bill also provides for alternative investment fund managers and members of limited liability partnerships a strategy in which the Government anticipate a considerable increase in returns from taxation, because they will have ended what we recognise is not just avoidance of tax but unfairness between the groups concerned. We are in favour of what the Government are doing there but, again, the Minister will recognise that quite a lot of what he has said in relation to the Bill here is only part of the general picture.

At this stage in my brief response, I am entirely happy to associate the Opposition with the broad thrust of the Bill—particularly as the noble Lord, Lord Razzall, indicated that we should concentrate on the Liberal Democrat part of the coalition when discussing this matter. We will of course seek to test the Government further in Committee, while applauding the fact that the main principles of the Bill are those to which we subscribe. In particular, we recognise the application of GAAR to this area. GAAR is always going to loom up as a deus ex machina in relation to a great deal of finance legislation. It does so here, and we noted the optimistic assessments that the Minister put forward on what it may achieve. The proof of that particular pudding will be in the eating—but, as a concept, we support that interaction in the Bill.

My Lords, I thank both noble Lords for their broad welcome for the proposals in the Bill. I am very grateful to my noble friend Lord Razzall for setting the Bill in the context of all the other measures that we have taken to support business, particularly SMEs. The Bill contains useful and valuable measures but, as my noble friend pointed out, they are only a couple of pieces in the large jigsaw of provisions which, taken together, we believe will help to sustain the recovery and put Britain on the path to strong, prosperous growth in the years ahead.

The noble Lord, Lord Razzall, referred to the findings of the Federation of Small Businesses’ survey in this area and what small businesses said they would do with the additional resource. I thought that one of the more interesting aspects of that survey was that a substantial proportion of respondents said that they would increase wages. Given that I think both the Government and the Opposition are keen that wages at the bottom end are improved, if the measure does have the impact of increasing wages—as well as generating new jobs in other cases—that will mean that it has been effective.

The noble Lord, Lord Davies, slightly chided me on the fact that I had no support on my Benches. He will have seen support flooding in during this short debate.

If the Minister will allow me, the verb “flood” in the present circumstances is not the right one to use.

My Lords, the noble Lord is of course absolutely correct. He is also aware that the number of people in the Chamber is normally in inverse proportion to the degree of support for a measure. The fact that the Chamber is largely empty just shows how popular this measure is.

The noble Lord slightly chided the Government on the fact that the regional employers’ NICs holiday had not been as effective as we had originally hoped. That is undoubtedly the case. However, it did support over 90,000 jobs, and I suspect that the people in those jobs think it was a pretty good scheme. It certainly did not have the scale of effect that we were looking for. Although that was in no small measure because of the overall economic environment into which that programme was launched, having a nationwide permanent scheme rather than a temporary targeted scheme is likely to make the impact of the scheme that much more difficult.

The noble Lord also slightly chided me on the fact that we were not bringing in the abolition of employer NICs for under-21s sooner than 2015. That is largely because of the need for computer systems to be changed. The view taken by HMRC in consultation with business was that it would be extremely difficult to get all that sorted out by next April, which would be the alternative.

The noble Lord also said that it would be impossible to accurately assess the impact of the scheme because we had not introduced it on a pilot basis. Of course the conundrum is that, if you do something on a pilot basis, you are only allowing a small proportion of the overall audience that you seek to affect to be part of that pilot. Particularly with the employment allowance, we wanted to make the scheme available to everybody as soon as possible. As the FSB survey suggests, we are confident that it will be effective.

I agree with the noble Lord that quite a lot of the implementation of this legislation will obviously be done by secondary legislation. The primary legislation is already pretty complicated; the secondary legislation will be even more technical. We will be very happy to discuss our approach to that with him when we get to Committee.

For today, the Government believe that the Bill does and will enable the reduction of taxation of labour nationally through the employment allowance, and provides support to employers of under-21s. As I have said on several occasions, the Bill is good for growth and good for jobs. I commend it to the House.

Bill read a second time and committed to a Grand Committee.

House adjourned at 9.08 pm.