My Lords, the Bill before us today takes forward the Government’s commitment to simplify taxes and make avoiding tax harder. The Bill contains four measures: first, simplifying NICs paid by the self-employed; secondly, accelerating the payment to the Exchequer of NICs in dispute in avoidance cases, and providing for the issue of follower notices where the scheme or arrangement has been shown to fail in another party’s litigation; thirdly, applying new information powers and penalties to promoters of avoidance schemes; and, fourthly, introducing a targeted anti-avoidance rule—TAAR—to prevent people from circumventing new legislation tackling avoidance involving employment intermediaries. I will explain each of these four measures in more detail, starting with simplifying NICs paid by the self-employed.
In Budget 2014, the Chancellor announced that the Government intended to simplify the NICs collection process for the self-employed, who currently have to operate two different processes for two separate classes of NICs. This followed a 2012 recommendation by the Office of Tax Simplification and a consultation paper published in July 2013. As noble Lords may be aware, having two separate collection methods for class 2 and class 4 NICs causes confusion and extra work for both the self-employed and HMRC. Class 2 NICs are currently collected via a flat-rate charge paid through six- monthly billing or by direct debit, while class 4 NICs are a percentage charge on profits paid through self-assessment alongside income tax. This measure will move the collection of class 2 NICs into self-assessment, making the system simpler and more straightforward, while reducing administrative burdens on the self-employed by allowing them to deal with their tax and NICs in one go.
The aims of Clauses 1 and 2 and of Schedule 1 to the Bill are: to change the way in which class 2 NICs are structured; to change the means by which class 2 NICs are collected by moving their collection into self-assessment, so that they can be collected alongside class 4 NICs and income tax; to change the means by which class 2 NICs are enforced, with changes to associated appeal rights to broadly mirror those for class 4 NICs and income tax; and to make consequential changes to legislation relating to maternity allowance to allow women to continue to become eligible for it post-reform. It is proposed that these changes will take effect for the 2015-16 tax year onwards, so that the collection of class 2 NICs under self-assessment will be from 6 April 2016.
One of the key changes that will be made by this reform is that there will no longer be a need for customers with low profits who want to opt out of paying class 2 NICs to apply for a small earnings exception in advance. HMRC is aware that the self-employed find this confusing and burdensome. Under the reform, customers with profits below the new small profits threshold will not be liable to pay class 2 NICs but will be able to choose to pay on a voluntary basis. Those with low profits who want to opt out of paying class 2 NICs will not need to do anything except to confirm this when completing their self-assessment return, while those who still choose to pay—in order to protect their benefits entitlement—will be able to do so quickly and easily. Rather than requiring a separate process, this decision will be built into the self-assessment return. There is a small proportion of HMRC customers who pay class 2 NICs but are not in self-assessment. These individuals will continue to get a separate class 2 NICs payment request. They will receive this once a year instead of twice a year, as they currently do.
I will now mention some specific points on this measure that attracted interest in the other place. The Financial Secretary provided reassurance that the self-employed will continue to have the option to spread the cost of paying class 2 NICs. The facility already exists in self-assessment to make budget payments to spread the cost of tax and NICs through the year. The Bill makes provision to allow women to continue to become eligible for maternity allowance following the class 2 changes. There was a concern in the other place that the process being put in place to allow pregnant women to pay class 2 NICs if they have not yet filed their self-assessment return would be impractical and require a high level of forward planning. I would like to confirm the remarks of the Financial Secretary that this will not be the case. I emphasise that the process does not require any forward planning beyond that which a pregnant woman would routinely undertake under the current process of applying for MA. A self- employed woman who wishes to make a claim for MA and has not already submitted her self-assessment return will be able to pay for any shortfall in contributions at the time of her claim, through the exception process that HMRC and DWP are putting in place.
I turn now to the provisions in the Bill dealing with accelerating the payment to the Exchequer of amounts of NICs in dispute in avoidance cases. This also includes providing for the issue of follower notices where there is a relevant case in which the scheme or arrangement has been shown to fail in another party’s litigation. For NICs, the provisions in the Bill broadly follow new powers included in the Finance Act 2014 that allow HMRC to issue a notice to taxpayers who used avoidance schemes that failed before the courts in another party’s litigation—a so-called follower notice. It is estimated that the provisions in the Bill and the Finance Act 2014 will raise £5 billion in tax and NICs for the Exchequer.
A follower notice sets out HMRC’s view that a judicial decision in another case is directly relevant and that those who receive the notice should settle their disputes. If the taxpayer does not settle in response to this notice, they will face a penalty if they are unable to show that their case is materially different from the other party’s litigation, or if they do not have reasonable grounds to continue the dispute. An accelerated payment may be required from taxpayers in the following circumstances: where a follower notice has been issued and the taxpayer decides not to settle their dispute; where taxpayers are involved in schemes subject to disclosure under the disclosure of tax avoidance schemes, or DOTAS, rules; and where taxpayers have used arrangements that HMRC decides to counteract under the general anti-abuse rule, or GAAR. These measures are expected to lead to the issuing of payment notices to some 43,000 taxpayers involved in avoidance schemes currently under dispute with HMRC over the period to the end of March 2016.
In debates in another place, the issue of HMRC implementation and resourcing of this measure was raised, and assurances were sought that HMRC would be sufficiently resourced to implement the measures. I echo the reassurances provided by the Financial Secretary. Since 2010, this Government have made sure that HMRC has the resources it needs to effectively police the rules, making significant investment of nearly £1 billion to assist it in its work. HMRC’s success demonstrates that it is well resourced and doing a good job. For example, in 2013-14, HMRC brought in £23.9 billion in additional tax revenue—a record amount.
I will now explain the provisions in the Bill that apply new information powers and penalties to the highest-risk promoters of tax avoidance schemes. This measure was announced for tax in Budget 2013 and the Government’s intention has been to extend the measure to NICs at the earliest opportunity. A consultation on the tax aspects, Raising the Stakes on Tax Avoidance, ran from August until October 2013. The Finance Act 2014 included legislation that allows HMRC to issue conduct notices to promoters of tax avoidance schemes and to monitor promoters who breach a conduct notice. This Bill applies the tax legislation to NICs so that the legislation operates as one unified measure covering both tax and NICs.
Monitored promoters will be subject to new information powers and penalties, which will also apply to intermediaries that continue to represent them after the monitoring commences. The monitored promoter may be named by HMRC and required to inform its clients that it is being monitored by HMRC. Clients of monitored promoters will also be subject to certain obligations and extended time limits for assessments. This measure is part of the Government’s strategic response to avoidance and is to deter the use of avoidance schemes through influencing the behaviour of promoters, their intermediaries and clients. It is aimed at changing the behaviour of promoters of NICs and tax avoidance schemes. Naming a monitored promoter should deter intermediaries from acting for them, and clients and potential clients from using their products.
Finally, I will describe how the provisions in the Bill relating to the new targeted anti-avoidance rule will work to prevent people from circumventing new legislation tackling avoidance involving employment intermediaries. The National Insurance Contributions Act 2014 strengthened existing legislation in respect of offshore employment intermediaries. That measure was effectively intended to address the non-payment of employers’ national insurance in the oil and gas industry involving the placement of the employer of oil and gas workers—who are working on the UK continental shelf—outside the UK.
As noble Lords will be aware, the temporary labour market is quick to react to any legislative changes and to find new convoluted ways to reduce the amount of income tax and NICs they would otherwise be liable to pay. Stakeholders have indicated to HMRC that intermediaries involved in the facilitation of false self-employment may set up avoidance vehicles involving convoluted structures specifically designed to circumvent the legislation introduced in the National Insurance Contributions Act 2014. To dissuade such intermediaries, the Government propose that a TAAR, which would be similar to the tax TAAR included in Finance Act 2014 for the same purpose, is included in NICs legislation to deter such avoidance. It will focus on the motive for setting up the arrangements and what they achieve. Were they set up with the motive of avoiding NICs? Do they result in less national insurance contributions being paid? In order that the tax and NICs TAARs operate as one, both will take effect from 6 April 2014.
In conclusion, the Government have already taken action to reduce significantly the burden of NICs on earnings and employment through previous Bills. This Bill continues that approach and I commend it to the House. I beg to move.
My Lords, this is clearly an important Bill, bearing in mind the number of people in the workforce in the United Kingdom who are now self- employed. Indeed, there is an ever-increasing percentage in that position and I suspect the Minister will agree with me that, as so often in your Lordships’ House, the importance of this legislation is in inverse proportion to the number of people who want to speak on it.
On these Benches—as indeed, I understand, on the Labour Benches—we welcome this legislation. On the first point of tax simplification, every Government come in saying they are going to simplify the tax code and four years later the tax legislation is even more complicated than it was when they came in. Anything that can be done, even of a minor nature, to simplify tax legislation is clearly desirable. All noble Lords will welcome the attempts to reduce tax avoidance in this area—again, all Governments want to do that and having practical examples there is obviously beneficial.
In supporting the Bill, I will just raise three or four questions. First, the Minister was correct that concerns were expressed in another place regarding the position of self-employed women claiming maternity allowance, which he referred to in his remarks. I understand the answer that the Government have given, which is a combination of responses from the Treasury and the DWP. However, as I understand it, the Chartered Institute of Taxation has suggested that the Government should review these changes at the earliest opportunity—maybe in a couple of years’ time. I would be grateful if the Minister could indicate whether that is a suggestion that the Government welcome. The idea is to ensure that the introduction of these provisions has not resulted in the reduction in the number of claims for the standard rate of maternity allowance, which would obviously be hitting women who wish to claim the allowance.
Secondly, the Chartered Institute of Taxation has pointed out that there will be a gap of 22 months between the collection of class 2 payments for 2014-15 and for 2015-16, as the liability moves from a weekly basis to arising at the end of the tax year. Have the Government considered the cash-flow implications of class 2 NICs coming in up to 10 months after the end of the tax year rather than being paid in-year as they are at the moment? That is clearly quite a significant point in relation to the Government’s finances.
Thirdly, there are significant changes being brought in to the entitlement to contributory benefits. I would be grateful if the Minister could confirm that the Government are satisfied that moving class 2 into self-assessment will not adversely affect entitlement to contributory benefits. In particular, what proposals do the Government have in mind to educate and inform people as to these changes? For example, direct debits will have to be cancelled before the introduction of the programme in 2015.
Finally, I have a general question. As the Minister will well know, a number of people have advocated for some time the merging of the NIC structure with the general income tax structure. Do the Government feel that these proposals, when implemented, will be neutral, negative or positive on that issue?
My Lords, as the noble Lord, Lord Razzall, indicated, the Opposition support this Bill. In fact, he succeeded in raising most of the critical points that I was going to make in my contribution—a growing sign of just where the Liberal Benches stand as we get closer to the general election, I suppose. It certainly obviates the necessity for me to repeat all those points.
This is a fairly modest Bill, but a constructive one and one that went through without opposition in the other place, although I congratulate my honourable friend Shabana Mahmood on her contribution to the debate there. She raised the points that the noble Lord, Lord Razzall, reiterated today. She was not entirely satisfied with the responses. The noble Lord, Lord Razzall, obviously is not as yet. He thinks that there are still questions, and so do I, but those questions are more on the margin than on the central thrust of the Bill, which we endorse.
It is important that we get this issue right. Some 4.5 million people are now self-employed in this economy, which is one in six people. Of course, in many cases that will be through choice, but in many other cases it will reflect the fact that getting a job that pays remotely adequately remains very difficult for many people and that there are those who are self-employed because the people who organise their work see advantages in doing so on that basis, as tax advantages accrue to the organisers of the work as well as, supposedly, to those who are self-employed. I am therefore glad that the Government have taken up this issue and have addressed their mind to improving the situation.
We are in favour of the simplification contained in the Bill, and we wholeheartedly endorse the other main objective which is the targeted anti-avoidance rule. It means that we can tackle disguised employment made possible through employment intermediaries or offshore employers. We need to make sure that the Exchequer gets its proper receipts from those working in the economy and effectively owing a contribution to the finances of the nation.
We recognise that it is important that the Government get the specifics of this position right. At present, 0.3% of the £102 billion collected in NI contributions engenders 40% of the calls to Her Majesty’s Revenue and Customs. There is something clearly wrong with this distortion, and it all revolves around the category of the self-employed. That is why the Government have acted, and they have acted well in ensuring that the class 2 payers of NICs can now pay at the end of the tax year, and that they have their assessments worked out on the basis of self-assessment. So we are clearly seeing an improvement in the position, which we greatly welcome.
The noble Lord, Lord Razzall, raised the maternity issue. I will therefore not reiterate what he said except to endorse that there are still anxieties. The Chartered Institute of Taxation said that it had enough anxieties and question marks to urge the Government to think in terms of reviewing the situation within two years, and I hope that the Minister can, perhaps, be categorical in his and the Government’s determination to guarantee that this occurs. The maternity allowance affects about 25,000 women each year who claim for it, and it is absolutely critical that the system should work effectively for them.
I also endorse the point made by the noble Lord, Lord Razzall, to which the Minister made some reference in his opening remarks. It is quite clear that the Government have to be successful in their communication of the benefits of this legislation and the way in which people respond to it. Increasingly, the Inland Revenue, for all the obvious reasons, uses the internet and the computer for communication, and expects people to be online in response. A great number of our fellow citizens are only too delighted that their tax returns and obligations to the Government are met in this much more efficient and effective way. But a great many of the self-employed, for the very reason that I established the categories in the early part of this speech, have limited abilities and understanding of how to use the internet. We have just got to recognise that a substantial percentage of our population are not computer literate. An awful lot of them will be in the category of those who are in the self-employed ranks. That is why we need the assurance of the Government that they are going to carry out an effective programme of communication to all of our citizens, to ensure that there is a fair deal for the less advantaged among them, as well as the more obviously computer literate. I hope that the Minister will give some reassurance on that front.
Of course, people will get a vague perspective that the Government have done something about the NICs situation. But there is a difference between that and being able to implement action which defends their own direct interest, as the NICs payments are clearly of such significance to the substantial number of people who get very little returns in their self-employment statement. If there is any doubt about just how lowly the returns can be to the individual, just look at the Exchequer’s problem in indicating the lower level of receipts it has been getting in certain categories. A great deal needs to be done to make this legislation effective and fair.
Of course, we endorse the targeted anti-avoidance rule. It is clearly important that workers who are self-employed are in that position through their own wishes and are not just badged as self-employed by those people who take advantage of their labour, and organise it, and do it on a self-employed basis for the obvious advantages it gives to the so-called employer, or organiser of the work, in taxation terms. Clearly, if people fail to meet their NICs payment, they will have no provision for holidays or even for sickness, unlike others in the workforce, so this is an important piece of legislation for a substantial section of our population —and a growing section, as we all appreciate.
The Bill went thorough the Commons without a Division. It is not customary to divide the House at Second Reading and therefore I have no intention of doing so in any case. However, as the House will recognise, the Opposition are fully behind the Bill. We have a few questions that we want the Minister to answer satisfactorily but we join him in commending the Bill to the House.
My Lords, I thank both noble Lords who have welcomed the Bill. The noble Lord, Lord Davies, said that it was a sign of the times that my noble friend Lord Razzall agreed with him, but surely it is a sign of the times that the noble Lord, Lord Davies, agreed with my noble friend. Whoever is agreeing with whom first, it is an extremely satisfactory position for a Minister at the Dispatch Box to find such a general welcome for a Bill.
Both noble Lords asked about the impact of the changes on the administration of the maternity allowance and whether it would be sensible to have a formal review two years after the Bill comes into force. That timetable does not make any sense, because the first payment of class 2 through self-assessment does not have to be made until the end of January 2017, so a two-year review date is pointless. However, both the DWP and HMRC are committed to ensuring that this group of women is not disadvantaged by the way the reforms work and will be keeping the operation of MA under review on a continuous basis. In response to the specific point that my noble friend Lord Razzall raised, it will be possible to see on an ongoing basis whether the number of claimants falls. I assure noble Lords that if there is any sign of that happening, the Government will act to deal with whatever the administrative problem is that has caused it because, obviously, that is not the intention of the legislation.
My noble friend Lord Razzall asked how there could possibly be no Exchequer impact, particularly when the measure is introduced, with people changing from paying monthly to paying up to eight months after the end of the tax year. National insurance contributions are accounted for on an accruals basis, so the important factor is the time period for which the money is due rather than the date on which it is actually paid. It will therefore continue to be counted in the tax year itself.
My noble friend Lord Razzall asked about the impact of the reforms on entitlements for benefits claimants and how that would work. The contribution conditions for benefits are changing. In addition to the maternity allowance, which we discussed, and in order to ensure that the self-employed are not disadvantaged as a result of the changes, the DWP will modify the relevant legislation to safeguard the position of claimants who pay their class 2 NICs by 31 January—the deadline for paying class 2 NICs through self-assessment. This will be done, first, by treating them as having satisfied the relevant contribution condition at the right time and, secondly, by disapplying the 42-day penalty that normally applies where contributions are not paid until after the start of the benefit year.
Questions were also asked about how the self-employed will learn about these changes and make sure that they comply with them satisfactorily.
HMRC and the DWP are working closely together in communicating the class 2 changes to the people who are going to be affected so that key messages are cascaded in a number of ways and a number of times. The department’s communication strategy includes: undertaking customer research and testing some of the products with customers; HMRC writing to all self-employed customers; an updating of existing customer outputs, such as the small earnings exception renewal letter; making HMRC staff and DWP staff aware of the changes and building the relevant information into call scripts and telephony, where appropriate; and using stakeholder partnerships with intermediary groups, agent organisations and forums to ensure that key messages are understood by everyone so that the self-employed hear the messages through a number of channels and in a consistent way.
Finally, the noble Lord, Lord Razzall, asked whether the effect of these changes on any possible future merger of NICs and income tax would be neutral, negative or positive. The whole question of merging income tax and NICs is fraught with difficulty and complexity. To the extent that these changes would have any impact at all, were any future Government to plan such a scheme, I suppose, if anything, it would be very marginally positive, but in the overall scheme of things and in the context of such a wide-ranging review it would be almost lost in the wash.
This is a short Bill, but as all noble Lords who have spoken have recognised, it is important to simplify the way in which we administer the system and to reduce the scope for avoidance. Therefore, I commend the Bill to the House.
Bill read a second time and committed to a Grand Committee.