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Grand Committee

Volume 769: debated on Wednesday 2 March 2016

Grand Committee

Wednesday 2 March 2016

Employment Allowance (Increase of Maximum Amount) Regulations 2016

Motion to Consider

Moved by

That the Grand Committee do consider the Employment Allowance (Increase of Maximum Amount) Regulations 2016.

My Lords, I am pleased to introduce the Employment Allowance (Increase of Maximum Amount) Regulations 2016, the Employment Allowance (Excluded Companies) Regulations 2016 and the Social Security (Contributions) (Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2016. As all three sets of regulations deal with national insurance contributions, it seems sensible that they should, with the leave of the Committee, all be debated together.

The substance of the two instruments concerning the employment allowance was announced at the Chancellor’s summer Budget on 8 July last year. The NICs rates and thresholds for the 2016-17 tax year were announced as part of the Chancellor’s Autumn Statement on 25 November.

I will start with the Employment Allowance (Increase of Maximum Amount) Regulations 2016. The Government are committed to supporting businesses which want to expand their workforce. To that end, the employment allowance was first announced at Budget 2013 as a reduction of up to £2,000 a year for eligible businesses and charities on their employer NICs bill. In the year 2015-16, the allowance has benefitted almost 1.2 million employers, helping to cut the cost of employment in the UK. These regulations increase the employment allowance to £3,000 from 6 April 2016. The increase will further support businesses and charities to enable them to grow. As a result of this increase, 90,000 more employers will be taken out of employer NICs altogether. It also means that firms will be able to employ four workers full-time on the new national living wage next year without paying any employer NICs.

The Employment Allowance (Excluded Companies) Regulations 2016 focus the employment allowance on companies that support employment. As announced at summer Budget 2015, these regulations mean that limited companies where the director is the sole paid employee will no longer be able to claim the allowance from April 2016. This ensures that the allowance is focused where it should be, on its original objective of supporting businesses with the costs of employment. HMRC anticipates that there still will be around 1 million employers who will benefit from the employment allowance next tax year, taking this measure into account.

Lastly, I turn to the Social Security (Contributions) (Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2016. As you may be aware, these regulations contain some technical detail, so I hope noble Lords will bear with me while I explain their content. The consumer prices index rate of inflation is the basis of indexation for most of the national insurance contribution limits and thresholds. The CPI rate of inflation was minus 0.1% in the year to September 2015. As a result, not all of the national insurance contribution limits and thresholds will need to be changed for the 2016-17 tax year. The exceptions to this are the upper earnings limit, the upper secondary threshold, the upper profits limit and the new apprentice upper secondary threshold.

I start with the upper earnings limit, which is the level of earnings at which employees begin to pay class 1 national insurance contributions at the additional percentage rate. It is aligned with the point at which the higher tax rate is paid. From this April, the income tax personal allowance will increase above indexation from £10,600 to £11,000 and the point at which the higher tax rate is payable will increase from £42,385 to £43,000 in the 2016-17 tax year. The upper earnings limit will be increased from £815 to £827 per week from 6 April 2016 to maintain this alignment.

The upper secondary threshold is the level below which employers are entitled to a 0% rate of national insurance contributions on the earnings of employees under the age of 21. Since it was introduced in April last year, the zero-rate earnings band for employees under 21 has supported the jobs of more than 1.5 million young people. The UST will continue to be aligned with the upper earnings limit and will also be set at £827 per week from 6 April 2016.

From April this year, employers will also be entitled to a reduction in secondary class 1 NICs on the earnings of eligible apprentices under the age of 25. This will reduce the cost to employers of providing apprenticeships for young people. The new apprentice upper secondary threshold will be the level below which employers are entitled to a 0% rate of NICs on the earnings of relevant apprentices. Like the UST, it will be aligned with the upper earnings limit, and so it will be set at £827 per week from 6 April 2016.

Moving on to the self-employed, these regulations also set the upper profits limit for class 4 contribution liability. The upper profits limit is the level of profits below which the self-employed pay the main class 4 percentage rate of NICs on profits above the lower profits limit. The UPL also will rise to maintain alignment with the level at which the higher rate of income tax is payable—to £43,000 for the 2016-2017 tax year. These regulations also set the prescribed equivalents of thresholds and limits I have mentioned for employees paid monthly or annually.

In the 2016-17 tax year, employers will continue to pay contributions at 13.8% on earnings above the secondary threshold. Employees will continue to pay 12% on earnings between the primary threshold and the upper earnings limit, and 2% on earnings above that. This is in line with the commitment the Government made in the National Insurance Contributions (Rate Ceilings) Act 2015 to provide certainty for businesses and employees by locking in the main rates of class 1 NICs for the duration of this Parliament.

Finally, to ensure that the National Insurance Fund can maintain a working balance throughout the coming year—which the Government Actuary recommends should be one-sixth of benefit expenditure for the year—these regulations provide for a Treasury grant of up to 5% of benefit expenditure to be made available to the National Insurance Fund in the 2016-17 tax year. A similar provision also will be made in respect of the Northern Ireland National Insurance Fund.

I commend the draft Social Security (Contributions) (Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2016, the Employment Allowance (Excluded Companies) Regulations 2016 and the Employment Allowance (Increase of Maximum Amount) Regulations 2016 to the Committee.

My Lords, I thank the Minister for introducing these regulations this afternoon. As he has outlined, there are three separate instruments before us today. I will start by addressing the two on the employment allowance before turning to national insurance limits and thresholds. The Opposition will not oppose any of the measures, but I will put a number of questions and clarifying points to the Minister.

Labour is committed to stimulating employment growth and in particular supporting SMEs, and therefore from the outset we have been behind the intent of the employment allowance. That said, it is not clear whether the policy is having the intended impact. The main reason stated by the Government for these changes is to make the employment allowance more focused on businesses that create and sustain employment, ensuring that the employment allowance is better targeted on employers who may take on additional staff, and so supports the objective of supporting employment. However, as the Chief Secretary to the Treasury openly admitted, there is a particular problem when it comes to,

“assessing how many jobs are created as a result of the allowance, because of the inherent complexity in that matter”—[Official Report, Commons, National Insurance Bill Committee, 21/11/13; col. 58].

Given the Government’s stated purpose, it is not at all unreasonable for us to judge the success of this policy against the number of people it enables SMEs to employ. However, due to the apparent impossibility of collecting the necessary data, how would we know? How can the allowance be targeted on particular gaps in small business employment if we do not know who is and who is not using the allowance to take on more staff? Indeed, according to the employment allowance impact report, only 34% of those surveyed stated that they planned to use the allowance to take on additional staff. The majority said that the money would be absorbed into the general revenues and expenditure of the business.

Increasing the allowance by £1,000 to mitigate the increased cost of the national minimum wage seems perfectly reasonable. However, can the Minister go into some more detail about the impetus behind the exclusion of sole-director companies? What were the reasons why further exemptions were felt appropriate? Can the Minister when responding make particular reference to whether the evidence of tax avoidance had encouraged the Government to respond in this fashion?

As I stated at the beginning, we support the measures, but perhaps it will be appropriate to offer a word or two of caution. In the report Awareness and Impact of the Employment Allowance–Research with Small Employers, the main reason for businesses not claiming the allowance was concerns around eligibility. Does the Minister anticipate whether further exemptions will be added? If so, the Government ought to be aware of the confusion that already exists among employers about who is eligible. It is also worrying that the understanding of the rollover mechanism built into the legislation is lower still. Does the Minister not agree that producing policy with the intent of easing the burden on SMEs can only be as effective as the knowledge of those whom the policy impacts? Without this, the efficiencies that the Government are making are pointless.

I turn to some of the specifics about the regulations themselves. The consultation was held for five and a half weeks, between 26 November 2015 and 3 January 2016. Why was the period so short? The Chancellor announced these measures in his summer Budget; surely consultation could have commenced during the Summer Recess?

A more significant point is that HMRC has not published a summary of the responses to the consultation in question. Its publication would be of value—I would be interested to see, for example, whether contributions were made by those who had started their own business and claimed the employment allowance, and what they believed the impact of the proposed restriction of the allowance to companies with a single director would have had on the ability to establish their company. Can the Minister say whether there are any such examples? Could he give a commitment to publish the consultation and place it in the Libraries of both Houses? Given the acknowledgment that data collection on, and analysis of, the employment allowance is difficult to come by, any information gathered on the issue would be of considerable value.

Paragraph 11.3 of the Explanatory Memorandum refers to the same consultation on the regulation of small businesses, and says:

“The basis for the final decision on what action to take to assist small business will be responses to the technical consultation on the Excluded Companies Regulations, to ensure that the measure does not have any unintended consequences”.

We are only going to access the merits of the Government’s judgment in this regard if we have the relevant information available to us.

Finally, paragraph 3.2 of the Explanatory Memorandum states:

“Disregarding minor or consequential changes, the territorial application of this instrument includes Scotland and Northern Ireland”.

Would the Minister commit to writing to me to outline how this measure, and indeed the national insurance measures, will be applied differently in the devolved Administrations?

The third measure in this set of statutory instruments —the Social Security (Contributions) (Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2016—sets limits and thresholds for class 1 national insurance contributions paid by employees and employers on employee earnings and for class 4 national insurance contributions paid by the self-employed. The rise in the threshold for employees means that employees will pay up to an additional £1.20 per week in national insurance. However, the Government have not shifted the lower threshold upwards accordingly. Although this has occasionally stayed the same as the previous year, that has not been normal government practice. Could the Minister expand on the Government’s thinking behind this aspect of the proposals?

In addition, the regulations set the thresholds for two national insurance relief measures: first, abolishing NICs for employees under the age of 21 on earnings up to the higher rate threshold; and secondly, abolishing employer NICs up to the upper earnings limit for apprentices aged under 25. The Government’s ambition to create 3 million apprenticeships by 2020 is widely known. However, a repeated problem that we have consistently raised is that, although a rise in the number of apprenticeships is of course welcome, they have disproportionately favoured people over the age of 25. Could the Minister say whether today’s regulations are a recognition from the Government that something needs to be done to tackle the lack of high-quality apprenticeships available to young people? Have his colleagues at the Treasury produced statistics about the number of people under the age of 25 who will be affected? If the Minister has any information on this, I would be very grateful if he would share it with us.

I end by once again stating that the Opposition will not be opposing these measures today. However, I would be grateful if the Minister could respond to the points that I have raised, if not in his reply perhaps at a later date in writing.

My Lords, I thank the noble Lord for his questions and above all for his party’s support for these regulations, which I believe was also given last year. When I have answered some of the questions, I think he may feel even happier about providing that support.

The noble Lord asked whether the employment allowance achieved its intended purpose of supporting employment, given that the impact report stated that only 34% of those surveyed planned to take on more staff. The aim of the employment allowance is of course to support businesses and help them to grow by reducing the cost of employment. Statistics published by HMRC at the end of October 2015 show that 1.17 million employers have had their employment costs reduced by the employment allowance. Of course, it is up to individual businesses to decide how best to use these savings. The latest research from the Federation of Small Businesses suggests that 29% of small businesses will use the savings to boost staff wages, 28% will employ additional staff and 24% will invest resources. However, this is one of a suite of measures and, as I said, it is up to them how to use the allowance.

The noble Lord made a point about information and asked how we can target the employment allowance to specific gaps in small business employment if we do not have the data about who is using it. There are already positive indications to suggest that employment allowance is being widely claimed by the small business community. The impact report states that nearly seven in 10 eligible businesses with fewer than 50 employees are claiming the allowance. That report was compiled when the scheme had been running for less than a year. Since then, figures show that 1.17 million employers have benefited and, at the moment, 98% of the benefit of the allowance goes to small and medium-sized businesses—by which I mean those with fewer than 250 employees.

I turn to the regulations on excluding single-director companies from employment allowance. The impetus, as the noble Lord put it, behind these is to reinforce the objective of the allowance as a means to support wider employment and to help to ensure that it is focused on reducing the cost to companies of expanding their workforce or taking on their first employee.

On the question of eligibility for the allowance, whether further exemptions will be added to it and potential confusion from the changes, the report on awareness and impact on employment that the noble Lord cited was published last July and represents a snapshot of the research carried out between November 2014 and January 2015. Since then, the Government have published take-up figures and, at the end of 2014-15, the take-up rate stood at 89%—a quite substantial improvement—with more than 1 million employers claiming the allowance. As I mentioned, the mid-year estimate was 1.17 million employers. We are encouraged by those statistics and think that the early concerns set out in the report have eased with the passage of time, but, of course, the Government continue to monitor the effectiveness of employment allowance and its contribution to wider government aims.

The noble Lord asked why the technical consultation on single-director companies was so short. In fact, the tax consultation framework sets out that the consultation period for this sort of secondary legislation is four weeks, and this consultation was a bit longer, at five and a half weeks, because of the Christmas break. It was closed in early January to enable the measure to come into effect in April, as announced. As for a summary of the responses to the consultation on the single-director company measures, paragraph 8.1 of the Explanatory Memorandum provides a short summary of the comments made in response. It was quite short, and we have no plans to extend that because the essence of the replies is contained in that short summary.

The noble Lord asked, in relation to the paragraph in the Explanatory Memorandum on the technical consultation on excluded companies, whether the responses to the consultation informed the action taken to assist small businesses. That paragraph relates to the technical consultation. The responses to the consultation were useful in assisting HMRC to write the guidance for the measure, which will be published in due course on the government website GOV.UK.

The territorial application was mentioned. I can confirm that all these measures will apply to the whole of the United Kingdom, as set out in paragraphs 5.1 and 5.2 of the Explanatory Memorandum on the employment allowance changes. The paragraph that the noble Lord cited was included in relation to all the SIs to assist the Speaker in the other place by drawing attention to the fact that the instrument does not need to be certified for the purposes of the English votes procedures in the other place.

There was slight confusion about the Government increasing the upper earnings limit, meaning that employees have to pay more national insurance contributions on their earnings. The proposed increase in the upper earnings limit will maintain the alignment with the point at which the higher tax rate is paid. This will increase to £43,000 next year, which is slightly above inflation. At the lower end, the CPI rate of inflation, as I mentioned in my opening remarks, has been minus 0.1%, so those rates have been frozen. That is consistent with the approach taken in the past when the retail prices index was negative, which led to the thresholds being frozen for the 2010-11 tax year.

I may have suffered from a touch of brain fade, but did the noble Lord respond to my question about the extent to which tax avoidance had been a feature in the single-director exclusion?

I did not, or at least I did in the sense that I made the point that it was focused on helping businesses to employ people. This brought it in line with the original policy, so I made it into a positive point and I did not specifically mention avoidance. However, we think that overall, in line with the policy, it is right to focus it on creating employment.

The new policy on apprenticeships starting in April will involve the abolition of the class 1 national insurance contributions for young apprentices under the age of 25. That will obviously reduce the cost of employing an apprentice, which is part of the Government’s strategy to support high-quality apprenticeships. It is part of a wider strategy, which will also introduce the UK-wide levy on employers with pay bills over £3 million to fund the step change needed in apprenticeship starts and help to achieve the 3 million apprenticeship starts this Parliament, which is part of our policy.

I was asked how many people will be affected by the under-25 national insurance relief. The impact assessment published with the regulations notes that an estimated 180,000 employers offer apprenticeships in the UK and are likely to benefit from this measure. The BIS apprenticeship data in England for the 2013-14 academic year show that around 500,000 apprentices under the age of 25 were employed throughout the country. HMRC estimates that there are around 130,000 apprentices in England aged 21 to 24. This group will be directly affected by this measure, with those under 21 already benefiting from the zero NIC rate since April 2015.

I think that I have dealt with most of the questions. Of course, if I have not covered them all, I will certainly look through the record of the noble Lord’s speech and write to him. I repeat that I am grateful to him for his support and I commend these regulations to the Committee.

Motion agreed.

Employment Allowance (Excluded Companies) Regulations 2016

Motion to Consider

Moved by

That the Grand Committee do consider the Employment Allowance (Excluded Companies) Regulations 2016.

Motion agreed.

Social Security (Contributions) (Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2016

Motion to Consider

Moved by

That the Grand Committee has considered the Social Security (Contributions) (Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2016.

Motion agreed.

Patents (European Patent with Unitary Effect and Unified Patent Court) Order 2016

Motion to Consider

Moved by

That the Grand Committee do consider the Patents (European Patent with Unitary Effect and Unified Patent Court) Order 2016.

Relevant document: 24th Report from the Secondary Legislation Scrutiny Committee

My Lords, this order forms part of the implementation of the unified patent court agreement and is an essential step in the United Kingdom’s ratification process of that international agreement. The creation of a single patent system has been a long-held desire across Europe. The current European patent system is fragmented. Even if you go through the European Patent Office, you have to maintain a bundle of patents with each patent covering a single country where you want protection. Each patent must be enforced separately in the national courts of each country. For example, around a quarter of the patents litigated in the UK between 2000 and 2008 had parallel litigation in other European countries involving the same parties. This can be very costly and burdensome.

The negotiations to bring about a single patent and court for Europe were finally concluded in February 2013 with the signing of the unified patent court agreement. The UK worked hard during those negotiations to secure changes to the agreement which UK businesses needed. Most notably, my right honourable friend the Prime Minister was personally involved in bringing the part of the court dealing with the pharmaceuticals and life sciences sectors to London. This is good for the pharmaceutical industry, which is very important to the UK economy, and it will further boost the reputation of the UK as a global centre for commercial dispute resolution.

The unitary patent and the unified patent court form a package of European patent reforms which aim to provide a more streamlined and cost-effective option for innovative businesses wanting to protect and market their inventions across Europe. The Government want the UK to be the best place in Europe to innovate, to patent new ideas and to set up and expand a business. The unitary patent and the unified patent court will help us to deliver this goal. Importantly, the whole system can come into effect only once 13 countries, including the UK, have ratified the unified patent court agreement. So far, nine countries have ratified the agreement, and it is likely that the court will be open for business in early 2017.

I now wish to address the matters which the report of the Secondary Legislation Scrutiny Committee has brought to the attention of noble Lords as issues of public policy likely to be of interest. The committee raised a concern that the approach to implementing the software exception appeared to be inconsistent with the European Patent Convention, which requires that European patents are treated in the same way as national patents. I want to reassure noble Lords that there is no inconsistency. The UPC agreement introduces an exception to patent infringement which allows very limited use of computer programs. The exception is intended to allow someone to find out how a computer program works so that they can write another program that works with the original. For example, a programmer wishing to write an app to work on a smartphone needs to know how the phone’s software works to make sure that the app will communicate properly with it. The new software exception would allow the programmer to find out how the phone software works, but if the app still used the patented features of the phone’s software, the programmer would need a licence from the patent owner.

The consultation identified widespread and serious concerns from businesses in the high-tech and ICT sectors about the uncertain scope of the proposed exception. Many responses to the consultation proposed a “safe haven” approach, where the exception would not apply to national patents which are granted by the UK Intellectual Property Office. In the light of these concerns, and after further discussions with concerned parties, the Government have decided that the software exception will be introduced only for European patents and unitary patents at first. It will not apply to national patents, thus providing the safe haven advocated by business. The legislation will then be reviewed within five years of entry into force of the UPC agreement, which is expected in 2017. The safe haven approach is not inconsistent with the European Patent Convention, which allows for contracting member states to make special agreements on any matter concerning European patents which are subject to national law, and the UPC agreement is just such an agreement.

The second matter of interest raised by the Secondary Legislation Scrutiny Committee relates to contributory infringement, where a person knowingly provides another with the means to infringe a patent. For example, providing someone with a part which is essential to making a patented invention without the patent owner’s permission could be a contributory infringement. The Patents Act 1977 already makes adequate provision for contributory infringement of European patents valid in the UK. For such a patent, the infringement can occur only in the UK, because the patent is valid only in the UK. The order amends the Act to account for the unitary patent because infringement of a unitary patent can take place in any country covered by the patent, not just the UK. I wrote to the committee on 27 January to clarify those points, and I note the report of the committee which acknowledges that my letter dealt with the issues raised.

The order amends the Patents Act 1977 and makes changes in three areas: it clarifies where the UPC will have jurisdiction and where the UK courts will retain jurisdiction; it ensures that the Patents Act correctly provides for the unitary patent; and it introduces two new exceptions to patent infringement which are provided for in the UPC agreement but which do not currently exist in UK law. These two new exceptions to patent infringement are an exception to allow plant breeders to use patented biological material to create a new plant variety—the UK is the fourth largest market for plant breeding in Europe after the Netherlands, Germany and France, where this exception already exists—and an exception which allows limited use of computer programs, which I have already spoken about.

The European Patent Convention established the current system more than 40 years ago. The order is a major milestone towards achieving the goal of an even more streamlined and cost-effective system. It allows the UK to ratify the agreement in conjunction with a further order on privileges and immunities, which will be brought before the House later in the year, following a recent international agreement. I commend the draft order to the Committee.

My Lords, I was waiting for the noble Lord who speaks for the Opposition to commend the excellent work and great speech of my noble friend. Your Lordships may be startled to learn that, 39 years ago, I was a young Opposition Whip taking the Patents Bill through your Lordships’ House. One had to be a lawyer and a scientist, and I am neither, but it enabled me to have immense fun, and I am sure that involved in the proceedings—luckily, not today—are issue and action estoppel, res judicata and many other elements.

One particular chunk of that Bill, now an Act, is concerned with compulsory licences. I thank my noble friend very much for her excellent opening speech. I think that it was less than a minute in that she mentioned the pharmaceutical industry, which caused me to pay close attention. There was quite a problem—indeed, a government defeat—on compulsory licences. Will my noble friend be kind enough to write to me to confirm that there is no major change on compulsory licences, which I think are covered from Section 48 onwards?

If my noble friend glances at page 4 of the draft order, she will see mentioned, among the enormous number of entries on the left-hand side, Sections 103 and 105. Perhaps I should have grasped this 39 years ago, but I did not. Why is there an,

“extension of privilege for communications with solicitors relating to patent proceedings”

in England and Wales—I know not about Northern Ireland—but an,

“extension of privilege in Scotland for communications relating to patent proceedings”?

In England, it is communications with solicitors; in Scotland, it is not necessarily so. I do not think that there is a major problem—it may be a legal problem, or it may be something else. As I murmured to my noble friend before we started our proceedings, I recall that two years ago there was a singularly difficult case that will have concerned her department over extradition, and the law of extradition did not cover the territory of Scotland for that particular matter. However, I do not think that compulsory licences and the communications and privilege that we are discussing will be of that gravity.

I thank the Minister very much for setting out the necessity and the reasons for this order. Perhaps she would be kind enough to write to me about Sections 103 and 105 and confirm that the situation concerning compulsory licences is still in order and working. I am very grateful to her and to the Committee.

My Lords, I was not in any sense trying to discombobulate the noble Lord, Lord Lyell. I certainly wanted to hear what he said so that I could use anything that he did say to amplify and extend the point that I want to make in response to the Minister. As the noble Lord said, the noble Baroness made a very good fist of introducing a complicated and technical area, showing her ability to switch from detailed trade union negotiations and Sunday shopping yesterday to today’s detail on patents. This subject usually attracts a slightly larger audience. I am rather sad that we do not have the usual coterie of friends and camp followers who normally flood in for debates on this interesting and yet rather narrow topic.

Funnily enough, the noble Lord, Lord Lyell, has stolen one of my lines, which must be almost unique in the annals of your Lordships’ House. I was going to pick up a slightly narrower point but he raised it for me by drawing attention to a potential territorial problem in the way in which some of the sections are described. Mine is a more general question, which is that this instrument—which we are certainly not against and indeed support—does not include the Isle of Man. I wonder whether some explanation can be given as to why plant breeders and others in the Isle of Man will be excluded from the new benefits. I am sure that the officials supporting the Minister will have a ready answer for that, as it is an obvious question to ask.

I was involved, as was the noble Baroness, in the primary legislation that set up this court and we had a lot of discussions about it. Therefore, many of the comments that I would have made are redundant because we are aware of where this has come from and fully support the way in which it has been developed. As far as I can tell, the statutory instrument is exactly as one would expect it to be.

Having said that, I notice that the Minister said that we were making some progress—albeit glacial rather than dramatic—on getting this to take off. She mentioned that nine out of the 25 countries have now signed up to the agreement, but she said that she thought there was a possibility of the court starting in 2017. I wonder whether she can expand on that a bit. Can anything more be done to progress this? I know that she has been active in Europe on these matters and I am sure that she has been raising people’s interest in it as she has gone around.

Related to that are two questions about overall progress, assuming that we get there in 2017. There was talk in the original discussions in Committee and on Report about the possibility of a second court in this whole approach. The first one is clearly going to be in London, where the bulk of patent work and activity is happening, but there were hopes in Scotland that the expertise within the Court of Session could be deployed if there were sufficient work. I wonder whether she has any thoughts on that and whether progress on that or any further assessments has been made.

Secondly, for those who are not up to speed on the detail, the way in which the scheme operates is that, rather than having a single place within which patent expertise is to be developed, four of the major countries have bid for—and got, as I understand it—the four main platforms of patent law. However, I think that I read in the papers somewhere that there were some difficulties in holding these courts in one or two of the countries which had expressed an interest. Is there is anything to report on that? Clearly, it would be great if more than one court could be located in the UK, and if there were a failure, possibly in Spain, perhaps there will be an opportunity for the UK patent group to bid for that as well.

Turning to the two exceptions which the Minister talked about, the comments she referred to in the report of the Secondary Legislation Scrutiny Committee were broadly supportive of the plant breeding exception, as are we. As has been said and she repeated, the UK has the fourth largest plant breeding industry in Europe, and we must do what we can to try to support it. I did not come across any evidence to back the assertion made in the report that the plant breeding industry is very supportive of introducing this patent to the UK. I do not wish to delay the debate, but if I could be sent a letter explaining where that evidence is to be found I would find that helpful, because my colleagues in Defra have indicated that they would like to be better apprised of this development.

On the points about computer programming, it is a pity that the noble Baroness, Lady Bowles of Berkhamsted, is not able to be here, because she has such expertise in this area. I will resist making too heavy a gibe on this, but in a move towards trying to create a successful unified patent court, it seems a little bizarre to provide a safe haven for a group of people in the country who do not particularly want to be fully engaged with this patent activity in the unified court. To create a safe haven for patents developed in this area within the UK and allow them to be dealt with separately, not exposed to the rigours of the EU and the unified patents scheme, seems a little bizarre. I accept that a five-year review will take place, but perhaps the Minister could explain a little further why that was necessary. Again, the representations were not published for us and we are not aware of them. If there is significant concern about this, it may be the right decision, but I do not have the information to allow me to make a judgment.

Finally, I associate myself with the general comments that this is an exciting European initiative. This is the sort of thing that strong membership of the European Union could and should be developing for the people of this country, and I absolutely associate myself with the words of the noble Baroness in saying that this is the right course and we should support it.

My Lords, I thank the noble Lord, Lord Stevenson, for his comments and for his support for this statutory instrument. As he said, we have debated these issues on and off, and this is a very important European initiative which I am very glad to be presenting to the Committee.

I am also delighted to see my noble friend Lord Lyell and to hear about his experience of the 1977 Act. I will now look to him when I have patent complications, which will improve our discussions in the Tea Room even more. My noble friend courteously gave me advance notice of his questions, so I will answer them briefly and write to him if he feels that necessary. Sections 48 and 49 of the Patents Act 1977 relate, as he said, to compulsory licences. There is no change. The unitary patent regulation requires national law on compulsory licences to apply to unitary patents. He also asked about Sections 103 to 105 relating to the client-attorney privilege before the comptroller of patents. The comptroller will have some jurisdiction over unitary patents, for example over entitlement, so we need to apply Section 103, which is the reason for this curious provision.

Continuing on these difficult questions of detail, the noble Lord, Lord Stevenson, asked about the Isle of Man. There will be a separate order for the Isle of Man, but the Isle of Man Government have indicated that they want the UPC. The noble Lord shot the bullet in terms of questioning me, but I think that the answer is a positive one; this European endeavour will also stretch to the Isle of Man. He also asked about the ratification process. As I have said, we have had nine ratifications so far with a few more expected this summer. In particular, we expect Germany and the UK to be ready this autumn for the reasons I have already stated.

On the point about keeping the pressure on, on Monday I was at the European Competitiveness Council at which Commissioner Bienkowska gave us an update on progress with ratification. I think it is fair to say that the Competitiveness Council is keeping up the pressure in this important area.

In terms of where the UPC will be based, the noble Lord, Lord Stevenson, mentioned that several countries were sharing in the opportunity here, and it is worth just running through them. The court of appeal will be in Luxembourg. The court of first instance will have a central division in Paris and specialist sections in London, for pharmaceuticals, and Munich, for mechanical engineering. The court of first instance will also have a number of local divisions in most member states, including in the UK, Germany, France, the Netherlands, Austria, Denmark and Finland. Sweden and the Baltic states will join together in a regional division based in Sweden.

The case-counting data so far suggest that the UK will only have enough cases to sustain one local division, at least in the early days of the new court. Of course, the UK could set up an additional local division in Scotland in future, should the case load increase, in consultation with the court jurisdictions across the UK.

The noble Lord, Lord Stevenson, asked about the object of the software exception. I think I explained this fairly well in my opening remarks. We listened to industry concerns because this exception is untested and there is no case law on its interpretation. As a result, we are implementing the exception for European patents first and will then review how it works—as he said, we have a five-year review clause. In that way, the Government are able to meet their obligations under international law and to give effect to the provisions of the UPC while addressing the real concerns of industry on this issue. I can certainly share some of those with the noble Lord, but they were quite substantial. We believe in listening to consultation on these sorts of matters in the IPO area.

The noble Lord also asked about the evidence from plant breeders. They were pretty noisy about this provision, both here and in the European Parliament. They responded to our consultation to support it. I know that other member states feel the same: that the system for plant breeding works well and you do not necessarily want to add extra patent complications. That is why we felt it was okay to make this exemption.

I understand the case for that, and we take it, but it would be interesting to see the nature of the evidence. I have not seen evidence published for this particular point, and it would be helpful if it was possible to see it.

We would of course be delighted to send the noble Lord what evidence we have. It is useful, when you make exemptions, to look at why you are doing it—what the rationale is—and what it means for future cases. I would be delighted to share that evidence with the noble Lord and look forward to his comments. Plant breeding is a very important industry. We are not number one in Europe, but its output is very important to the future of this planet.

I think we are all agreed that the order takes us a step closer to implementing the UPC agreement and makes it easier for businesses to enforce their patents across Europe. Innovative businesses have been waiting for more than 40 years for a single European patent system, and we are much closer to achieving that long-held aim. With the introduction of the UPC, for which we now have premises, firms will be able to start taking advantage of the unitary patent if they so wish. I commend the order to the Committee.

Motion agreed.

Sitting suspended.

Limited Liability Partnerships (Register of People with Significant Control) Regulations 2016

Motion to Consider

Moved by

That the Grand Committee do consider the Limited Liability Partnerships (Register of People with Significant Control) Regulations 2016.

My Lords, for the convenience of noble Lords, it will be helpful to consider the Register of People with Significant Control Regulations 2016 together with the Limited Liability Partnerships (Register of People with Significant Control) Regulations 2016. These regulations set out how the register of people with significant control will work and apply the register to limited liability partnerships.

In 2013, the Prime Minister set out the ambition for the UK to improve corporate transparency and tackle criminal abuse of UK corporate entities. I am therefore pleased that we are today debating regulations underpinning the detail of the register of people with significant control, which bring that ambition one step closer to reality. The register of people with significant control is the foundation of the UK’s ambition to increase the transparency of UK corporate entities.

The benefits of the increased transparency provided by the register have the potential to be far reaching. For law enforcement, the Metropolitan police force estimates that, in cases where hidden beneficial ownership is an issue, 30% to 50% of an investigation can be spent in identifying the beneficial owners through a chain of ownership layers. For business, increased transparency will ensure that companies know who owns and controls their suppliers and customers. Investors will also know who controls companies they are investing in. For civil society, increased transparency will allow people to hold businesses to account, and citizens will know who controls companies when they purchase goods or services.

The register of people with significant control—the PSC register—will record the details of people who own or control UK companies. There are five separate conditions for being a PSC, which are set out in Part 1 of Schedule 1A to the Companies Act 2006: first, that an individual holds, directly or indirectly, more than 25% of the shares in a company; secondly, that an individual holds, directly or indirectly, more than 25% of the voting rights in a company; thirdly, that an individual holds the right, directly or indirectly, to appoint the majority of the board of directors; fourthly, that an individual has the right to exercise, or actually exercises, significant influence or control over a company, the definition of which is set out in statutory guidance, and would include individuals with significant veto rights over the operation of the company. I shall paraphrase what the fifth condition is for the benefit of noble Lords. The fifth condition is where a trust or a firm controls a company through one of the other conditions and there is a person who has the right to exercise, or actually exercises, significant influence or control over that trust or firm. Again, the definition of significant influence or control in these circumstances is set out in the statutory guidance.

Where a PSC meets one of the first three conditions, the company does not need to identify on its PSC register whether that person also meets the fourth condition—I remember discussing that during the passage of the Bill. In summary, the company regulations set out the detailed requirements for the PSC register. They are: the scope of the register; the fees a company can charge for providing copies of its own register; the information to be included on the register; the contents of warning and restriction notices; and how the protection regime will work for PSCs at risk of harm by their information being made public. The limited liability partnership regulations—the LLP regulations—apply the provisions of both the primary and secondary legislation on the PSC register to LLPs, with appropriate modifications.

The full costs of the register of people with significant control are set out in the three impact assessments. First, the enactment impact assessment sets out the broad policy costs, including the costs of the provisions in the Act and many of the provisions in the regulations, which are calculated to have a net cost to business of £85.9 million per year. Secondly, the protection regime impact assessment sets out the costs and benefits of companies applying to the protection regime. This is calculated to have a net cost to business of £4.7 million per year. Thirdly, the impact assessment on the costs and benefits of making a company’s own PSC register publicly available calculates the net cost to business of companies giving access on request to the company’s own register. This is calculated to have a net cost to business of £10.9 million per year. A very important point, given the scale of these costs, is that they are spread over a very substantial population of some 3.4 million companies, including 59,000 LLPs. The average cost per company is estimated to be £25 per annum. As I explained earlier, this is an important policy and the benefits of the register have the potential to far outweigh the costs.

The PSC regime contains robust penalties to promote compliance with the requirements. These measures support law enforcement and the tax authorities’ existing powers and investigations. The most serious offences, when a company fails to investigate its ownership or when a person or body fails to respond to a request for information from the investigating company, carry a maximum sentence of two years’ imprisonment on indictment or a fine, or both. We will take strong action where companies and individuals break the rules.

Noble Lords will recall from the debates on the Small Business, Enterprise and Employment Bill last year that we put in place a protection regime because this Government believe it is important, where an individual is at serious risk of violence or intimidation, to protect a PSC’s identity from the public register. The PSC’s information will of course still be available to law enforcement, and the individual will still have to fulfil their PSC obligations. Through these regulations, we have set a high bar for the protection regime, so it cannot be abused or damage the utility of the public register. We have tightly drawn the grounds for protection where the risk of violence or intimidation is a result of the company’s activities or where the risk comes from the association of the PSC with that company.

Parts 6 and 7 set out who can apply for protection, what types of PSC information can be protected and how they can apply. Noble Lords will see that Part 6 follows the successful existing company law for directors, whereby a PSC’s usual residential address can be protected. I know I have benefited from that company provision in the past. Part 7 is novel and allows the protection of all of an individual’s PSC information from the public register. This is because we recognise that the nature of a PSC differs from that of a company director. As part of the broader package of changes to company filing requirements made by the Small Business, Enterprise and Employment Act, the date of birth—2 January in my case—will be suppressed on the public register at Companies House in the details of both PSCs and directors, so that dates of birth are not so freely available.

I will also set out the key differences in how the limited liability partnership regulations apply compared to the company provisions. The LLP regulations adapt two of the conditions mentioned earlier, so that they apply more appropriately to LLPs. The first condition is adapted to take account of the fact that LLPs do not have share capital. The revised condition is that an individual has the right to more than 25% of the surplus assets of an LLP on winding up. The third condition, which is adapted to reflect the fact that LLPs do not have directors, is that an individual holds the right to appoint or remove the majority of persons entitled to take part in the management of the LLP.

I will bring the other parts of the PSC register provisions to your Lordships’ attention. An important part of the PSC register conditions is the term, “significant influence and control” in the fourth and fifth conditions. During the passage of the Bill I explained that the meaning of this term would be set out in statutory guidance. The draft statutory guidance for companies was laid in the House Library alongside these regulations. I am very grateful to the company law experts and civil society organisations that helped develop this guidance throughout last year. I am also grateful to the businesses and individuals who commented on the guidance when it was published for final comments in December.

The draft statutory guidance for LLPs has also been prepared and is currently published on GOV.UK. This statutory guidance can be laid in Parliament only once the LLP regulations we are debating today have been made. My department has also developed, with the help of a working group of legal experts, business representatives and civil society organisations, non-statutory guidance for companies and LLPs to guide them through the requirements step by step. The guidance was published at the beginning of February and has been well received by businesses so far.

Before I conclude, I will give the Committee an update on international progress, and highlight how the Government are building on the foundation of the PSC register and leading by example on the global stage by putting the register in place. In the EU, the fourth anti-money laundering directive was adopted in May 2015, which means that by early 2017 all member states must hold beneficial ownership information through a central register. I welcome the close working with my honourable friend Harriett Baldwin, the Economic Secretary to the Treasury in the other House, to transpose this directive.

The UK is taking the lead on extractives transparency. We were the first member state to implement reporting requirements for all large and listed companies, and we expect the first reports for UK companies detailing the payments they have made to Governments across the world to be made available later this year. In a similar vein, in October 2014 the UK was successfully admitted as a candidate country for the extractives industry transparency initiative. This in effect puts more information into the public domain and allows the Government to be held to account for our policies on the extractive industries in the UK. We continue to work with other countries, through the G7 and G20 fora, to implement international corporate transparency standards, which are of course very important. I commend these regulations to the Committee.

My Lords, I want to intervene briefly. My noble friend makes a powerful case for the regulations and I appreciate the changes which have been made, particularly as regards the protection regime to allow confidentiality where people may be vulnerable to intimidation or attack. However, I want to sound a cautionary word about how we can pile further regulation in with the best of intentions but which may have consequences that we do not really appreciate and do not want. It is the balance to be struck between transparency on the one hand and privacy on the other; that is to say, my right to confidentiality about my personal and private affairs and the right of the wider public to know about situations where my actions may affect them.

The regulatory balance that we are trying to strike must be to have a regulatory structure that is sufficiently robust and imposes sufficiently strong standards to attract people, because they have confidence in the way the markets are being policed, but not such high standards that the bureaucratic burden of doing business becomes too heavy and people therefore seek alternative ways of carrying out their businesses in markets in other parts of the world. We also need a structure that is risk-focused so that it looks at the points of vulnerability and worry. My noble friend was unwise enough to mention the money laundering directive in her remarks, which gives me a chance to say that this is a classic example of blanket regulation which achieves very little indeed. It makes wonderful work for compliance officers filling in forms. The accountants love it because they have to verify that it has all been done, and the thousands of our fellow citizens who are wandering around the country with certified copies of their passports and a utility bill under their arm beggars belief.

The Government have resisted and resisted a de minimis number, which would mean that when you wish to open a bank account for your godson that you can put £10 into on his birthday, you would not go through the ridiculous performance that we are going through now. I think that the situation has reached a level of fear among the regulated community that is hard to believe. Last week I happened to have a money laundering inquiry. When I left Oxford, I went to work in the United States. I had an inquiry saying, “We see that you worked in the United States in the 1960s. What were you paid?”. That was 50 years ago and I cannot remember. That sort of thing brings the regulatory system into disrepute.

I am broadly satisfied that the balance between maintaining confidence in the market and not driving business away has been struck in these regulations, so I do not oppose them but the Government need to think that they are all of a piece, getting away from money laundering. Just as water will find the weakest point in the dam, so the malefactor will find the weakest point in the regulatory structure. Can my noble friend comment, either this afternoon or perhaps by letter, on what is now happening at Companies House? As I understand it, from 1 April you are going to be able to incorporate a company for £10. Incorporating a limited liability company gives you fantastic benefits and quite a lot of credibility. Is £10 really the amount at which you show a serious level of financial commitment? Further, I understand that there is something called the citizens’ company registration service. You just fill in a form online and there are no mandatory money laundering checks.

If we are going to lean hard, as we are, in these regulations, and I understand why we are doing that, should we be taking these sorts of steps, which facilitate people starting up and running companies with virtually no financial commitment at all and, apparently under this alternative citizens’ registration service, virtually no checks on a person’s background? My noble friend is an experienced company director. I do not think that I have ever been asked a question by Companies House about any of the companies which I have been responsible for filing. It is an entirely self-policed service. If you are an honest chap, you tell Companies House and it accepts it; if you are not an honest chap, it still accepts it. I understand that there is now a net increase of 200,000 a year in the number of companies being registered. I think that my noble friend said in her opening remarks that the total is now 3.4 million companies.

Therefore, while I understand why we are going to approve these regulations, I think that the Government need to keep in mind the balance to be struck. Of course we want to make this country an attractive place to do business; of course we want people to have confidence in the markets; but we need to make sure that we are placing the weight of regulation where it really needs to be placed, as opposed to just spraying regulations all over the place.

My Lords, it is a pleasure to hear the bilious rants from the other side, with which we on this side have some sympathy. I liked the point about the number of times one has to scan one’s passport into an email in order to prove some point or other. Whatever happened to identity cards?

However, there are serious points relating to these regulations which I welcome and will support as they go through. I take the point made by the noble Lord, Lord Hodgson, about the weight or pressure being placed on companies in relation to transparency and the money laundering system more generally. However, that is not the only area where this process came from; as the Minister mentioned, it came from the desire of civil society to have a better handle on how some companies are being operated, as well as from those who wish to invest and from other stakeholders. There is a feeling that the Companies Acts cumulatively perhaps have not kept pace with how people regard the operations of the commercial sectors in the country. Obviously now with LLPs as well, which are not strictly commercial in the business sense but still operate commercially, the ability to have scrutiny is being reduced. It is interesting that the extractives directive and other things have been quoted in support of the need to have this transparency. That better contextualises the situation and I was grateful to the Minister for sketching that out.

That having been said, the point was made that at the end of the day, people will have to operate this in a way that will not be destructive to jobs, the creation of new companies, investment and trade, and these things sometimes do not see it right. Certainly when I began going through these Explanatory Memorandums, piles of which still wait to be destroyed, trees having been cut down all over Europe to create them, it seemed a bit otiose to say the least. On the other hand, these are some of the better Explanatory Memorandums I have seen and I congratulate the department on its work. However, this was difficult to get right. The issues here are complicated and are not factual; with these things we often see that a figure is mechanically put in at one end and comes out at the other, while this is judgment all the way through. I read them with interest and recommend them to those who might have an interest in how this process goes through.

The Minister mentioned this but perhaps it was not brought out as much as it could have been. The Government could have taken a position on this, which is articulated in the EMs, that the regulatory process might not achieve the best result. In the past we on this side have often been critical of the sense of a “voluntarism approach” to many of the problems which we perceive in the commercial world. On this occasion the Government have decided to go with a regulatory structure. It has not been an easy decision but I commend them for the rigour with which they have approached it.

Nevertheless—the noble Lord, Lord Hodgson, picked this up—the judgments about what is a significant interest and control in an operation are heavily dependent on interpretations in the fourth and fifth legs of the process. While I listened with interest to what the Minister said about that, I was not entirely convinced that that was picked up either in the documentation we have had or in the wording she used to describe it. I do not think that that is sufficient to hold this back because, as I say, it is a good attempt to try to get it to balance out in a fair way. However, I wondered about the review process because I suspect that this is such a major change in some ways, not in monetary terms and not necessarily in its impact but in the whole way companies relate to the Government and to the wider parts of civil society, that it would be useful to have a pretty firm statement about how this will be seen in practice and whether there will be a formal process. Of course there will be a review, but it would be helpful to have that articulated now. Perhaps the Minister will be able to address that when she comes to respond.

The weakest part of this is the relationship to LLPs. In a sense that sounds very critical but I am not trying to be. LLPs are relatively new in the way we do business and therefore are not perhaps as well exposed as conventional companies. Their instance is largely in the business services and professional area, and it is harder to see quite where the analogues with a board of directors and control for profit is concerned. However, the sense is that the most appropriate way of biting a person with control of an LLP is in the way in which the proceeds of any dissolution would fall, with 25% going to the person deemed to be a person of significant control. That was not perhaps as strong as some of the other measures that apply in the commercial sector, and maybe that could be reflected on before the guidance finally gets published. I suspect that there might be a bit of an issue around that as we go forward, but it would be appropriate for a review provided that it is picked up and it is made clear to people that it will be coming forward.

In summary, I was present during the time the primary legislation went through last year. I was not directly involved in some of the debates around it but I followed them with interest. This is a big change; those who care about some of the actions and activities of companies and have been frustrated in the past because there was a veil behind which it was very difficult to see will feel that this is a step in the right direction. It is not overly bureaucratic but the noble Lord, Lord Hodgson, is right to say, “Hang about—is this really worth all the hassle?”. I personally think that it is, but the questions that need to be asked are: how will you review this, how quickly will that happen and how effective will it be as regards how we might take this forward?

My Lords, I thank the noble Lord, Lord Stevenson, for his support for these regulations and for his kind words about the Explanatory Memorandum. I will make sure they are passed on to those who worked on it. It always helps to thank people when things are good because that leads to yet further good performance. Let us hope that the regulatory structure works. As the noble Lord said, it is a big change, but this is an important new regime for companies and it is critical that the detailed requirements are correct and fit for purpose. Increased transparency about who owns and controls UK companies is important in maintaining the UK’s higher standards of corporate trust. As we have discussed in relation to many different issues recently, having the sunlight of transparency can be an extremely powerful policy weapon, and we as a Government seek to use it in a number of areas.

We have committed to a review: I think that both sets of regulations require the Government to review the costs to business within five years. I note the points that the noble Lord made, in particular in relation to the LLP regulations, and will make sure that we keep an eye on that. I also repeat the hope that other countries will move ahead as we have done with the PSC, because this only works, as in so many areas, if other countries do this as well.

It was a delight to see my noble friend Lord Hodgson returning to the debate. I am grateful for his cautionary warning about perverse effects, which one could write into many areas of regulatory life. As he says, we need the right balance between transparency and privacy. We focus on risk, and the National Crime Agency is fully on board to be involved in the protection assessment process. As an expert in risk assessment, the NCA is well placed to ensure that assessments are consistently applied and protection applications robustly interrogated.

I share my noble friend’s concerns about the operation of the money laundering directive, which I used to speak about when I was on the Back Benches. I am glad to say that the business department and the Treasury are doing work on its application as part of a deregulation review. I very much welcome the chance to have a discussion with him so that his examples can be fed into that work.

I thank my noble friend for that and will make sure that it is seen by the relevant reviewers. My husband has already provided some examples. He has to look after an elderly aunt—not an obvious money launderer—and has run into the same sorts of difficulties that I am hearing from my noble friend. We need to try to improve things in these areas, which is partly why the work we are doing on the deregulation initiative continues to be very important. The Treasury is in the lead of course on the transposition of the directive, but BIS has responsibility for article 30. The important thing is that the two departments are working together to try to make sure that this is done in a proportionate and sensible way.

My noble friend Lord Hodgson asked a very good question about the accuracy of data at Companies House and whether we receive complaints about that. Companies House will follow up on all complaints about company information being incorrect or incomplete. My noble friend may be right that there are not that many complaints but it will follow them up. In 80% of cases where there appears to be a breach of the Companies Act, companies correct the information straightaway. Most companies are trustworthy and want to provide the correct data, although there are occasionally errors. Where appropriate, investigations are passed to other enforcement agencies, and the changes we are making here will improve our chances of catching the bad guys.

Finally, the noble Lord, Lord Stevenson, asked about capital. My officials considered whether using rights over profit and capital should be part of the approach to identifying the PSCs of the LLPs but, in consultation, business and others told us that this could be difficult conceptually and operationally. As I explained in my opening remarks, the regulations therefore operate on the basis of the closest analogy to owning a share of the company’s capital for LLPs, which would be the right to a share in the LLP’s capital if it were wound up. We will have to see how that goes, as we discussed, and we have the review provision, as I have already explained.

I am not asking my noble friend to reply now but can she give us the Government’s considered view as to whether 10 quid gives you the right of access to a limited liability company? Will she also comment on the citizens’ registration service that apparently—I may be completely wrong—enables you to go online and get a company registered with no money-laundering checks at all? It must be a hole in the dam if you set up this elaborate structure but people say, “If you do it this way, you can have no money-laundering checks at all”. I am not asking for a response now but it would be helpful if she could comment on that at some length.

My Lords, I should like to reflect and write to my noble friend. Obviously, we want to make it easy for people to set up companies. We have had a record level of company creation in this country, and that has been part of the Government’s success over the past few years. I will certainly write to my noble friend and look forward to engaging further with him on this important topic.

Motion agreed.

Register of People with Significant Control Regulations 2016

Motion to Consider

Moved by

That the Grand Committee do consider the Register of People with Significant Control Regulations 2016.

Motion agreed.

Electricity Supplier Payments (Amendment) Regulations 2016

Motion to Consider

Moved by

My Lords, this instrument amends regulations concerning the contracts for difference scheme and the capacity market. As noble Lords will be aware, these schemes were introduced as part of the electricity market reform programme introduced in the previous Parliament.

Specifically, a series of technical amendments will be made to the CFD supplier obligation, which is levied on all licensed electricity suppliers in Great Britain to meet the costs of CFDs, in order to improve its efficiency and transparency. Separately, the instrument will amend the levies that fund the bodies responsible for managing CFD contracts and for managing settlement under the capacity market, which I shall outline to noble Lords now.

The first of these schemes, contracts for difference, or CFDs, encourages investment in low-carbon generation at a lower cost of capital due to the long-term price stabilisation provided under the contracts, which reduce overall costs to consumers of transitioning to a low-carbon generation mix. Then, through the capacity market, regular payments are provided in return for reliable capacity being available when needed, to ensure that sufficient capacity is available to meet demand. A fundamental aspect of both schemes is the competitive auction process for awarding contracts, which drives down costs to consumers.

As noble Lords may be aware, the first CFD allocation round in October 2014 resulted in 25 renewable generation projects being awarded CFDs at a significantly lower cost than would have been achieved through the renewables obligation scheme, which is being phased out. The capacity market auctions were held in 2014 and 2015, with the latest auction securing 46 gigawatts of capacity at a price of £18 per kilowatt per year. A recent transitional auction for demand-side response was also held earlier this year.

Noble Lords will have seen that the Government made an announcement yesterday of a number of changes to the capacity market framework to ensure that it remains fit for purpose to meet our security of supply needs, including bringing forward delivery by holding a new early auction for delivery in winter 2017-18. We have now launched a consultation on these changes, and in due course will be taking final decisions and will present revised regulations.

However, the regulations we are considering today have a different purpose, and in them the Government are simply looking to make several minor amendments to the payment arrangements in order to improve the efficiency with which CFD costs are recovered from electricity suppliers, which will ultimately reduce costs to consumers, and to set the rates for the operational levies relating to both schemes. In order to implement these amendments, three sets of regulations will need to be amended by this instrument. Subject to the will of Parliament, these changes are due to come into force by 1 April 2016.

Before we commence the debate, I will describe these amendments briefly. First, the Electricity Supplier Payments (Amendments) Regulations 2016 amend the instrument that established the CFD supplier obligation mechanism in order to improve its efficiency. As I outlined earlier, the CFD supplier obligation is levied on all licensed electricity suppliers in Great Britain to meet the costs of CFDs. It is set on a quarterly basis by the Low Carbon Contracts Company, a government-owned company that acts as the counterparty to CFD contracts. The supplier obligation is comprised of a levy which is paid on every unit of supply, and a reserve amount. The levy and reserve amount are calculated based on forecasts of payments to CFD generators. These supplier payments are then reconciled against actual payments following the end of every quarter.

This instrument makes a number of minor and technical amendments to improve the efficiency and transparency of the supplier obligation. They are designed to minimise costs both to suppliers and ultimately to consumers. The most significant of these amendments amend, first, the calculation of the levy that is paid by electricity suppliers so that it is a better estimate of suppliers’ actual liabilities. Secondly, they allow this levy to be reduced without notice in circumstances where the Low Carbon Contracts Company considers that electricity suppliers are likely to pay significantly more than they need to. Thirdly, they improve the transparency of CFD costs in the future by requiring the Low Carbon Contracts Company to forecast CFD costs for at least 12 months ahead and to publish the date that each generator is expected to start receiving CFD payments.

These changes were the subject of a public consultation and received a largely favourable response. We estimate that when combined with further regulations that the Government intend to lay in due course, they will reduce the costs to consumers of CFDs by approximately £38 million over the period 2016 to 2020. The Government intend to lay further regulations in due course as not all of the proposals consulted on are being implemented by this instrument due to cost and their impact on the CFD settlement system.

The second objective to be delivered through this instrument is to set a revised operational cost levy for the Low Carbon Contracts Company and to set a revised settlement costs levy for the Electricity Settlements Company, the company responsible for transactions relating to the capacity market. The increases to the budgets of both companies reflect the operational requirements and objectives of the Low Carbon Contracts Company and the Electricity Settlements Company in 2016-17. Both levies were subject to public consultation, allowing the opportunity for scrutiny of the key assumptions in the budgets and, importantly, to ensure that they continue to represent value for money for consumers.

Finally, before we start the debate, I would like to assure noble Lords that the Government will continue to evaluate and monitor the measures introduced under electricity market reform to ensure that they remain effective and continue to represent value for money. I beg to move.

I thank the Minister for his introduction to the regulations. As he rightly says, they are mostly technical in nature and do not impact on policy to any large degree. The ESO regulations around the CFD counterparty to raise funds are largely operational and, quite understandably, are likely to be subject to amendment through operational experience in order to improve efficiency and increase transparency with a view to reducing the costs of the scheme for suppliers and their consumers.

All the amendments included in the regulations appear sensible and come with a very large acceptance on the part of stakeholders, both through consultation responses and through discussions at a stakeholder event in October last year. The main amendments are largely financial and will lead to changes between the balance of funding moving more towards the interim levy and away from the reserve payments. Notice periods for changing the interim levy rate will become more flexible, deadlines will become more helpful, and generally information, data and recognition of commercial sensitivities will improve the scheme’s operations. Within the structure of the scheme, that is commendable.

However, seeing the details of its workings, the CFD counterparty mechanism struck me as somewhat cumbersome. While I am sure that there are unlikely to be major changes to the structure, nevertheless the Minister might enlighten the Committee about why the scheme is set up with quarterly contributions to reserve funds and a yearly operational costs levy for the capacity market settlement body.

I understand the reasoning behind setting up the CFD counterparty in relation to Treasury implications and as the mechanism through which CFDs will be administered and paid, but I understand that suppliers strongly urged the Government to allow the CFD counterparty to operate a working capital model for funding cash flow and building reserves as a more commercial way to operate. Surplus levies could then be rolled into subsequent levy periods to smooth out volatility of payment. Can the Minister confirm whether reserves and operational cash flow costs are to be reconciled to suppliers every year and balanced?

In the reconsiderations of the scheme, did the Minister’s department put any thought into whether working capital arrangements at a marginal cost to public borrowing requirements could be less cumbersome and less costly to operate? In trying to widen and increase the pool of supply participants, are the Government confident that the costs on small independent suppliers are not constraining their participation? I am sure that the Minister will confirm that the CFD counterparty body will be audited, but are there other operational cost checks on the operation of the body?

Perhaps I may widen my remarks beyond the supplier obligation to CFDs in general for a moment. I take the opportunity today to ask the Minister whether the Government will set any technology requirements or specific exclusions for participants in the next auction. I am thinking here of onshore wind and solar technologies. Can the Minister confirm that they will still be allowed to participate so that these technologies can develop and generators will have a continuing route to market for returns on their investments? With the challenge of climate change and the changes required of the UK energy market, we wish to be technology neutral.

My Lords, I declare an interest as chairman of the Committee on Climate Change, and I want to comment on these documents.

It is extremely helpful to have had the Minister’s clear explanation. Of course, congratulating a Minister means that you are then going to use the word “but”, and that I intend to do. One problem is that the public find all these matters impenetrable. I recognise that they are technically very complex, but I ask the Minister to seek better ways of explaining the system to a wider range of people. I spend a lot of my time doing that, and I hope that I get it right, but one of our difficulties in trying to convince people of the battle that we face on climate change is that many of the arguments are not easy to understand. Therefore, a constant desire to try to explain what we are doing and how it works in language which normal people can understand is very important. I do not expect, and I am sure that no one here would say, that the statutory instruments here will advance that cause. However, I do not want us to miss the opportunity of saying that what the Minister has so clearly said really needs to be said more widely, because there are many for whom difficulty arises simply because they do not understand.

Secondly, I very much support the Government’s determination to be flexible when dealing with these matters so we can deliver what we have to as cheaply as possible. In the Climate Change Act 2008, great play is made of the cost-effective means of delivery. I believe that if we are to win and continue to win the battle for public support, they must feel that we are doing this in the most cost-effective way that it can be done. Many of the technical changes being made here are for that purpose.

I ask the Minister, as did the spokesman for the Opposition, about the concept of bringing all this into a more commercial mechanism, which was very much part of the discussions in the consultation. Again, I congratulate the Minister on the very genuine nature of those consultations. It was clear that the Government wanted to know and understand how the industry saw its proposals. I emphasise that because it is not always true. Some consultations ought to have inverted commas around the word “consultation” because there is no intention of changing anything. These clearly were not of that kind and I thank the Minister for making sure that that was so. However, that leads me to suggest that the proposal from people in the business world for greater commercialisation of the mechanisms used should be attractive to a Conservative Government, if I may put it in this controversial way. I am surprised that we have not taken those steps and I wonder whether we intend to do so in future—the Minister said there would be further instruments.

I also associate myself with the question about the opportunity for different generating systems to compete. The principle under which we have to operate is a portfolio of generating mechanisms. I am sure that the Minister would agree that is because we are trying here to tell the future. We are trying to do what needs to be done to ensure that in future we will be able to make the best decisions. That means that we cannot make choices based on deciding well in advance which of the technologies is likely to become the most valuable. We cannot do that because we do not know. Therefore, we have to pay the cost of running a number of technologies in parallel. Sometimes that cost is considerable, as we see in the nuclear industry. However, it is a necessary part of ensuring that we both combat climate change and keep the lights on.

Britain has shown a remarkable example to the rest of the world in being very clear that it does not want to be prescriptive wherever non-prescription is possible. It would be a great pity if we started to resile from the basic concept of, as far as possible, allowing the market to make these decisions. That does mean ensuring that all the differing ways of development have their time to compete against each other. I very much hope that the Minister can reassure me on that.

Lastly, every time we talk about this mechanism, we should remind ourselves that it is the product of a cross-party agreement. This was not dreamt up by the coalition, the previous Labour Government or this Conservative Government. It was a mechanism which came out of the cross-party commitment—the consensus we have on climate change. Therefore, when we debate these things it is perfectly proper to debate the mechanisms, because we are agreed on the purpose. The aims are one thing; the means are bound always to be a matter of sensible discussion. Although this has not been the sharpest of debates or the largest of audiences, it is important for us always to distinguish between our common purpose and our common desire to find the best way to achieve that purpose. Sometimes we mistake those two things, therefore, as always, I will say that it is good to repeat that this is part of our consensus, but it is also right in a democracy to be prepared to argue about some of the ways in which we might make sure that that consensus obtains. Therefore, in pressing those last two points and joining the spokesman for the Opposition, the noble Lord, Lord Grantchester, on that, I hope that the Minister will be able to satisfy both of us.

My Lords, I thank the contributors to this important debate. I am grateful for the contributions from the noble Lord, Lord Grantchester, and my noble friend Lord Deben. I will deal with the points in the order in which they were raised, turning first to the points raised by the noble Lord, Lord Grantchester.

The point about the organisation of the levy and the fact that we are looking at it in terms of supplier obligation is for the precise reason he hinted at, that we did not want to put a pressure on the public purse. That is why it is funded in the way it is and why we looked at the working capital method but decided that it was not good value for the public or the consumer, so the obligation here, as the noble Lord knows, is placed on the supplier. While I appreciate that the marginal cost might not be that great, he will know that the approach of the Government is to bear down on unnecessary costs on the public purse as much as possible, and we felt that this was one.

The noble Lord also asked a question about the review, and he is absolutely right: there will be an audit process. He also asked whether reserves are reconciled at the end of each quarter. Yes, they are, as the operational costs will be at the end of each year; that is absolutely right. Therefore the key principle is that it is an industry-funded system. I thank him very much for the largely warm support he gave to this, and as I say, the essence of this—I am not very often able to do this—is that it saves money for the consumer and at the same time maintains the principle of ensuring that we look at renewables as a large part of the way we are driving forward our policy on decarbonisation. We will of course keep it under review.

On the points raised by my noble friend Lord Deben, indeed I was fearful as soon as he said that he thought that I made a very good job of presenting the case because I knew that something would come along as the sting in the tail. However, he made some fair points. I understand what he said about the legislation sometimes being impenetrable. Of course that is not confined to this area; I can well remember taking the pension schemes legislation through the House of Lords, which was certainly at least as obscure and probably more so. However, the point is well made, and there is a constant battle between trying to ensure that what is necessarily a technical piece of legislation is at least to some extent reconciled with a degree of clarity. I struggle as much as anyone else sometimes to understand exactly what we are doing. We want to take people with us, so it is important that we ensure that we put the case across in very plain and simple ways.

I welcome what my noble friend said about the need to be flexible and to do what we are doing as cheaply and reasonably as possible—that is very much part of the Government’s intention. That was set out in plain language by the Secretary of State when she presented her reset speech. In that speech she set out clearly what we are doing with regard to the CFD auctions, and of course one will be held towards the end of 2016. Pot 2 will ensure that it is open to new technologies and we will come forward with more details on that in due course. But as noble Lords would expect from a Government that are committed to a market approach, again as was made clear in the reset speech, obviously we want to deliver the best solution in terms of decarbonisation in the most affordable way while of course maintaining security of supply. These are the three aims of the department, and as I say they were set out very clearly in the reset speech.

I can reassure my noble friend Lord Deben that we are looking at these issues in terms of value for money with the innovation budget and the budget we have at large. He will know that we are looking, for example, at tidal lagoons across the piece to see if they can possibly deliver part of the mix in a value-for-money way. So that is very much the approach. I agree with what my noble friend said at the end of his contribution about the importance of going forward together across parties, and indeed not just parties. Earlier this afternoon I met Archbishop Gallagher from the Holy See, and we are grateful for what faith leaders, and not least the holy father, are doing in relation to promoting the importance of climate change and stressing how it affects the world at large and the most vulnerable. This is not limited to political parties and I think that we in the United Kingdom, without being complacent, have been adept at building a broad coalition on the need to move forward on decarbonisation across parties and beyond parties. I very much welcome that; in fairness it was evident in Paris in how opposition parties reacted and expressed their support, and in other ways too. I would certainly associate myself and the Government with what was said there.

If there is anything I have missed, it will be picked up and I will write to noble Lords, but with that I commend the regulations to the Committee.

Motion agreed.

Immigration (Health Charge) (Amendment) Order 2016

Motion to Consider

Moved by

My Lords, the Committee will be aware that the immigration health charge was introduced in April last year by the Immigration (Health Charge) Order 2015, with the aim of ensuring that temporary migrants make a fair and proportionate contribution to the NHS services available to them in a manner in line with their immigration status. The charge is paid by non-European Economic Area temporary migrants who apply for a visa for more than six months or who apply to extend their stay in the UK, and is set at a competitive level of £200 per annum and at a discounted rate of £150 per annum for students. The charge is refunded where an immigration application is refused, rejected or withdrawn.

The Government estimate that the charge could raise as much as £1.7 billion at present value over 10 years. This represents an important new source of income for the NHS, income that is shared between the NHS in England, Scotland, Wales and Northern Ireland, and spent as they see fit. The charge has already been shown to be highly successful, collecting more than £100 million in its first six months of operation for the NHS.

Those who pay the charge and who are subsequently granted entry clearance or leave to remain receive NHS care in the same way as a permanent resident, subject to the same clinical need and waiting times, as long as their leave is still valid. They pay only charges that a UK resident would also be expected to pay, such as dentistry and prescription charges in England. The exemptions to the charge are listed in Schedule 2 to the Immigration (Health Charge) Order 2015 and include visitors and certain vulnerable groups. Also exempted are nationals of Australia and New Zealand, which leads us to the purpose of today’s debate.

The Immigration (Health Charge) (Amendment) Order removes the exemption from the charge for Australian and New Zealand nationals. It also reduces the amount of the charge for youth mobility scheme applicants from £200 to £150 per annum, in line with students. It also makes a minor and technical change that updates the reference in the 2015 order to the part of the Immigration Rules that relate to visitors. Australian and New Zealand nationals have benefited from a one-year exemption from the charge, and this order ensures that there will be equal treatment for all non-EEA nationals.

The UK, Australia and New Zealand all face the challenges of increasing healthcare costs and the management of migration flows. We regularly discuss these challenges with Australia and New Zealand, and have held consultations with them on the charge since 2013. The Secretary of State for Health confirmed our intention to introduce the charge with his Australian and New Zealand counterparts in December.

We greatly value our close relationships with Australia and New Zealand, and remain committed to strengthening the relations between our countries. For this reason we are retaining the reciprocal healthcare agreements for short-term migrants from Australia and New Zealand coming to the UK for a period of less than six months. These agreements provide that short-term migrants to the UK from Australia and New Zealand are entitled to some NHS treatment free of charge. In turn, this is broadly reciprocated when our citizens go there.

The application of the health charge to nationals of Australia and New Zealand is compatible with the terms of our reciprocal healthcare agreements, as these reciprocal agreements do not apply to the longer-term, temporary migrants who will fall within the scope of the charge.

I will also comment on the application of the health charge to Australian and New Zealand nationals. First, the health charge is set well below the true cost to the NHS of treating temporary migrants. For example, non-EEA temporary workers who are here for more than 12 months have a weighted average cost to the NHS of just over £800 per head per year.

Secondly, Australian and New Zealand migrants who come to the UK for a short stay, including tourists, will not pay the health charge. In 2014, nearly 70% of the total number of Australian and New Zealand nationals who came to the UK came as visitors. This group will continue to benefit from the reciprocal healthcare agreements we hold with these countries, which entitle them to free-of-charge NHS care for health conditions that arise during their stay and which require immediate or prompt attention.

Thirdly, and outside the terms of our reciprocal healthcare agreements, we do not charge Australian and New Zealand nationals for the use of any NHS primary care services such as GP or nurse consultations; nor do we charge for treatment in an accident and emergency department. The NHS also provides free-of-charge care to those with certain infectious diseases and, in England, to victims of certain types of violence.

Fourthly, and in recognition of the UK’s close and important links with Australia and New Zealand, we are reducing the amount of the health charge that applies to the youth mobility scheme from £200 to £150. The youth mobility scheme is a cultural exchange programme which allows young people aged 18 to 30 from participating countries and territories to experience life in the UK for up to two years. This is the category used by more than half of Australian and New Zealand nationals applying to come to the UK for more than six months, who would consequently be liable to pay the health charge. Young people of all nationalities eligible to enter the UK under the youth mobility scheme will benefit from this reduced health charge rate, not just those from Australia and New Zealand.

We place great value on the strong relationships that we have with Australia and New Zealand, but the UK, like New Zealand and Australia, faces the challenges of increasing healthcare costs and managing migration flows. It is therefore right that temporary migrants from these two countries should now contribute to the extensive and high-quality range of NHS services available to them, in line with temporary migrants from all other non-European Economic Area countries. We estimate that the changes set out in the order will result in additional income of £41 million for the NHS in present value over five years, in 2016-17 prices. The Governments of Australia and New Zealand have been fully consulted on the charge and I commend the order to the Committee.

I thank the Minister for his introduction and explanation of the purpose of the order. I suppose that neither of us this evening will have to go through the experience of having to address a packed meeting of the Committee.

The Immigration Act 2014, as the noble Lord said, enabled the Secretary of State to provide by order for an immigration health charge to be applied to those seeking leave to enter or remain in the UK for a limited period. The charge was introduced in April last year through an order. This order now amends that order—the Immigration (Health Charge) Order 2015—by reducing from £200 to £150 the immigration health charge payable by youth mobility scheme applicants and it removes the exemption from the immigration health charge available to nationals of Australia and New Zealand. The changes are intended to take effect from early next month.

As the Minister said, the immigration health charge of £200 annually and £150 for students is payable by non-EEA nationals who enter the UK for more than six months in a temporary capacity or who apply to extend their stay in the UK. Those who pay the charge can access NHS services free of charge to the same extent as UK residents. Nationals from Australia and New Zealand were exempt from paying the charge pending further consideration of reciprocal healthcare arrangements, and it has now been agreed that the immigration health charge should be applied to nationals of Australia and New Zealand to bring them into line with other non-European Economic Area nationals. We will not oppose that amendment to the 2015 order, but I have a couple of points to raise.

First, can the Minister say whether these amendments will have any impact on present charges for healthcare paid, or not having to be paid, by UK citizens in Australia and New Zealand, and, if so, in what way? I raise this point in the context of the Government’s statement in the Commons debate on this order that the Department of Health has entered into discussion with Australia and New Zealand on the scope of reciprocal healthcare agreements.

The Minister referred to the fact that the £200 did not cover the NHS costs incurred in respect of those paying the charge. While we agree with the principle that people should make a fair contribution to the costs, we asked in the Commons debate what proportion of people paying the immigration health charge levy were in fact in work and making a contribution to the NHS through the taxes and national insurance that they pay. For people in this category, what is the net cost of their use of the NHS once their taxes and national insurance payments are taken into account? I do not think that the answer to that question is contained within the Explanatory Memorandum, although I say that with some hesitation, as I cannot say that I have necessarily understood all the figures in that document. That is not a criticism of it, by the way. It would be helpful if the Minister could, either now or subsequently, provide a response to the questions that I have raised.

My Lords, I am very grateful to the noble Lord for indicating his support, as did the Opposition in the other place a couple of days ago. I am also grateful for his questions. The noble Lord asked whether there were any new charges within the reciprocal arrangement as a result of the immigration health charge that has been brought in. The answer is no, to my knowledge. However, as the noble Lord mentioned, the reciprocal health charge is being reviewed partly as a result of this charge. It is not so much a direct causal link, but in negotiating and discussing the immigration health charge with the relevant two countries, it was decided that, in view of the fact that the reciprocal health charge is 30 years old, it would be suitable to look at it again. The Department of Health is currently doing that.

There are charges within the reciprocal health agreement. There are different charges for Australians and New Zealanders here as opposed to UK citizens in Australia and New Zealand. For example, Australia levies a health charge for certain categories of visa applicants, including older migrants applying to become permanent residents. Students are required to have health insurance while in Australia. There is a consultation fee for anyone in New Zealand accessing GP care. These things will be reviewed in the next few months. The Department of Health intends to work with both countries over the next year to clarify those terms.

The noble Lord also asked about the number of migrants who work here, pay taxes here and contribute to the NHS. He also asked, as did the Opposition spokesman in the other place, about the net cost to the NHS once those taxes are taken into account. I do not have the details to hand, but I will write to him with them. However, I point out that, of the Australians and New Zealanders who come here, 70% come as visitors, so the charge does not apply to them anyway. I can tell him that for Australians, in the year to September 2015—this is not the net figure but in terms of those working—22,333 visas were issued, of which 15,284 were work visas, tier 5 or tier 2, which is about 68%. For New Zealanders, it is roughly 69%. There were 8,104 visas issued, of which 5,606 were working visas. This includes the youth mobility scheme, which allows young people to work for up to two years. However, I will look at the figures in detail and write to him.

I think that I have covered most of the questions that the noble Lord asked, and I stress once again that we greatly value our relationships with Australia and New Zealand, which is one reason why we maintain the reciprocal healthcare arrangements. We have no intention of removing them. In fact, they will be the only ones left by the end of the year. On that basis, I commend the orders to the Committee.

Motion agreed.

Committee adjourned at 5.59 pm.