National Insurance Contributions Bill
(10 years, 3 months ago)
Commons ChamberRead Hansard Text Read Debate Ministerial Extracts
The Financial Secretary to the Treasury (Mr David Gauke)
I beg to move, That the Bill be now read a Second time.
This is the third national insurance contributions—NICs—Bill this Parliament. The Government have already taken action to reduce significantly the burden of NICs on earnings and employment through previous Bills. At Budget 2011, the Chancellor announced a £21 a week above-inflation increase to the employer’s NICs threshold. Last April, the employment allowance was introduced, which will benefit up to 1.25 million businesses and charities. Next April, the vast majority of under 21-year-olds in work will be lifted out of employer NICs, which will support 1.5 million jobs. All those measures have been strongly welcomed by business and have contributed to the current record levels of employment.
This Bill contains four measures: simplifying NICs paid by the self-employed; accelerating the payment to the Exchequer of NICs in dispute in avoidance cases, and providing for the issue of follower notices where the scheme or arrangements have been shown to fail in another party’s litigation; applying new information powers and penalties to promoters of avoidance schemes; and introducing a targeted anti-avoidance rule—TAAR—to prevent people from circumventing new legislation tackling avoidance involving employment intermediaries.
Let me explain each of those four measures in more detail, starting with the simplification of NICs paid by the self-employed, which is contained in clauses 1 and 2, and schedule 1. Hon. Members may recollect that at Budget 2014 the Chancellor announced that the Government intended to simplify the NICs collection process for the self-employed, who currently have to operate two different processes for two separate classes of NICs. This followed a 2012 recommendation by the Office of Tax Simplification and a consultation published in July 2013 entitled “Simplifying the National Insurance Processes for the Self Employed”, which sought views on proposals to simplify class 2 NICs.
The number of self-employed individuals in the UK is growing, with more people having multiple jobs and moving in and out of self-employment. Having two separate collection methods for class 2 and class 4 NICs causes confusion and extra work for both the self-employed and Her Majesty’s Revenue and Customs. The objective behind the measure is to modernise the way class 2 NICs are assessed and collected, making the system simpler and more straightforward, and reducing administrative burdens on the self-employed. Class 2 NICs are currently collected via a flat-rate charge of £2.75 per week, paid through six-monthly billing or by direct debit, while class 4 NICs are a percentage charge on profits—of 9% between the lower and upper profits limit and 2% above the upper profits limit—paid through self-assessment alongside income tax.
The aims of clauses 1 and 2, and schedule 1 are to change the way in which class 2 NICs are structured; change the means by which class 2 NICs are collected, by moving their collection into self-assessment, so that they can be collected alongside class 4 NICs and income tax; change the means by which class 2 NICs are enforced, with changes to associated appeal rights to mirror broadly those for class 4 NICs and income tax; and make consequential changes to legislation relating to maternity allowance to allow women to continue to become eligible for it post-reform.
Those changes are proposed to take effect for the 2015-16 tax year onwards, so that the collection of class 2 NICs under self-assessment will be from 6 April 2016. The changes are aimed at simplifying NICs for the self- employed and small businesses—sole traders, partnerships and unincorporated businesses—by enabling them to report their class 2 NICs liability and pay it through their self-assessment, thus reducing the administrative burden of the two current separate collection mechanisms. The six-monthly billing and direct debit systems will cease from April 2015 and July 2015 respectively.
During the consultation there was some concern that the reform would mean that the self-employed would no longer be able to spread the cost of paying class 2 NICs. I want to take this opportunity to reassure the self-employed that there is already the facility in self-assessment to make budget payments to spread the cost of tax and NICs through the year.
Hon. Members may be interested to know that one of the key changes that we made through this reform is that there will no longer be a need for customers with low profits who want to opt out of paying class 2 NICs to apply for a small earnings exception in advance—something that we know they find confusing and burdensome. Under this reform, customers with profits below the new small profits threshold, which will be equivalent to the current small earnings exception threshold, will not be liable to pay class 2 NICs, but will be able to choose to do so on a voluntary basis. That means that those with low profits who want to opt out of paying class 2 NICs will not need to do anything apart from confirm that when they are completing their self-assessment return, while those who still choose to pay in order to protect the benefits entitlement will be able to do so quickly and easily. Rather than a separate process, the decision will be built into the self-assessment return.
There is a small proportion of HMRC customers who pay class 2 NICs but who are not in self-assessment. Those individuals will continue to get a separate class 2 NICs payment request. They will receive that once a year instead of twice a year as they currently do. Hon. Members will be pleased to learn that the tax information impact note published by HMRC about this measure indicates a net administrative burden reduction to the self-employed of £74 million over five years as a result of these reforms.
I now wish to take the House through the provisions in the Bill that deal with accelerating the payment to the Exchequer of amounts of NICs in dispute in avoidance cases. That also includes providing for the issue of follower notices where there is a relevant case in which the scheme or arrangement has been shown to fail in another party’s litigation. Those provisions are in clauses 3 and 4 and schedule 2.
The provisions broadly follow, for NICs, new powers that are included in the Finance Act 2014—the hon. Member for Birmingham, Ladywood (Shabana Mahmood) and I debated this matter not that long ago—which allow HMRC to issue a notice to taxpayers who have used avoidance schemes that have failed before the courts in another party’s litigations. The provisions in the Bill and the Finance Act 2014 are estimated to raise £5 billion in tax and NICs for the Exchequer in the years ahead.
A follower notice sets out HMRC’s view that a judicial decision in another case is directly relevant and that those who receive the notice should settle their disputes. If the taxpayer does not settle in response to this notice, they will face a tax-geared penalty if they are unable to show that their case is materially different from the other party’s litigation or if they did not have reasonable grounds to continue the dispute.
An accelerated payment may be required from taxpayers in the following circumstances: where a follower notice has been issued and the taxpayer decides not to settle their dispute; where taxpayers are involved in schemes subject to disclosure under the disclosure of tax avoidance schemes—DOTAS—rules: and where taxpayers have used arrangements that HMRC decides to counteract under the general anti-abuse rule.
For both follower notices and accelerated payments, taxpayers will have 90 days to make representations. There is no formal right of appeal against the notices or payments, but taxpayers can appeal against any penalties. The measures are expected to lead to the issue of payment notices to around 43,000 taxpayers involved in avoidance schemes currently under dispute with HMRC over the period to the end of March 2016.
Now that I have outlined what the provisions in the Bill do, I want to address some of the points raised in debate on the Finance Bill and by some commentators. One point that has been made is that the measure effectively assumes that someone is guilty before they are proved innocent. The Government do not agree, as most people pay their tax up front and can apply for a refund afterwards, for example through pay-as-you-earn, VAT and tax on interest income, and the measure extends the existing practice of having disputed tax sit with the Exchequer. That is already the case when taxpayers seek tax refunds for disputed avoidance. The measure in no way alters the rights of appeal that people already have when disputing the tax or NICs they owe HMRC; it is only about where the money sits while the dispute continues.
Hon. Members might also be aware that the measure has been described as having retrospective effect. The Government do not agree. It is not retrospective and there is no change to the liability to make a contribution. It involves NICs that the individual and his or her employer would already have paid if they had not entered into the avoidance scheme. The taxpayer can continue to dispute the case and will be repaid with interest if they succeed.
It has also been suggested that taxpayers are likely to find it difficult to find the money to pay. The Government’s view is that we would expect a prudent taxpayer to anticipate that an avoidance scheme might not deliver savings and would be subject to challenge by HMRC and that such a taxpayer should have made some provision against that possibility. I can reassure the House, however, that when a taxpayer has genuine difficulties in paying some or all of the NICs, HMRC will use its usual collection tools, including appropriately structured payment arrangements, to assist taxpayers in paying the required amounts.
I have seen representations from businesses suggesting that they entered into such arrangements to reduce business costs and that the measures will now put unacceptable pressure on their business activity. The Government have put in place an attractive business tax regime and expect everyone to pay the taxes that are due. Avoidance involves trying to pass the burden on to the vast majority who have not tried to avoid tax and where business is concerned it involves attempts to gain an unfair competitive advantage against those who pay their taxes and do not try to avoid tax.
I want now to take the House to the provisions in the Bill that apply new information powers and penalties to the highest risk promoters of tax-avoidance schemes. The provisions are also contained in clauses 3 and 4 and schedule 2. The measure was announced for tax in Budget 2013 and the Government’s intention has been to extend it to NICs at the earliest opportunity. A consultation on the tax aspects, called “Raising the stakes on tax avoidance”, ran until 4 October 2013.
Hon. Members might also be aware that the Finance Act 2014 includes legislation that allows HMRC to issue conduct notices to promoters of tax-avoidance schemes and monitor promoters who breach a conduct notice. The Bill applies the tax legislation to NICs so that the legislation operates as one unified measure that covers tax and national insurance contributions. Monitored promoters will be subject to new information powers and penalties, which will also apply to intermediaries who continue to represent them after the monitoring commences. The monitored promoter will be named by HMRC and the naming details will include information on why the conduct notice was breached. It will be required to inform its clients that it is being monitored by HMRC. Clients of monitored promoters will also be subject to certain obligations that have a penalty for non-compliance and extended time limits for assessments.
The measure is part of the Government’s strategic response to avoidance. It will deter the use of avoidance schemes through influencing the behaviour of promoters, their intermediaries and clients and it is aimed at changing the behaviour of promoters of NICs and tax-avoidance schemes. Naming a monitored promoter should deter intermediaries from acting for them and clients and potential clients from using their products. I can confirm to the House that the measure is not expected to have any significant economic impact and that the cost to HMRC of dealing with the additional information and reporting it is expected to be negligible.
Now that I have outlined what those provisions do, I would again like to address several points that have been raised during Finance Bill debates and by some commentators. It has been suggested that the Bill is too wide and will catch innocent promoters, but the Government disagree. To be covered by the legislation, a person must be the promoter of avoidance schemes that give a tax advantage, or that avoid or reduce a NICs liability, and to have made a significant breach of a threshold condition. The vast majority of promoters will not be in that position.
Hon. Members may be aware that it has been suggested that this response to avoidance is disproportionate, but we disagree. The Government have made it absolutely clear that we are determined to crack down on tax avoidance. The vast majority of taxpayers pay the right tax and NICs at the right time, and should not have to subsidise those who participate in avoidance.
One part of the Government’s strategy is to tackle the behaviour of the supply side of the market—those highest-risk promoters who design and sell avoidance schemes. We want to ensure that promoters who avoid their obligations to HMRC and their clients are made to change their behaviour, and the Bill achieves that by imposing consequences for those who do not meet acceptable standards of behaviour. It requires monitored promoters to tell HMRC about their schemes and clients, and there will be significant fines if they do not comply.
Another argument that has been made against the measures is that they apply retrospectively. The House will not be surprised to learn that the Government disagree with that proposition. While the provisions involve looking back at a promoter’s past behaviour, they are designed to improve current and future behaviour. It is only if there is no improvement in the promoter’s compliance with their obligations that they are subject to significant information powers and penalties.
I shall now describe to the House the provisions relating to the new targeted anti-avoidance rule that will prevent people from circumventing new legislation that tackles avoidance involving employment intermediaries. The proposed TAAR is set out in clause 5. The National Insurance Contributions Act 2014 strengthened legislation in respect of offshore employment intermediaries. It was specifically intended to address the non-payment of employer’s national insurance in the oil and gas industry involving the placement outside the UK of the employer of oil and gas workers working on the UK continental shelf.
Hon. Members may be aware that the temporary labour market is quick to react to legislative change and to find new convoluted ways to reduce the amount of income tax and NICs that would otherwise be liable to be paid. Stakeholders have indicated to HMRC that intermediaries involved in the facilitation of false self-employment may set up avoidance vehicles with convoluted structures that are specifically designed to circumvent the 2014 Act. To dissuade such intermediaries, the Government propose that a TAAR is included in NICs legislation to deter such avoidance. That TAAR is similar to the tax TAAR established for the same purpose through the Finance Act 2014. The rule will focus on the motive for setting up arrangements—on whether it is to avoid NICs—and whether those arrangements result in less NICs being paid. To ensure that the tax and NICs TAARs operate as one, both will take effect from 6 April 2014.
Let me explain why we are bringing forward the TAAR now. The use of employment intermediaries as a way of avoiding tax has grown in recent years, and they are increasingly marketed and promoted as a way of avoiding employer’s NICs. The TAAR will dissuade some businesses from entering into convoluted arrangements to avoid NICs. The proposed measures will help to level the playing field for UK businesses and ensure that compliant UK businesses that facilitate the UK’s flexible labour market are not undercut by those trying to avoid tax.
The Government have already taken action significantly to reduce the burden of NICs on earnings and employment through previous Bills. At Budget 2011, the Chancellor announced a £21 a week above-inflation increase to the employer’s NICs threshold. Last April the employment allowance was introduced, which will benefit up to 1.25 million businesses, and next April the vast majority of under-21s will be lifted out of employer NICs, which will support 1.5 million jobs.
The Bill introduces further welcome measures and is both important and necessary. The modernisation of the way class 2 NICs are assessed and collected will make the system simpler and more straightforward and will reduce administrative burdens on the self-employed. The Bill also includes a package of measures aimed at activity that attempts to reduce the amount of NICs payable to the Exchequer. I commend the Bill to the House.
Shabana Mahmood (Birmingham, Ladywood) (Lab)
I thank the Minister for his introduction to this short Bill, which, as he said, aims to simplify the administrative process of paying class 2 NICs for the self-employed; apply measures from this year’s Finance Bill, now the Finance Act 2014, to NICs; and introduce a targeted anti-avoidance rule, TAAR, to tackle disguised self-employment made possible through employment intermediaries and offshore employers. We support the measures and so will support Second Reading, but we will examine in detail some of the expected practical impacts of the measures in Committee.
As the House will know, national insurance benefits are funded by a system of compulsory contributions on earnings paid by employees, employers and the self-employed. Most of the income from NICs goes into the national insurance fund to pay for contributory benefits, including the state pension, contributions-based jobseeker’s allowance and bereavement benefits. Some NICs money goes directly into the national health service. NICs are the second largest tax after income tax, raising £108 billion in 2013-14.
The self-employed make two types of national insurance contribution. Class 2 NICs are paid by the self-employed at a flat weekly rate of £2.75. A self-employed person can apply to be exempted from liability if their annual profits are under a certain threshold—the so-called small earnings exemption—which is currently set at £5,885. Class 4 NICs are paid annually by self-employed persons on profits immediately derived from a trade, profession or vocation that are chargeable to income tax. Class 4 NICs are payable at a rate of 9% on profits between £7,956 and £41,865 and 2% on profits above £41,865.
Until now, payments of class 2 and class 4 NICs have had to be made separately. Individuals may pay class 2 NICs by direct debit either twice a year, in January and July, or monthly, paid four months in arrears. Alternatively, HMRC will issue two payment requests a year. In contrast, self-employed persons pay class 4 NICs with income tax on completion of their self-assessment tax return. From 2011, the dates on which payment of class 2 NICs is due have been aligned with the dates for tax and self-assessment—31 January and 31 July each year—but payment of both has continued to be made separately.
As the Minister said, when the Office of Tax Simplification looked at these matters in 2012, it suggested bringing class 2 NICs within self-assessment, and that this would bring administrative benefits to self-employed persons and businesses. In July 2013, HMRC published a consultation document in which it noted that the present system places significant burdens on small business, and that while class 2 NICs accounted for less than 0.3% of the £102 billion-worth of NICs collected by HMRC in 2012-13, they accounted for more than 40% of national insurance-related telephone calls to HMRC and the associated processing work that resulted. The Bill therefore changes the liability for class 2 NICs so that it arises at the end of the tax year and not weekly, as now, and moves class 2 NICs into self-assessment, so that self-employed people can deal with their class 2 NICs together with their income tax and class 4 NICs.
We support the aim of making the system easier for self-employed people and reducing the administrative burden caused by the current arrangement of having two separate systems for collection of class 4 and class 2 NICs. Almost one person in six is self-employed, so this is a significant issue affecting a large number of people. Making the system easier to navigate is therefore welcome and of genuine practical benefit for the self-employed.
A number of specific issues arise as a result of this change on which we will seek greater clarification from Ministers in Committee. However, it would also be helpful if the Exchequer Secretary offered some further comments on the points I am about to raise, as that could help to clarify the issues ahead of Committee. The first relates to the maternity allowance. At present, 25,000 self-employed women claim maternity allowance each year. Entitlement to maternity allowance is not assessed on self-employment and class 2 NICs paid in a particular benefit year. Instead, it is assessed over a test period of 66 weeks up to and including the week before the baby is due. Collecting class 2 NICs at the end of the tax year means that some women may find that it appears as though they have not been paying class 2 NICs during the period needed to make them eligible for the maternity allowance.
In order to address this problem, the Government have proposed measures in the Bill that would enable women who have not had the opportunity to file a self-assessment return and pay class 2 NICs to pay them early in order to secure maternity entitlement at the standard weekly rate. However, there is a danger that these proposals may be impractical. Women would have to make voluntary contributions before they filed their self-assessment returns, and this demands a very high level of forward planning on their part. The provisions may therefore require some additional clarification. If the Exchequer Secretary or the Financial Secretary have had any additional representations on these points—I know that some stakeholders have been raising such concerns—it would be helpful if they set out their thinking. The Minister will be aware that the Chartered Institute of Taxation has suggested that the Government should review these changes at the earliest opportunity—in two years, I think—to ensure that they have not resulted in a reduction in the number of claims for the standard rate of maternity allowance. Again, it would be helpful to have an indication of the Minister’s current thinking on this point.
For the 650,000 self-employed households that claim universal credit, these proposals will have a different impact. Universal credit regulations require the individual to report their income, net of certain expenses, on a monthly basis. That net income is then used to establish their entitlement to universal credit. Certain safeguards are built in so that if income from self-employment for an assessment period falls below a certain level, the claimant’s income is treated as being a higher amount called the minimum income floor. Because universal credit is assessed on a monthly basis, if a claimant has to pay all their class 2 NICs in one month, this could push their earnings under the minimum income floor, thereby reducing their universal credit for that month. Simplification should not come at the cost of hardship, We will press the Government for assurances that they have fully considered the potential impacts of this change along with the introduction of universal credit, and the interplay between both policies.
The tax information and impact note suggests that the option of monthly payments will still be made available to self-employed persons and businesses. However, there is no provision for that in the Bill. A number of stakeholder groups have suggested that the retention of a monthly payment system would be of particular value to those on very low incomes who may struggle with one lump sum payment. Even accepting that for many people the total amount does not seem large or too onerous, of course that is not necessarily the case for those on extremely low incomes, and retaining the monthly payment option would therefore be helpful. It is not clear why the note suggests something that the Bill does not touch on. I would be grateful for some further clarification on that.
The Chartered Institute of Taxation points out that there will be a gap of 22 months between the collection of class 2 payments for 2014-15 and the collection of payments for 2015-16 as liability moves from a weekly basis to arising at the end of the tax year. Thereafter, the payment of class 2 will be in arrears on 31 January following the end of the tax year. This could affect entitlements to benefits. Under the current system, the entitlement to many contributory benefits is based on the claimant having paid contributions and operating on a pay-as-you-go basis. Have the Government considered the cash-flow implications of class 2 NICs coming in up to 10 months after the end of the tax year, rather than being paid in-year as they are at the moment? Are they able to give us some more information on that today?
We will also seek reassurance and confirmation that moving class 2 into self-assessment will not adversely affect entitlement to contributory benefits. These are significant changes and the Government will need to ensure that they are properly advertised and that taxpayers are educated about them. We do not want a situation to arise whereby people have gaps in their payments. As I have said, NICs relate to eligibility for important benefits that people rely on. We need greater reassurance from the Government that they will have a full programme of education and information about the changes. It is also fair to say that we will need a relatively widespread publicity programme ahead of April 2015, as existing direct debits will need to be stopped. It would be helpful if the Exchequer Secretary could tell us what the Government have planned in relation to educating taxpayers who will be affected by the changes.
As the Financial Secretary said, the Bill also extends measures introduced in the Finance Act 2014 to cover NICs, particularly in relation to follower notices, accelerated payment notices and measures to tackle high-risk promoters of tax avoidance schemes. During the passage of the Finance Bill we had an extensive debate on the issues raised by the new provisions, which are the same as those contained in this Bill, and we will continue to press Ministers in Committee on the practical arrangements for the measures.
On follower notices, we welcomed the amendment made on Report of the Finance Bill, which brought in a right of appeal on three grounds where a follower notice has been issued. Outside of those three grounds, however, the only other option will be for taxpayers to seek a judicial review. What further reassurances can Ministers give that follower notices will be issued only in cases that are on all fours, as it were, with the precedent or lead case, so that occasions where a taxpayer may have to resort to a judicial review are kept to a minimum?
It is important that the internal systems operated by Her Majesty’s Revenue and Customs in deciding whether to issue a follower notice allow for the points of difference in a case to be considered, rather than the process amounting to a more straightforward box-ticking exercise to determine eligibility for a notice. Now that the Finance Act is law, I would be grateful if the Government could set out what further work has been done on the approach and methodology that will be adopted by HMRC staff and officials as they make important decisions about whether to apply a follower notice to a particular case.
As the Financial Secretary has noted, there has been considerable controversy and heated debate about whether accelerated payment notices amount to retrospection, as we discussed in Committee. Although we have put to him the concerns of stakeholders and constituents from all over the country, I agree with him that, from a legal perspective, they are not retrospective per se. The issue is more one of tax liability that has already been disputed and of where that liability sits. We have, therefore, supported the measures relating to accelerated payment notices. The Government have assured the House that decisions about whether to issue an APN will be made only by HMRC staff with sufficient seniority who are at a high grade. The Financial Secretary and I have had a number of discussions about HMRC staffing and resources, so he will not be surprised to hear that I will be taking up those issues again.
The Association of Revenue and Customs believes that HMRC faces a demographic time bomb, with more than half its work force aged over 45 and 18% over 55. That proportion is even higher at senior level, where about 30% of grade 6 employees are over 55. It is important to know how that will affect the implementation of APNs. We will need to be satisfied that there will be enough sufficiently experienced staff and that those who are due to retire are being replaced at the correct rate.
We have pressed Ministers on the resourcing of HMRC, and I note the Financial Secretary’s comments in our previous debates about the expansion of the counter-avoidance team at HMRC. Again, we will pick that up in greater detail in Committee. Now that the Finance Act is law, we must keep a close eye on implementation and resourcing. Especially given the high level of interest in such matters, the first decisions made about follower notices and accelerated payment notices must be robust and stand up to scrutiny if they are to inspire confidence within the population of taxpayers.
The Bill will introduce a new targeted anti-avoidance rule to cover the payment of national insurance contributions, which sits alongside the provisions in this year’s Finance Act aimed at tackling the issue of employment intermediaries who falsely label workers as self-employed to reduce their tax liabilities. The problem is widespread, and a Government review found that at least 100,000 individuals working in this country were employed through an intermediary company that had no presence, residence or place of business in the UK. In many cases, the employee was unaware that their payroll was located offshore and that tax was avoided on their earnings.
For workers falsely badged as self-employed, particularly those who do not know that that is the case, the impact is that they are not eligible for many of the benefits available for employed earners, such as holiday and sickness pay. This year’s Finance Act amended legislation directly to address the issue in relation to the payment of income tax. A worker will now be designated as an employee if they are under the supervision, direction or control of someone else, and in that case they must be paid through PAYE, rather than as self-employed people. That is a change from the previous designation, under which a worker was deemed to be an employee if they provided their services personally. It was found that many intermediaries could exploit the test by claiming that there was no obligation for the worker to provide their services personally, and to get around that, a clause was often inserted into a worker’s contract stating that they could send someone else to do their work, even though the employee in reality wanted that specific worker.
The role of the TAAR in this Bill is to ensure that the new measures cannot be circumvented, and that workers who would be employed earners if it were not for the intermediary arrangements are treated as employed earners. The TAAR will allow HMRC to consider both the motive for setting up such an arrangement, including whether it was set up with the motive of avoiding NICs, and what was achieved, including whether it resulted in less NICs being paid.
During debates on the Finance Bill, we supported the new measures and the corresponding TAAR for income tax, but we stressed the importance of considering the resource that HMRC would need both to implement the changes and to ensure that sufficient guidance was provided to those affected. The same applies to this Bill. In addition, we will continue to press, as we did on the Finance Bill, for further examination of the case for having deeming criteria to combat disguised employment in the construction industry, particularly where such practices are a significant problem, with self-employment levels at 40% compared with an average of 14% across all industries. However, the TAAR envisaged in this Bill takes us forward in dealing with the problem, and we will support it.
With those points, I hope that I have given Ministers sufficient notice of the debates that we will have as the Bill progresses, and I look forward to picking up those issues in greater detail in Committee.
Ian Swales (Redcar) (LD)
I rise to say a few words in favour of the Bill, which the Liberal Democrats wholeheartedly support. We are very pleased that it incorporates measures to deal with tax avoidance.
The whole problem of disguised employment is rife across the country, and the Bill will go some way to combat it. The shadow Minister, the hon. Member for Birmingham, Ladywood (Shabana Mahmood), spoke about it as though people were unwilling to be disguised employees, but in many cases people are willing disguised employees who duly make savings themselves. I believe that the Bill will help to combat the problem.
The measures in relation to offshore workers are particularly welcome in my constituency, which has a large number of them. Some only realised what their real national insurance status was when they claimed their pension and found that their contribution record was nothing like they expected, because the payments that they thought they had paid were not properly rendered as national insurance contributions. I therefore very much welcome the removal of another anomaly in the system.
I look forward to the Bill passing smoothly through the House, as it so far seems to be doing.
Catherine McKinnell (Newcastle upon Tyne North) (Lab)
Before I begin my remarks, I should probably declare an interest as a member of the all-party parliamentary group on the freelance sector. As such, I am fully aware of the invaluable contribution that genuinely self-employed people, including freelancers, make to the economy. They play an increasingly prominent part in the generation of economic growth and prosperity.
As my hon. Friend the Member for Birmingham, Ladywood (Shabana Mahmood) and the Financial Secretary set out, the main aim of the Bill is to make life a bit easier for self-employed people in respect of the payment of their national insurance contributions. That is more important than ever, given the structural changes in our labour market over the past few years. There are 4.5 million self-employed people, which is more than at any point in the past 40 years, according to the Office for National Statistics. Welcome though the changes are, the Government need to go further in supporting the self-employed because, while we know that the majority of working people are not feeling better off in their pockets, it is becoming increasingly clear that the self-employed have been hit particularly hard by the cost of living crisis of the past few years.
The latest labour force survey figures from the ONS show that more than a third of the new jobs that have been created since the last quarter of the last Parliament—39%—are self-employed jobs. The self-employed make up one in seven people in the work force. The Institute for Public Policy Research recently described the UK as the
“self-employment capital of Western Europe”.
Although the Government like to boast that 2,000 businesses have been set up and have been “flourishing” in every month over the last year, that masks the true effect of the cost of living crisis on many self-employed people. Although self-employed people are included in the employment figures in the ONS labour force survey, they are not included in the pay figures. The Resolution Foundation has concluded that, were the 4.5 million self-employed people included in the labour force survey, average wages could have fallen by a further 20% due to the huge shift towards low-paid self-employment. Whereas the official figures show that working people are, on average, £1,600 a year worse off since 2010 after inflation, Labour’s analysis shows that the self-employed have been hit particularly hard and that their average incomes have fallen by £2,000 a year. According to the Institute for Fiscal Studies,
“the fall in average living standards was caused primarily by sharp falls in gross earnings and self-employment income.”
We know that the Bank of England’s Monetary Policy Committee has a range of views on the extent to which the growth in self-employment has painted a false picture of the strength of the labour market. We also know from a recent survey by the Resolution Foundation that more than a quarter of those who have become self-employed in the past five years—almost half a million people—would rather have salaried jobs.
It is for those reasons that the shadow Secretaries of State for Business, Innovation and Skills and for Work and Pensions have written to Sir Andrew Dilnot, the chairman of the UK Statistics Authority, to ask him to examine whether new measures are needed to take better account of the earnings of self-employed people. The truth is that they are working harder for less and that many of them are struggling to make ends meet. We must ensure that they get the support that they need.
My hon. Friend the Member for Birmingham, Ladywood set out the Opposition’s concerns about the Bill. The first relates to clauses 1 and 2 and schedule 1, which will simplify the payment of national insurance contributions that are currently paid by monthly direct debit or in six-monthly instalments, so that they will be paid under the self-assessment regime at the end of the tax year. Although that simplified process will be welcomed by many self-employed people, there are concerns that shifting all liability for NICs to the end of the tax year, potentially to be paid in one big lump sum, could be difficult for low-paid workers.
The Chartered Institute of Taxation recommended that the option of monthly direct debit is retained, and the Government’s tax information and impact note also anticipates that
“a small number may want to continue to make Class 2 NIC payments through a regular payment option.”
No such option is referenced in the Bill, however, so it would be helpful if the Minister cleared up that point and said whether there is any intention to include such a measure.
There are also implications for self-employed people who receive universal credit—I say receive, but I mean when, or if, universal credit is ever fully rolled out, given the current timetable. Because under universal credit income is reported net of expenses on a monthly basis, as my hon. Friend the Member for Birmingham, Ladywood said, if income falls below a certain threshold in a given month—the minimum income floor—the claimant’s income is treated as being a higher amount, and they therefore lose some of their universal credit entitlement for that month. NICs and income tax will count as such deductions, and in any one month liability may fall on both of those under self-assessment. That could result in universal credit claimants losing out in that month, which could set them back significantly for a longer period. The Low Incomes Tax Reform group has expressed its concerns that that shift could “spell misery” for some self-employed people, and create a system where
“payments will be made much later and could affect entitlements to benefits in the meantime.”
Ian Swales
I am following the hon. Lady’s argument with interest and she is making an excellent point. Does she believe that the annual assessment and payment of class 2 NICs will cause a big problem for people on universal credit? How does she think that could be dealt with? Clearly, it is part of their costs and deductions from income, which will not be known when they are claiming and receiving universal credit.
Catherine McKinnell
I think the hon. Gentleman very much agrees with the concerns raised by Labour Members, and I hope that the Minister will have some suggestions on how those potential pitfalls can be addressed. If not now, thought should certainly be given to that before the Committee stage to ensure that the most vulnerable self-employed workers, and those on lowest incomes, are not penalised by the change in processing national insurance contributions. We accept that there are clear benefits to reducing red tape and the administrative burden on self-employed people who would benefit from such a measure, but there are those in a more vulnerable position who could be forced into “misery”, as the Chartered Institute of Taxation puts it well.
There is also an increased administrative burden for those who are self-employed as a result of the introduction of universal credit. They will have to draw up two separate accounts—one for HMRC that they report yearly, and one for the DWP that they report monthly. Perhaps Ministers will provide some much-needed clarity about the provisions that they intend to put in place to support low-paid self-employed people, so that they are not disadvantaged by the Bill.
My hon. Friend the Member for Birmingham, Ladywood mentioned the 25,000 self-employed women who claim maternity allowance each year. Currently, class 2 contributions are the means by which a self-employed earner accesses entitlement to contributory benefits, including the standard rate of maternity allowance. In order to receive that, a self-employed woman must have paid 13 weeks’ of class 2 NICs within the previous 66 weeks. That shifting liability for class 2 NICs to an annual payment to cover the previous 12 months’ liability could mean that they fail to satisfy those criteria and are not able to access the standard rate of maternity allowance. HMRC’s consultation document from July 2013 flags those concerns. It states:
“The Government recognises that the proposals have implications for the way eligibility for”
maternity allowance
“is determined for pregnant self-employed women and will be considering how best to ensure the changes have no adverse impact for the small group who might otherwise be affected.”
Despite the promise of that wider review of maternity allowance eligibility for self-employed women, the Government have settled on what has been described as a “wholly impractical” solution, whereby women must pay their class 2 NICs throughout the year of their own accord before they file their self-assessment returns at the end of the year.
The Bill’s aim is to simplify NICs for the self-employed, but the proposed approach is anything but simple. In fact, it places a much greater burden on some 25,000 pregnant women each year who want to access their entitlement to the standard rate of maternity allowance. The Chartered Institute of Taxation has labelled that approach as “impractical”, and has suggested that a review should be carried out after two years to see what impact it has had on the claims of self-employed women for standard rate maternity allowance. Perhaps the Minister could respond to those concerns. Have the Government considered alternative approaches, and why have they settled on what has been described as an impractical approach for those women who could be affected?
My hon. Friend the Member for Birmingham, Ladywood spoke in depth about the anti-avoidance measures in the Bill, which were debated at some length in the Finance Bill Committee. However, I want to make the general point that the Opposition are committed to anti-tax avoidance measures. We believe strongly that everybody should pay their fair share. That is why we support the measures in the Bill, but what reassurances can the Minister provide for hon. Members that HMRC will be sufficiently resourced in order to implement the measures and the safeguards? My hon. Friend mentioned the demographic challenges that HMRC is likely to face in the coming years, and the challenge of the numbers of those available to ensure that the promised safeguards are put in place. Will the Minister provide reassurances on that? I am sure the matter will be debated at some length in Committee.
To conclude, we have only to look at the Government’s past record on tax avoidance to understand why the Opposition seek those reassurances. The Government have got it wrong in some respects, such as on the UK-Swiss tax deal, and have over-egged their tackling of tax avoidance and the tax gap, which the National Audit Office recently said is almost £2 billion lower than it should have been, and that the Government have mis-stated the situation. Ministers must provide reassurance for hon. Members and for those who are interested in the debate that they have learned those lessons, and that we will not experience tax avoidance in relation to measures in this Bill that the Government are similarly unable to deal with.
The Exchequer Secretary to the Treasury (Priti Patel)
This has been an efficient debate—the Bill was discussed at great length in debates on the Finance Bill. On that basis, I will not recap the purpose of the Bill or the clauses, which have been effectively discussed. However, it is fair, right and proper that I address the points made by Labour Members. Clearly, there is consensus in a number of areas—work has taken place in debates on the Finance Bill and discussions have been had—but there are a number of areas that I should like to address.
The hon. Member for Birmingham, Ladywood (Shabana Mahmood) asked a number of questions. I will begin the debate on them now, and I have no doubt that they will be explored further in Committee. On the reform of maternity allowance for self-employed women, I challenge the assertion that the process is burdensome. As we have heard, the Bill is about simplification and introducing a degree of efficiency to NICs. Primary legislation and supporting regulations, and a revised claim process, will ensure that expectant mums are no worse off than they were under the previous class 2 arrangements. Right hon. and hon. Members will be pleased that HMRC and the DWP are working together to ensure that the process is straightforward and simple for them. As I have said, that will no doubt come up again in Committee.
The hon. Members for Birmingham, Ladywood and for Newcastle upon Tyne North (Catherine McKinnell) made a point on reform for the low paid and the impact of universal credit. It is fair to say that most self-employed people have the option to pay their class 2 NICs regularly using the budget payment option that is already available in self-assessment. Importantly, they are enabled to spread the cost of those payments. That is not legislated for in the Bill because the option to make the budget payments already exists within the current system of self-assessment. Once the Bill becomes law, the issue is how we raise awareness to ensure that people know about that. NICs are accounted for on an accruals basis, so the important fact is the time period within which the money is due rather than the date for payments. Of course, they will continue to be counted in the tax year, but as I have said, it is a question of spreading the costs.
The hon. Member for Birmingham, Ladywood rightly asked how HMRC will ensure that it applies the rules fairly for all taxpayers. It is fair to say that that argument was rehearsed in Finance Bill debates. The Government recognise that there are significant new powers. Obviously, the system must be administered fairly and consistently for all taxpayers. To that end, HMRC will establish clear governance for the key decisions on which cases can be designated as followers, which disclosure of tax avoidance schemes will be within scope and on the appointment of designated officers for the calculation notices. One important point is that clear separations will be established so that reviews of follower notices are carried out independently of the original issuing team. In addition, clear internal guidance and training will be provided for staff within HMRC on how they are to apply the rules. That goes with the clear external guidance, which has been published by HMRC so that taxpayers and advisers know how the rules impact on them. This is about not only fairness, but transparency, so that there is no confusion. On follower notices, those who know that they are deliberately avoiding tax will also know that they are being looked at, which is important. It is fair to say that our determination to lift every stone, and ensure that those who deliberately avoid tax are actively watched and pursued, is unequivocal.
The hon. Member for Newcastle upon Tyne North touched on wage growth for self-employed individuals. The self-employed community is growing, which is a good thing. This is about how we support them through the tax system, but there must be agreement that the only way to raise living standards is to tackle wider challenges and economic problems. We appreciate that times are tough, but this is about how we support hard-working people and the self-employed. We have increased the tax-free personal allowance to £10,500 from April next year, which will save the typical taxpayer £805 per year. We have also taken more than 3.2 million people out of tax altogether and cut income tax for someone on the minimum wage by nearly two thirds. There have been other effective measures such as the freeze in fuel duty and the freeze in council tax in every year of this Parliament.
There is no doubt that more discussion will follow in Committee, but given that there is a great deal of agreement on the Bill’s provisions, at this stage I commend the Bill to the House.
Question put and agreed to.
Bill accordingly read a Second time.