Lord Newby (LD)
My Lords, the Bill before us today takes forward the Government’s commitment to simplify taxes and make avoiding tax harder. The Bill contains four measures: first, simplifying NICs paid by the self-employed; secondly, accelerating the payment to the Exchequer of NICs in dispute in avoidance cases, and providing for the issue of follower notices where the scheme or arrangement has been shown to fail in another party’s litigation; thirdly, applying new information powers and penalties to promoters of avoidance schemes; and, fourthly, introducing a targeted anti-avoidance rule—TAAR—to prevent people from circumventing new legislation tackling avoidance involving employment intermediaries. I will explain each of these four measures in more detail, starting with simplifying NICs paid by the self-employed.
In Budget 2014, the Chancellor announced that the Government intended to simplify the NICs collection process for the self-employed, who currently have to operate two different processes for two separate classes of NICs. This followed a 2012 recommendation by the Office of Tax Simplification and a consultation paper published in July 2013. As noble Lords may be aware, having two separate collection methods for class 2 and class 4 NICs causes confusion and extra work for both the self-employed and HMRC. Class 2 NICs are currently collected via a flat-rate charge paid through six- monthly billing or by direct debit, while class 4 NICs are a percentage charge on profits paid through self-assessment alongside income tax. This measure will move the collection of class 2 NICs into self-assessment, making the system simpler and more straightforward, while reducing administrative burdens on the self-employed by allowing them to deal with their tax and NICs in one go.
The aims of Clauses 1 and 2 and of Schedule 1 to the Bill are: to change the way in which class 2 NICs are structured; to change the means by which class 2 NICs are collected by moving their collection into self-assessment, so that they can be collected alongside class 4 NICs and income tax; to change the means by which class 2 NICs are enforced, with changes to associated appeal rights to broadly mirror those for class 4 NICs and income tax; and to make consequential changes to legislation relating to maternity allowance to allow women to continue to become eligible for it post-reform. It is proposed that these changes will take effect for the 2015-16 tax year onwards, so that the collection of class 2 NICs under self-assessment will be from 6 April 2016.
One of the key changes that will be made by this reform is that there will no longer be a need for customers with low profits who want to opt out of paying class 2 NICs to apply for a small earnings exception in advance. HMRC is aware that the self-employed find this confusing and burdensome. Under the reform, customers with profits below the new small profits threshold will not be liable to pay class 2 NICs but will be able to choose to pay on a voluntary basis. Those with low profits who want to opt out of paying class 2 NICs will not need to do anything except to confirm this when completing their self-assessment return, while those who still choose to pay—in order to protect their benefits entitlement—will be able to do so quickly and easily. Rather than requiring a separate process, this decision will be built into the self-assessment return. There is a small proportion of HMRC customers who pay class 2 NICs but are not in self-assessment. These individuals will continue to get a separate class 2 NICs payment request. They will receive this once a year instead of twice a year, as they currently do.
I will now mention some specific points on this measure that attracted interest in the other place. The Financial Secretary provided reassurance that the self-employed will continue to have the option to spread the cost of paying class 2 NICs. The facility already exists in self-assessment to make budget payments to spread the cost of tax and NICs through the year. The Bill makes provision to allow women to continue to become eligible for maternity allowance following the class 2 changes. There was a concern in the other place that the process being put in place to allow pregnant women to pay class 2 NICs if they have not yet filed their self-assessment return would be impractical and require a high level of forward planning. I would like to confirm the remarks of the Financial Secretary that this will not be the case. I emphasise that the process does not require any forward planning beyond that which a pregnant woman would routinely undertake under the current process of applying for MA. A self- employed woman who wishes to make a claim for MA and has not already submitted her self-assessment return will be able to pay for any shortfall in contributions at the time of her claim, through the exception process that HMRC and DWP are putting in place.
I turn now to the provisions in the Bill dealing with accelerating the payment to the Exchequer of amounts of NICs in dispute in avoidance cases. This also includes providing for the issue of follower notices where there is a relevant case in which the scheme or arrangement has been shown to fail in another party’s litigation. For NICs, the provisions in the Bill broadly follow new powers included in the Finance Act 2014 that allow HMRC to issue a notice to taxpayers who used avoidance schemes that failed before the courts in another party’s litigation—a so-called follower notice. It is estimated that the provisions in the Bill and the Finance Act 2014 will raise £5 billion in tax and NICs for the Exchequer.
A follower notice sets out HMRC’s view that a judicial decision in another case is directly relevant and that those who receive the notice should settle their disputes. If the taxpayer does not settle in response to this notice, they will face a penalty if they are unable to show that their case is materially different from the other party’s litigation, or if they do not have reasonable grounds to continue the dispute. An accelerated payment may be required from taxpayers in the following circumstances: where a follower notice has been issued and the taxpayer decides not to settle their dispute; where taxpayers are involved in schemes subject to disclosure under the disclosure of tax avoidance schemes, or DOTAS, rules; and where taxpayers have used arrangements that HMRC decides to counteract under the general anti-abuse rule, or GAAR. These measures are expected to lead to the issuing of payment notices to some 43,000 taxpayers involved in avoidance schemes currently under dispute with HMRC over the period to the end of March 2016.
In debates in another place, the issue of HMRC implementation and resourcing of this measure was raised, and assurances were sought that HMRC would be sufficiently resourced to implement the measures. I echo the reassurances provided by the Financial Secretary. Since 2010, this Government have made sure that HMRC has the resources it needs to effectively police the rules, making significant investment of nearly £1 billion to assist it in its work. HMRC’s success demonstrates that it is well resourced and doing a good job. For example, in 2013-14, HMRC brought in £23.9 billion in additional tax revenue—a record amount.
I will now explain the provisions in the Bill that apply new information powers and penalties to the highest-risk promoters of tax avoidance schemes. This measure was announced for tax in Budget 2013 and the Government’s intention has been to extend the measure to NICs at the earliest opportunity. A consultation on the tax aspects, Raising the Stakes on Tax Avoidance, ran from August until October 2013. The Finance Act 2014 included legislation that allows HMRC to issue conduct notices to promoters of tax avoidance schemes and to monitor promoters who breach a conduct notice. This Bill applies the tax legislation to NICs so that the legislation operates as one unified measure covering both tax and NICs.
Monitored promoters will be subject to new information powers and penalties, which will also apply to intermediaries that continue to represent them after the monitoring commences. The monitored promoter may be named by HMRC and required to inform its clients that it is being monitored by HMRC. Clients of monitored promoters will also be subject to certain obligations and extended time limits for assessments. This measure is part of the Government’s strategic response to avoidance and is to deter the use of avoidance schemes through influencing the behaviour of promoters, their intermediaries and clients. It is aimed at changing the behaviour of promoters of NICs and tax avoidance schemes. Naming a monitored promoter should deter intermediaries from acting for them, and clients and potential clients from using their products.
Finally, I will describe how the provisions in the Bill relating to the new targeted anti-avoidance rule will work to prevent people from circumventing new legislation tackling avoidance involving employment intermediaries. The National Insurance Contributions Act 2014 strengthened existing legislation in respect of offshore employment intermediaries. That measure was effectively intended to address the non-payment of employers’ national insurance in the oil and gas industry involving the placement of the employer of oil and gas workers—who are working on the UK continental shelf—outside the UK.
As noble Lords will be aware, the temporary labour market is quick to react to any legislative changes and to find new convoluted ways to reduce the amount of income tax and NICs they would otherwise be liable to pay. Stakeholders have indicated to HMRC that intermediaries involved in the facilitation of false self-employment may set up avoidance vehicles involving convoluted structures specifically designed to circumvent the legislation introduced in the National Insurance Contributions Act 2014. To dissuade such intermediaries, the Government propose that a TAAR, which would be similar to the tax TAAR included in Finance Act 2014 for the same purpose, is included in NICs legislation to deter such avoidance. It will focus on the motive for setting up the arrangements and what they achieve. Were they set up with the motive of avoiding NICs? Do they result in less national insurance contributions being paid? In order that the tax and NICs TAARs operate as one, both will take effect from 6 April 2014.
In conclusion, the Government have already taken action to reduce significantly the burden of NICs on earnings and employment through previous Bills. This Bill continues that approach and I commend it to the House. I beg to move.
Lord Newby
My Lords, I thank both noble Lords who have welcomed the Bill. The noble Lord, Lord Davies, said that it was a sign of the times that my noble friend Lord Razzall agreed with him, but surely it is a sign of the times that the noble Lord, Lord Davies, agreed with my noble friend. Whoever is agreeing with whom first, it is an extremely satisfactory position for a Minister at the Dispatch Box to find such a general welcome for a Bill.
Both noble Lords asked about the impact of the changes on the administration of the maternity allowance and whether it would be sensible to have a formal review two years after the Bill comes into force. That timetable does not make any sense, because the first payment of class 2 through self-assessment does not have to be made until the end of January 2017, so a two-year review date is pointless. However, both the DWP and HMRC are committed to ensuring that this group of women is not disadvantaged by the way the reforms work and will be keeping the operation of MA under review on a continuous basis. In response to the specific point that my noble friend Lord Razzall raised, it will be possible to see on an ongoing basis whether the number of claimants falls. I assure noble Lords that if there is any sign of that happening, the Government will act to deal with whatever the administrative problem is that has caused it because, obviously, that is not the intention of the legislation.
My noble friend Lord Razzall asked how there could possibly be no Exchequer impact, particularly when the measure is introduced, with people changing from paying monthly to paying up to eight months after the end of the tax year. National insurance contributions are accounted for on an accruals basis, so the important factor is the time period for which the money is due rather than the date on which it is actually paid. It will therefore continue to be counted in the tax year itself.
My noble friend Lord Razzall asked about the impact of the reforms on entitlements for benefits claimants and how that would work. The contribution conditions for benefits are changing. In addition to the maternity allowance, which we discussed, and in order to ensure that the self-employed are not disadvantaged as a result of the changes, the DWP will modify the relevant legislation to safeguard the position of claimants who pay their class 2 NICs by 31 January—the deadline for paying class 2 NICs through self-assessment. This will be done, first, by treating them as having satisfied the relevant contribution condition at the right time and, secondly, by disapplying the 42-day penalty that normally applies where contributions are not paid until after the start of the benefit year.
Questions were also asked about how the self-employed will learn about these changes and make sure that they comply with them satisfactorily.
HMRC and the DWP are working closely together in communicating the class 2 changes to the people who are going to be affected so that key messages are cascaded in a number of ways and a number of times. The department’s communication strategy includes: undertaking customer research and testing some of the products with customers; HMRC writing to all self-employed customers; an updating of existing customer outputs, such as the small earnings exception renewal letter; making HMRC staff and DWP staff aware of the changes and building the relevant information into call scripts and telephony, where appropriate; and using stakeholder partnerships with intermediary groups, agent organisations and forums to ensure that key messages are understood by everyone so that the self-employed hear the messages through a number of channels and in a consistent way.
Finally, the noble Lord, Lord Razzall, asked whether the effect of these changes on any possible future merger of NICs and income tax would be neutral, negative or positive. The whole question of merging income tax and NICs is fraught with difficulty and complexity. To the extent that these changes would have any impact at all, were any future Government to plan such a scheme, I suppose, if anything, it would be very marginally positive, but in the overall scheme of things and in the context of such a wide-ranging review it would be almost lost in the wash.
This is a short Bill, but as all noble Lords who have spoken have recognised, it is important to simplify the way in which we administer the system and to reduce the scope for avoidance. Therefore, I commend the Bill to the House.