National Insurance Contributions Bill
Wednesday 1st December 2021
(3 years ago)
Lords ChamberNational Insurance Contributions Act 2022 View all National Insurance Contributions Act 2022 Debates Read Hansard Text Amendment Paper: Notices of Amendments as at 6 September 2021 - (6 Sep 2021)
Viscount Younger of Leckie (Con)
My Lords, national insurance Bills, as I am sure many noble Lords are aware, occur regularly, often every two to three years, and NICs—as I will refer to them—have been debated countless times in this House since their introduction in 1911.
The Bill before noble Lords today is short but important, and it allows the Government to implement two new national insurance reliefs to support employers to hire new staff and deliver on manifesto commitments. It contains just 14 clauses and introduces four new measures: first, an employer NICs relief for new employees in free ports; secondly, an employer NICs relief for employers of veterans; thirdly, an exemption for test and trace support payments from self-employed NICs; and fourthly, changes to disclosure of tax avoidance schemes legislation with regards to NICs. I will explain each of these measures in more detail.
I will start with the employer NICs relief for new employees in free ports, which is contained in Clauses 1 to 5. This measure will support the delivery of the Government’s free ports programme, which will attract new businesses and regenerate communities by creating jobs, boosting investment and spreading prosperity.
Free ports present a great opportunity to drive regional growth, and the Government want as many areas across the UK as possible to benefit, including in Scotland, Wales and Northern Ireland. At the Budget, the Chancellor announced the locations of the first eight free ports in England. These sites, which range from Teesside to Tilbury, will become hubs for trade, innovation and commerce. They will attract new businesses and regenerate communities by creating jobs, boosting investment and spreading prosperity.
Noble Lords will be aware that a large part of the appeal of free ports for employers will be the wide variety of tax reliefs available. The incentives aimed at promoting regional growth include: an enhanced 10% rate of structures and buildings allowance; an increased 100% capital allowance for companies investing in plant and machinery; and full relief from stamp duty on land or property purchases.
In addition to these measures, we are also encouraging firms located in free ports to recruit employees based locally. The employer NICs relief for new workers in free ports, contained in this Bill, will help to achieve this goal, while supporting regional growth. Under this measure, employers with premises in a free port in Great Britain will be exempt from employer NICs on up to £25,000 of a new worker’s wages. This legislation applies to all new workers who spend 60% of their working time at a free port tax site in the first three years of employment. The relief will be available from 6 April next year, and it is the Government’s intention to make this relief available for up to nine years.
By April 2026—at the four-year mark of the scheme—the use and effectiveness of the relief will be reviewed and a decision will be required by the Government on whether to extend the relief beyond its earliest end date of 5 April 2026. Any decision to extend will be taken only on review of the relief’s impact. However, even if the Government decide not to extend the relief, employers will be able to claim it for the full three years on new hires taken on or before 5 April 2026.
Although these measures relate to Great Britain, I assure the House that it is the Government’s intention to legislate for this relief in Northern Ireland as soon as it is practicable. The Government remain in constructive discussion with the Northern Ireland Executive about the detail of the offer in Northern Ireland, and it is right that we ensure that the appropriate time is given for these discussions to continue to ensure that the offer is right for ports, businesses and communities in Northern Ireland, and meets our international legal obligations. Noble Lords will be aware that the Bill provides the Government with the power to set out the detail of the employer NICs relief in Northern Ireland in regulations that are subject to the affirmative procedure, once engagement with the Northern Ireland Executive is complete.
I now turn to the measure concerning the NICs relief for employers of veterans, which is contained in Clauses 6 and 7. As Noble Lords may recall, this policy was announced at Spring Budget 2020. It also fulfils a manifesto commitment to reduce employer NICs for a full year for every new employee who has left the Armed Forces, and to support veterans as they transition into civilian life. The UK’s veterans have given extraordinary service to our nation, but we know that some face great challenges in obtaining secure and fulfilling employment. It is only right that we do all we can to help them.
As noble Lords will be aware, this House has just passed the Armed Forces Bill, which, among other measures, fulfils the 2019 manifesto commitment to incorporate further the Armed Forces covenant into law. The new provisions in that Bill relating to the covenant are part of Government’s programme to ensure that members of the Armed Forces, veterans and their families are treated fairly.
Under this legislation, organisations will not pay employer NICs on earnings worth up to £50,270 in a veteran’s first full year of civilian employment. This amounts to a saving of up to £5,500 per hired veteran for the 2021-22 tax year. Indeed, the Federation of Small Businesses has urged
“every small employer to consider the value this relief can bring in helping them take on a new member of staff”.
This measure constitutes a real boost to veterans’ employment prospects. It should mean that many more businesses benefit from our veterans’ brilliant skills and experience.
I turn to the next measure included in this Bill: the exemption of test and trace support payments from self-employed NICs. At every stage of the coronavirus crisis, this Government have done what it takes to support the people of this country. However, if we are to contain the spread of the virus, it is crucial that those told to self-isolate by NHS Test and Trace do so.
Last September, the Government announced the launch of a £500 support payment in England for low-income individuals who had been told to self-isolate but could not work from home and would lose income as a result. As of 17 November 2021, local authorities have reported 362,573 successful claims since the start of the scheme, totalling £181.3 million in payments in England. Happily, the Scottish and Welsh Governments announced similar schemes shortly afterwards.
These payments, which were provided by local authorities, would ordinarily be subject to employee and employer, class 1 and 1A, and self-employed, class 2 and 4, NICs under long-standing legislation. Last year, we introduced secondary legislation to exempt payments under the support schemes from employee and employer, class 1 and 1A, NICs. The measure contained in this Bill will extend this exemption to the self-employed.
This legislation is intended to ensure these workers are treated consistently with their employed counterparts and do not have to pay NICs on support payments. It will therefore retrospectively exempt test and trace support payments from class 2 and 4 NICs for the 2020-21 tax year. It will also ensure that, in future, test and trace support payments will not be included in profits liable to class 2 and 4 NICs.
I turn to the final measure in this Bill: the changes to the disclosure of tax avoidance schemes regime for NICs, contained in Clause 11. Noble Lords may recall that the so-called DOTAS legislation was introduced in 2004. It seeks to provide HMRC with early information about new tax avoidance schemes, how they work and those who use them. The provisions in the Finance Act 2021 enhance the operation of the DOTAS regime, ensuring that HMRC can act decisively when promoters fail to provide information on suspected avoidance schemes.
In this regard, the NICs Bill includes changes to an existing regulation-making power in the Social Security Administration Act 1992. It will also ensure that HMRC can warn taxpayers about suspected avoidance schemes earlier than at present. In addition, this Bill places responsibility for the obligations within DOTAS and any failure to comply with them on both promoters of these schemes and their suppliers. The measure will not adversely impact legitimate businesses giving legal and commercial advice. Only those actively participating in the promotion, marketing or enabling of avoidance will be pursued.
By strengthening the existing anti-avoidance regimes and tightening rules we will ensure that those involved in promoting these unscrupulous schemes face the full consequences of their actions. I assure noble Lords that the Government will continue vigorously to tackle all avoidance schemes and their promoters.
I would like to say a few words about the report of your Lordships’ Delegated Powers and Regulatory Reform Committee, which has recently come out. I wish to reassure the committee and noble Lords here today that the Government are carefully considering the recommendations made by the committee. We will write to the committee with our response to the recommendations made, ensuring full transparency, in due course.
I conclude by briefly reminding the House of this Bill’s key purposes. It supports regional growth, and with it our levelling-up agenda; it boosts employment, while helping to protect those on low incomes from the financial impacts of Covid-19; and it strengthens our powers to tackle promoters of avoidance schemes. With that, I commend the Bill to the House.
Lord Davies of Brixton (Lab)
My Lords, I thank the Minister, the noble Viscount, Lord Younger of Leckie, for his clear and—given the time—concise exposition of the Bill. I hope that if, in my remarks, I express less than total support, he will not take that personally.
There are many aspects of this Bill that cause me some concern. Maybe there are not many of us left, but I believe in the National Insurance Fund, going back to the National Insurance Acts of the post-war Labour Government—a fund that you pay into while you are at work and that pays you benefits when you are sick, unemployed or retired; a fund that is guaranteed by the Government. Regrettably, it has come to be treated by successive Governments as a catch-all source of short-term political fixes that are nothing to do with a logical system of national insurance. Today’s Bill is a prime example.
One point that I particularly regret is the almost complete absence of any sort of financial information on how the Bill will affect the financial state of the National Insurance Fund. To me it is axiomatic that when changes are made to the contributions paid into or the benefits paid from the fund, Parliament should be presented with a report from the Government Actuary. Instead, we have a few figures in the Explanatory Memorandum and a few more—somewhat tardily—in the budget report from the Office for Budget Responsibility. Notably, the OBR spends some time explaining how uncertain the figures are.
None of the figures can be taken seriously, because this is what can be described as “performative legislation”. It is not being put before us because there is any sound logical or evidential basis, or even a clear idea of the effect of the legislation. It is just a performance, with the only idea behind it being the political benefit—its source in manifesto commitments gives that game away. It is here only because the Government want to say, “Look, here’s what we are doing: we are supporting veterans—who can object? We are promoting economic development—who can object?” But there is no evidence that it will have any sort of material impact, least of all on the stated objectives.
It is worth reading out the views of the OBR on the freeports issue. It said that
“given historical and international evidence, we have assumed that the main effect of the freeports will be to alter the location rather than the volume of economic activity, so the costs have been estimated on the basis of activity being displaced from elsewhere. To the extent that activity is genuinely additional, it will be revealed in GDP and receipts data over time, though given the small scale relative to the whole economy, such effects would probably be difficult to discern even in retrospect.”
So the promise to have a review of the policy is nonsense. We will not have any idea whether it achieves what the Government say it will. This is no surprise. Anyone who knows anything about the history of government efforts to promote local economic development knows that the same mistakes will be made time and again. There are a host of factors that we know lead to additional growth—connectivity is the big one—but relatively trivial tax incentives are way down the list.
I also draw the House’s attention to the evidence on the freeport provisions presented to us by the Chartered Institute of Taxation. It raises several technical issues that we will come to in Committee, but there are some more general points which I will paraphrase—these are my words, not the institute’s, but my comments are based on its evidence. Its questions are as follows. What evidence do the Government have for believing that these proposals will achieve their intended benefits? What about the risk that economic activity will be diverted from other, fully taxed areas, rather than increased overall? Will the impact not be felt through a rise in commercial property prices in the areas concerned, rather than fully in increased activity? These are serious questions; perhaps the Minister can start to enlighten us on these points.
The truth is that the Government’s policy of levelling up, of which freeports are a part, is a slogan in search of policies. However facile the proposal, it is the press coverage that counts, rather than the impact on the ground. The same general point applies to the national insurance relief for veterans. Again, there are technical difficulties that we will have to deal with in Committee but, to put it bluntly, the idea itself is bogus.
Of course, this is no attack on veterans, who deserve our support, but does anyone honestly believe that this policy will make any material difference to their employment prospects? If the Government are serious about the employment prospects of our veterans when they leave service, they should undertake a comprehensive review of the difficulties they face. Education and training opportunities are obviously the key, with direct financial support where necessary—resettlement grants and so on. I have little doubt that a comprehensive review would find that this money would be better spent in ramping up support for the existing services available for veterans. Again, this is all about presentation rather than substance.
Finally, I want to ask a question on Clause 11, about the disclosure of contributions avoidance arrangements. We will of course want to oppose avoidance arrangements for national insurance contributions, just as we are against avoidance arrangements for income tax, and it seems entirely reasonable that the two should be brought in line. But it would be helpful if we knew a bit more about what the Government have in mind here. Are there examples of national insurance contributions avoidance where action has proved difficult or impossible under existing arrangements? More specifically, what about the example of salary sacrifice? These are arrangements that are established specifically to permit employees and employers to pay less in national insurance contributions.
We are in the odd position that some of these arrangements—for example, pensions—get HMRC’s blessing, but others do not. It is difficult to see how all the arrangements do not fall, in everyday language, under the heading of avoidance. We need some certainty here. Will the Minister provide us with a clear explanation of what impact Clause 11 is intended to have?
Lord Bilimoria (CB)
My Lords, on 7 September, as president of the CBI, I spoke of the Government’s plan for social care reform and funding and said:
“There is genuine consensus in the country that social care reforms and greater investment are long overdue.
Businesses accept difficult choices need to be made, but are already set to be hit by a substantial rise in corporation tax in 2023.
After all that business has gone through during the pandemic and the fantastic Government support that followed, now is not the time for tax increases. It’s time to stimulate investment and growth in the economy.
National Insurance increase will directly hurt a business’s ability to hire staff, at a time when businesses have faced a torrid 18 months and are now fighting crippling labour shortages.
Government must be wary of heaping further pressure on businesses who will be central to the recovery, particularly by making it more expensive to recruit.”
I said at that time that this autumn and winter
“will be a critical period if we are to drive a sustainable recovery. The Government must use all the levers it has in its power to encourage more businesses to invest in the months to come and do everything it can to encourage growth.”
That is exactly what the Minister said when he said that parts of this Bill support regional growth.
The National Insurance Contributions Bill introduces new measures regarding national insurance contributions. National insurance is a tax on earnings—some people call it a tax on jobs. It raises huge amounts for the Exchequer. National insurance contributions were forecast to raise almost £150 billion in 2021-22, so they are one of the main ways in which tax is raised.
As I mentioned earlier, on 7 September the Government announced plans to increase the funding of health and social care through a new tax: the health and social care levy, which will be applied from April 2022 via 1.25 percentage point increases on national insurance for employees and employers. The Bill is of course separate from these rises.
Of course, the Bill introduces relief for employers based within free port tax sites. As the noble Lord, Lord Davies, just mentioned, it also introduces national insurance contribution relief for employers of ex-servicepeople. Anything that the Government can do to help them is brilliant, and I applaud them for making an effort.
There are eight new free ports that would be hubs for trade and help to regenerate communities. Of course, we know that, for the eight in England, the successful bidders have been East Midlands Airport, Felixstowe and Harwich, Humber, Liverpool City Region, Plymouth and south Devon, Solent, Teesside and Thames. I have personally met with the young mayor of Teesside, Ben Houchen, who is championing his area, and I heard first-hand about his exciting plans for increasing investment in Teesside, including with the free port.
Clause 1 will allow an employer to qualify for a zero rate of secondary class 1 national insurance on the earnings of an employee at a UK free port site. This would be zero up to the UST, which has been set at £25,000. This was challenged in the debate in the other place, and I ask the Minister: why is it £25,000? In areas where there are other relief schemes, it is set at over £50,000. The more generous it is, the more it will attract investment—if that is the objective, should we not do that? For ex-service personnel, the NIC relief is only for 12 months, while for the free port scheme it is three years. Why cannot the relief period for ex-servicepeople be longer?
The principle of free ports is to encourage investment, including by reducing taxes, to generate growth and jobs and, therefore, eventually raise more revenue. The Bill could have gone so much further in incentivising investments and reducing taxes. There is much research from around the world that shows that lowering taxes actually increases growth. I cite Mertens and Olea: a one percentage point decrease in tax increases real GDP by 0.78% by the third year after the tax change. In America in 2019, Zidar found that a tax decrease of 1% of state GDP for the bottom 90% of earners increases state GDP by 6.6%. I could go on. In 2018, Ljungqvist and Smolyansky looked at 250 state corporate tax changes from 1970 to 2010 to assess their impact on employment and income. They found that a cut of one percentage point in statutory corporate tax leads to increases of 0.2% in employment and 0.3% in wages. They find tax increases almost uniformly harmful, while tax cuts seem to have their strongest positive impact during recessionary environments.
Of course, the most famous of them all is Arthur Laffer, the American economist. The Laffer curve suggests that when the tax level is too high, lower taxes will boost government revenue and create higher economic growth. This theory formed the basis of the growth that took place in the 1980s with so-called Reaganomics, which saw low levels of inflation, a steep rise in private investment and rising incomes. In fact, between 1982 and 1990, the foundations of the Laffer curve enabled the second longest peacetime economic expansion in the history of the United States. Of course, Arthur Laffer advised President Reagan and Margaret Thatcher.
In this country spending is at its highest level since the 1970s and the tax burden is the highest in 70 years. Inflation has already hit 4.2%, and the Resolution Foundation estimates that real wages in 2024 will be just 2.4% higher than in 2008, compared with a 36% rise in the 16 years before the financial crisis. In 2016, the IMF said that austerity policies do more harm than good.
In September, the CBI’s director-general, Tony Danker, gave a speech on business investment. He said we should be doing everything we can to flip business taxes on their head and reward firms which invest; that is essential to high growth and a sustainable recovery. He said that one of the key levers the Government can use to get businesses investing more is smarter taxation. They should reward the firms which invest and stop punishing, for example, greening UK building stock through business rate increases. Does the Minister agree that the business rates system is not competitive and needs huge reform? Does he agree that business investment in the UK has been seriously underpowered since the 1990s? It has deteriorated from 14.7% of GDP in 1989 to a low of 10% at the end of 2019. Of course, we have had the pandemic, and we are still set to be 5% below our pre-Covid levels by the end of 2022. So, we need to do everything we can to increase investment.
However, between 2021 and 2025, the UK Government are projected to invest an average of 3.4% of GDP, compared to 3.9% in America, 4.1% in Canada, 5.9% in Japan and 9% in China. In 2019, net zero and green spending represented 3.8% and 1.8% of the US and EU economies, compared to just 0.55% for the UK’s climate funding. So, we have a huge opportunity here. The Government’s innovation strategy says all the right things to capitalise on the UK’s potential to be a global innovation hub and leader, but the ambition needs to be backed right now.
Our business rates are four times higher than Germany’s, three times higher than the OECD average and higher than those of any other G7 country. Surely, we need to do things such as reform business rates to increase investment. We invest 1.7% of our GDP in research and development and innovation. In 2019, the figure in Germany was 3.2% and 3.1% in the US. Just imagine the impact on our productivity if we invested just one percentage point more.
To conclude, one of the objectives of the Bill is very important, but I do not think it is going anywhere near far enough to genuinely increase investment. The Government say they want a high wage, high growth, high investment, high productivity, high skill economy. I agree with that 100%, but right now we are facing a high tax economy, including the planned corporation tax and national insurance increases, the business rates I have just spoken about and the highest tax burden in 70 years. We need to stop hiking taxes and focus on boosting investment, because that will create the jobs that will pay the taxes that will pay for the debt.
Lord Sikka (Lab)
My Lords, this Bill hangs on the failed concept of free ports, which are effectively a state within a state where vast amounts of money are showered on few, with little, if any, tangible benefits for the public at large.
We have had free ports before. They were created under Section 100A of the Customs and Excise Management Act 1979. Seven operated at various times between 1984 and 2012. In July 2012, the Government let the enabling statutory instrument lapse. Freeports morphed into enterprise zones, and many of those still exist.
In May 2014, the House of Commons Public Accounts Committee’s report, Promoting Economic Growth Locally, concluded that the Government’s claims of job creation in enterprise zones were “particularly underwhelming”. The Government promised 54,000 new jobs in these zones. BBC-commissioned research found that by 2017, only 17,307 jobs had been created against that claim of 54,000. These jobs were created in 24 zones, and in two others, the number of jobs actually fell. The Government seem to forget that it is investment in education, healthcare, social infrastructure and equitable distribution of income that gives people the spending power with which to buy goods and services. All these things are neglected by the Government. Unsurprisingly, these jobs were never fully created. I look forward to having a debate with the noble Lord, Lord Bilimoria, about the Laffer curve, one of the overstated theories that I would love to debunk. However, that will have to wait for another day.
This history of failures of the enterprise zone and freeport zones informs the OBR’s assessment. Page 211 of its commentary on this year’s Budget, it says that there is
“broader uncertainty around how much of the economic activity that takes place within a freeport will have been displaced from other UK regions and how much is genuinely additional”.
In the light of that, it would be helpful if the Minister can provide an impact assessment of the Bill assessing the gains, or the assumed gains, in freeports, and the losses that will be caused to other parts of the economy. What will happen to the towns that lose some of their economic activity to freeports?
The zero-rate contribution mentioned in the Bill is available to an employer other than a public authority. This is very strange. The Bill says that “public authority” includes any person whose activities involve the performance of functions which are of a public nature. It is hard to think of any entity which does not do anything of a public nature these days. This definition is not helpful at all. Many public functions are outsourced these days. Would a company performing public functions be precluded from making zero-rate contributions? An energy company located in a freeport zone can enjoy the benefit of the zero-rated national insurance under the Bill, but if a local council becomes an energy supplier, as many have in recent years, I do not think that it would then qualify under this Bill for the zero-rate national insurance contributions.
The Bill does not provide any clarity on the concept of public authority, and it is also utterly unfair. I hope the Minister can shed some light on this. Why is it that a company that might provide energy, cleaning, lighting and other services can somehow get zero-rate contributions, but if a local authority does the same, it will not?
The Government have not published a full impact assessment of the Bill. What will be its impact on the national insurance revenues, a point already touched on by my noble friend Lord Davies of Brixton? On page 11, the Explanatory Notes accompanying the Bill estimate the cost of the
“zero-rate secondary Class 1 Contributions for armed forces veterans”
over the next three years to be £55 million. However, for the zero-rate secondary class 1 contributions for freeport employees, which is a major part of this Bill, the Explanatory Notes say:
“This measure is expected to decrease receipts. The final costing will be subject to scrutiny by the Office for Budget Responsibility and will be set out at a future fiscal event”.
This is not satisfactory. Do the Government not have any idea of the cost of this policy? Why are they giving national insurance concessions to a select few without knowing the full cost?
The Treasury Red Book shows that the cost of free-port tax perks, which includes
“reliefs on Stamp Duty, Enhanced Capital Allowances … NICs and Business Rates”
over the next five years is £270 million. These numbers could not have been calculated without some assumptions about the number of jobs, the details of national insurance and other things. What assumptions did the Government make in coming up with these numbers? I invite the Minister to share the information with us, so that we can see how realistic the Government’s numbers are.
The Bill is offering a national insurance holiday to employers, which will result in lower revenues in the National Insurance Fund account. However, the Bill does not require the Government to remit or repay the cost of the national insurance concessions to the National Insurance Fund account. The net result is that this Bill will reduce the amount deposited in the National Insurance Fund account, or the surplus in it, and will reduce the ability of the account to pay state pensions and other benefits in the future. The cost of the Government’s ideological experiment is being borne by the poorest and vulnerable sections of our society. There is a wealth transfer from the poor and the vulnerable to a select few corporations. What is the justification for this wealth transfer? If the Government want to give a holiday, then please pay directly into the National Insurance Fund account.
The disclosure of tax avoidance schemes—DOTAS—was originally introduced in 2004, and the new measures are outlined in Finance Bill 2021. As the Minister said, they will now apply to cases of national insurance avoidance. But in the absence of robust enforcement, it is unlikely to yield significant results. That has been the case with tax abuses. The Government have been very soft on big enablers of tax abuses. Ministers constantly refer to laws tackling tax abuses, but it is the enforcement which is a big problem. If the Minister disagrees with my assessment, then I invite him to name any big accounting firm which has been investigated, prosecuted or fined after the courts judged that it had peddled unlawful tax avoidance schemes. One example will do, and if the Minister gives me an answer, I think that will be my lucky day and I will rush out and buy a lottery ticket—I can assure you of that.
The Government actually reward these firms with public contracts. The partners of the big four accounting firms have chaired and sat on the board of HMRC, while they have been simultaneously selling unlawful—that is what the courts have decided—tax avoidance schemes. Their partners sit on the general anti-abuse rule advisory panel, often known as the GAAR panel. They determine what counts as abusive. When I look at these arrangements, the phrase “foxes guarding the henhouse” comes to mind. I would like to hear what exactly the Minister is going to propose to deal with this.
Perhaps nobody will go out to avoid national insurance contribution payments because the Government already facilitate luxuries for the rich. The wealthy can easily convert their income to capital gains. Capital gains are not only taxed at a lower rate than earned income, but there is no national insurance payable on them at all. This favour to the rich, just on capital gains, costs us around £8 billion a year. We can see that the Government are enabling the rich to avoid paying national insurance. Why are these concessions given? Could the Minister please tell us why there is no national insurance on unearned income at all in this country?
Baroness Kramer (LD)
My Lords, this may have been a short debate but, my goodness, it has been a full one. I feel rather privileged to be one of the winders.
I want to open with a point made by the noble Lords, Lord Davies and Lord Sikka, on the integrity of the national insurance contributions fund. Like them, I am troubled. The fund was created primarily to pay the state pension; that is its primary role. Compared to most other developed countries, the basic state pension in the UK is very low. Pensioners will face a particularly harsh 2022 because increases have been detached from earnings growth. It adds to my concern that the Government are now choosing to use that fund as a piggy bank for all kinds of other purposes. There will be a new NICs levy to fund the NHS and perhaps, eventually, social care; I suspect that we will see that money constantly having to go to the NHS so we will have to think again about social care, but so be it. This money for the NHS and social care should have been raised through income tax for a whole variety of reasons that I will not reiterate here but which we have discussed in this House before.
I also become increasingly concerned when I see NICs holidays to support niche activities, such as free ports, while at the same time the NICs burden for SMEs—the noble Lord, Lord Bilimoria, raised this issue—is increasing across the country. Again, like the noble Lords, Lord Sikka and Lord Davies, I very much hope that the Minister will finally tell us exactly how much the NICs relief for free ports will cost in forgone revenues because I cannot tease it out of any of the figures that we have been presented with in the Red Book or by the OBR.
Free ports are, by definition, free trade zones. I know that the Chancellor has a particular passion for them but he is making a serious mistake. Even those who are fans of free ports admit that, as free trade zones, they create new jobs only in countries where tariffs on intermediate goods are normally high. The United States is a good example of a country with high intermediate tariffs, which is why free ports have been popular—and, some would argue, successful—there. In the UK, tariffs on intermediate goods are either non-existent or tiny. The savings on duties are negligible. Indeed, these tiny savings will be completely wiped out by the new costs of trading with the EU. Can the Minister confirm that the port operators were correct when they recently told the European Affairs Committee that the costs of the new port infrastructure needed for the new checks as a consequence of Brexit will all fall on port operators? Are the free port operators going to pick up their share of their charges, or will they be exempt and their share picked up by other operators?
There are no meaningful benefits to removing duties, which is normally the essence of a free port. Of course, that is why the Government are now offering a raft of various other tax reliefs, including NICs holidays; it is really an attempt to salvage the free port project. The primary effect will be to favour the initial free port locations —of which there are eight so far—thus cannibalising the prospects of similar or even more disadvantaged areas. During the coalition—I do not hesitate to criticise things that the coalition Government did not get right—the Treasury created enterprise zones; as proposed, the free ports are barely different from enterprise zones. Only a quarter of the predicted jobs were created and, of those, a third came as a result of displacement; I take my information from a study by the Centre for Cities, which is a good and respectable source.
Overwhelmingly, the jobs created were low-skilled jobs. Indeed, interestingly, the NICs relief in this Bill is for low-paid jobs only, as others have pointed out. That tells you everything about the true expectations of this project. It will be a low-skill, low-job set of operations. Again, I will not repeat the OBR quotes mentioned by the noble Lords, Lord Sikka and Lord Davies, but, as far I can tell, essentially it says that it considers that the return from the free port investment will be so small and negligible that it is not even worth putting it into its forecast numbers.
The Government’s free port package promises users a vague array of benefits other than tax release, but I noticed one especially, which is deregulation. It is not yet specified how that deregulation will work. The UK is already a hub for money laundering and free ports of all kinds are notorious for their appeal to cheating and crime, not least because the absence of tax and duties enables the ownership of goods to be concealed. It is virtually impossible for enforcement agencies to be effective in a free port, which is one of the reasons why free port legislation was allowed to die on the vine, in the UK. The Government say that the absence of rules will lead to innovation. I am all in favour of innovation, but not in tax avoidance, money laundering, substandard products or the transfer of stolen assets.
In looking at other parts of the Bill, I support the proposal for NICs relief for ex-services personnel, but I join others in asking whether 12 months is long enough to encourage hiring sufficiently. I pick up the point of the noble Lord, Lord Davies, that this should be part of a holistic programme to help ex-servicemen to achieve that change into civilian life and not just one isolated measure hanging there alone. I also fully support the exclusion from NICs of income for the test and trace self-isolation support system.
However, I would like to ask some questions about the implications of extending the disclosure of tax avoidance schemes—DOTAS—to cover NICs. I take the Minister at his word, because it makes sense, that this is intended to be targeted at the promoters of wrongful avoidance schemes. I am delighted if they are being tackled more effectively. As the noble Lord, Lord Sikka, said, there are 20 or 30 promoters still out there, which the regulators have completely failed to lay their hands on in any way. Anything that can be done to tackle the promotion of wrongful avoidance schemes has to be positive.
I just want to be sure that this does not have implications for small businesses that hire freelance contactors and that no new burdens will be placed on the freelancers themselves. We have so many questions surrounding IR35 and this issue can be woven and caught up in parts of that, particularly for freelancers who work through personal services companies. I have put that question to HMRC; I do not know whether it reached the Minister and suggested that he might mention it. I hope at some point to hear from HMRC, but the Minister might be able to give me more immediate enlightenment.
I close by saying that I am convinced by the Delegated Powers and Regulatory Reform Committee’s assessment of the Bill and the need, in Committee, to deal with Henry VIII and other powers in ways that provide more parliamentary scrutiny. I very much hope that the Minister’s statement that the Government are taking that report seriously and will potentially come forward with proposals meets the test that we are all looking to satisfy.
Lord Tunnicliffe (Lab)
My Lords, this has been a short but interesting debate. There has been a heavy focus on the Government’s policy on free ports, the first of which has now opened on Teesside. Seven more are due to follow, after sites were confirmed in the Spring Budget. Perhaps the Minister could provide an update on the status of these sites today. It will be interesting to see how free ports operate in practice. There is no doubt that they have potential benefits in jobs, economic activity and infrastructure improvement. However, it is unclear to what extent they are merely displacement benefits and there are certainly risks, as the noble Baroness, Lady Kramer, pointed out, of tax evasion, smuggling and other forms of criminal activity.
In the other place, the Government opposed a sensible Labour amendment to the Finance Bill, which would have required transparent evaluation of the success or otherwise of each individual site. That would have given us a clear picture of exactly where benefits are being derived and the extent to which they exist. It would also have given the Government much needed data to inform any tweaks to policy in the months and years ahead. Can the Minister inform your Lordships’ House of exactly how the ongoing balance of opportunity and risk will be reviewed and reported on? Will Parliament be given information and, if so, at what frequency and in what form? If not, why not?
Turning to the Bill, Clauses 1 to 5 introduce NICs relief for employers based in free-port tax sites. Such relief lasts for three years but, presumably for reasons of expediency, applies only to employment commencing from April 2022. With the Teesside site now operational and others due on stream soon, does the Minister not think that it is counterproductive to exclude these key early months? Does he foresee a situation in which employers delay recruitment?
Clauses 6 and 7 introduce a one-year period of NICs relief for employers of Armed Forces veterans to assist ex-service personnel in their transition back to civilian life. It is no secret that I believe the Government have a range of duties towards our service personnel and veterans. Supporting veterans into lasting work is one of those. The relief forms one part of that duty but its time-limited nature is a cause for concern. In the Commons, Sir Mike Penning observed that the first 12 months outside the forces is the most challenging period for former service men or women. In many senses, it is a case of sink or swim. That may be true and we welcome the temporary NICs relief, but the Government have thus far been unable to justify why free-port firms should enjoy three years of relief—the Minister hinted at a longer period—compared to those hiring ex-service personnel. Would the noble Lord the Minister care to have a go today?
The changes made in Clauses 10 and 11, bringing the self-employed into NICs relief for test and trace support scheme payments and extending the disclosure of tax avoidance schemes rules to NICs avoidance, are welcome. As I have made clear on several occasions, we do not feel that the Government do nearly enough to tackle or otherwise disincentivise tax avoidance, which deprives our public services of much needed funds. This measure provides HMRC with a further tool, which is positive, but can the Minister comment on what gains are expected from this change in each tax year? Some in the sector have expressed concern that the Government’s actions on tax avoidance are limited in scope and ambition, and have reached the point where they are achieving diminishing returns. The Bill may not be the right vehicle to discuss the ways forward but I hope that the Treasury and HMRC are able to broaden their horizons.
Indeed, the recently leaked Pandora papers once again highlighted the sheer number and complexity of tax avoidance arrangements. Those revelations arguably strengthen the case for a change of approach. In response to the emergence of those documents, Mr Sunak pledged that the Government would look through them,
“to see if there’s anything we can learn.”
That does not relate directly to NICs, so I will not ask the Minister to comment now but will he be kind enough to provide a written update on that project?
We did not oppose the Bill in the Commons and have no intention of doing so here. It has already had a long gestation period, having trundled through the other place over the course of many months. While there are areas where we would like clarification from the Minister, it is not the role of your Lordships’ House to unduly hold these measures up. I hope, however, that the Government will engage meaningfully with the Delegated Powers and Regulatory Reform Committee, which has made several modest recommendations. I look forward to the Minister’s response on the range of issues raised throughout this debate and would appreciate correspondence on any topics he is unable to cover in his winding speech.
Viscount Younger of Leckie (Con)
My Lords, this debate was initially down to have at least a dozen speakers. I am sorry to say that, as the day has worn on—for a very good reason, I am sure—the number of speakers has somewhat diminished. I am sure that they will reappear in Committee and we will have a greater number of Peers interested in this important Bill.
I will start by addressing some of the remarks of the noble Lord, Lord Davies. He gave me due warning of his remarks at the beginning of his speech but, as he will expect, I do take issue with quite a lot of the overly pessimistic comments he made. He said that this was not to do with national insurance and indicated that it was very much a PR exercise and simply a presentation. He is nodding at that. I am afraid that I do take issue with that, but of course it is up to me to prove today and particularly in Committee that this is not the case and that the matters we are bringing forward on this Bill are serious and have serious points and facts behind them.
I gently point out to the noble Lord that the Bill passed through the Commons with just one minor government amendment, which corrected a reference to another Act. On his point about the evidence of free-port clauses working, he will know that Labour tabled some amendments but ultimately withdrew them. That was on the basis that the Government argued they were unnecessary, as we have already indicated that we will review the effectiveness of the NICs relief before deciding whether to extend it.
On that, to answer the point made by the noble Lord and the noble Baroness, Lady Kramer, on whether the NICs relief will be an effective use of taxpayers’ money—which frankly is a fair question—the relief will significantly reduce the cost of taking on new employees and doing business in a free port. This, along with other reliefs being offered as part of the wider package that I mentioned in opening, will support businesses setting up and expanding in free-port tax sites.
The take-up and use of NICs relief in free ports will be monitored to ensure that it is having its intended effect. The Government have written a sunset clause into legislation that will allow us to review the relief’s effectiveness after four years and make a decision on its continuation accordingly. The noble Lord, Lord Sikka, asked about an impact assessment. I steer him towards the fact that a tax impact and information note—a TIIN—has been published alongside this Bill. If he has not seen it, I am more than happy to make him aware of it.
A number of questions, some quite technical, were raised in the debate and I will do my best to answer them. First, on free-port costing, which was very reasonably raised by the noble Lord, Lord Sikka, the OBR approved costings, including estimates, for all the tax and customs reliefs within the wider free-port offer. The programme is at an early stage of delivery, with the first sites beginning operations last month, but we have already seen significant investment. So there is more to come, but the noble Lord’s question is a fair one.
The noble Lord, Lord Davies, asked specifically about the link between NICs and benefits. The National Insurance Act and the National Assistance Act established the modern welfare state that continues today, as he may know. National insurance continues to fund contributory benefits, including the state pension. NICs receipts are paid directly into the National Insurance Fund and are kept completely separate from all other tax receipts.
The noble Lord, Lord Sikka, asked why NICs are not on unearned income. NICs is part of an earnings replacement scheme to provide help to workers when they are unable to work or retired. Unearned income is excluded as it does not rely on a person’s labour.
The noble Lord, Lord Davies, asked about the design of free ports and whether they will displace economic activity from other local areas. Our focus is on encouraging new investment from around the world and within the UK to create new businesses and new economic activity in free ports. This will create jobs in deprived communities across the country rather than harmful displacement. Employer NICs relief can be claimed only for new employees, encouraging employers and businesses to grow and create new jobs rather than relocate existing ones.
Finally, when designating free ports, the Government require bidders to explain how their choice of tax site location minimises displacement of economic activity from wider local areas, especially other economically disadvantaged areas. Displacement will be assessed in greater detail as part of the formal tax site approval process. Tax sites will be designated only once mitigation of displacement and other factors has been demonstrated by the successful bidder.
Lord Sikka (Lab)
The Minister just said that we do not charge national insurance because unearned income is not the result of labour. Many a person, instead of taking wages, draws dividends, which are inevitably the outcome of the investment of human capital—labour—yet there is no national insurance on dividends either, which is another example. Could it be that there are other ideological reasons why the Government do not levy this, rather than simply the investment of human capital? I agree that from 1911 onwards, when national insurance appeared on the scene, the focus initially was on employment, but we have moved a long way away from that. I wonder whether we can have this debate another day, if not today.
Viscount Younger of Leckie (Con)
I would be more than happy to do that. The noble Lord takes a slightly cynical view of this. We need to go back to the basics of what the Government are trying to do with this, which is to encourage more jobs and investment into these free-port areas. It is really as simple as that. I am more than happy to debate the rationale behind the detail in Committee, but I hope the noble Lord takes me at face value on that point.
The noble Lords, Lord Davies and Lord Bilimoria, asked whether the policy will be effective in encouraging the employment of veterans and whether it is appropriate to target this type of support to veterans. The House will know that some veterans will face particular difficulties in accessing the job market due to injury or trauma suffered in the course of duty; the noble Lord, Lord Bilimoria, alluded to that. These veterans will benefit most from the measure. Given that securing stable and meaningful employment is a key aspect of a veteran’s transition into civilian life, the Government wish to reward employers who facilitate this.
The noble Lord, Lord Tunnicliffe, asked about the status of free-port sites in England. I hope I can address this with some detail. At the Spring Budget, the Chancellor announced eight free ports from eight regions of England following a fair, open and transparent assessment process outlined in the bidding perspective. That included East Midlands Airport; Felixstowe and Harwich, the so-called Freeport East; the Humber; Liverpool City Region; Plymouth and south Devon; Solent; Teesside; and Thames. The first free-port tax sites in Humber, Tees and Thames went live on 19 November. This ensured that those free ports were able to begin initial operations last month, meeting our commitment to get free ports operational in England this year. The Government will continue to work with the remaining free ports and expect the next set of free ports to begin operations in early 2022.
The noble Lord, Lord Sikka, asked how free ports differ from previous free ports. Prior to 2012, the UK had five free ports offering only customs and tariffs benefits, similar to the duty referral on customs warehousing schemes subsequently introduced by the EU. This did not offer any direct tax incentives, so stakeholders indicated that this policy offer was not a substantial enough incentive to invest in these free ports, given its widespread availability outside these free ports. The new free-ports offer provides a more attractive overall package of incentives for businesses. Businesses will be able to take advantage of five tax reliefs and a range of customs incentives, as well as to benefit from a package of other measures that support the development of free ports and make them attractive places to do business, including infrastructure funding and planning measures.
The noble Lord, Lord Sikka, asked why public bodies are excluded from the free-ports relief. I probably alluded to this earlier. The aim of the policy is to boost growth in undeveloped areas, not to subsidise public bodies.
The noble Lord, Lord Tunnicliffe, asked how the ongoing balance of opportunity and risk can be reviewed and reported, and whether Parliament would be given the information on the frequency of this. He essentially asked: if not, why not? This relief will significantly reduce the cost of taking on new employees and doing business in the free port, along with other tax reliefs, which I mentioned earlier, being offered. The take-up and use of NICs relief in free ports will be monitored to ensure that it is having its intended effect. I mentioned earlier that we have the sunset clause, which I have covered. More information on assessments will be available in the free ports monitoring and evaluation—M&E—strategy, which, to reassure the noble Lord, will be published in spring 2022. The Department for Levelling Up, Housing and Communities, as the department responsible for the delivery of free ports, is leading the monitoring and evaluation but working closely and collaboratively across government to ensure robust and rigorous evaluation.
The noble Lord, Lord Tunnicliffe, also asked about any delay in implementing the free ports recruitment. Our focus is on encouraging new investment from around the world and within the UK to create new businesses and new employment. The Government have been clear that this relief is available only on new hires from April 2022 and have set this out in the Freeports Bidding Prospectus published in the autumn of 2020. Having a clear start date is, I think, the answer to his question, as it is a simple approach that will support the free-port businesses. There are complexities with HMRC, I understand, so this cannot be set up earlier than the date the noble Lord mentioned.
I go back to veterans relief—I am chopping and changing slightly here. The noble Lords, Lord Tunnicliffe and Lord Bilimoria, and the noble Baroness, Lady Kramer, asked about veterans relief and why it was for only one year compared with that for free ports, which is, as we know, for three years. I think I can answer this by saying that the policy intent for the two reliefs is different, so the structures of those reliefs are also different. The aim of the free-port relief is to support new businesses in the free-port tax site with the cost of employment to boost growth in and around the free port. Therefore, the free-port relief provides more sustained support for the lower upper threshold. The aim of the veterans relief is to support veterans’ transition into civilian life through employment. The veterans relief therefore provides a greater immediate incentive for employers to hire a veteran
The noble Lord, Lord Bilimoria, asked why the free-port relief was only £25,000 but the veterans relief is up to £50,270. The veterans relief has been kept in line with similar reliefs that aim to boost employment of a particular group of people—for example, those aged under 21 or apprentices aged under 25. The free-port relief has been designed to support new businesses during their infancy. A policy decision was made to make the relief available for a prolonged period and therefore, in fairness to other taxpayers, the threshold of this relief is lower.
I move on to the DOTAS regime, raised by the noble Lords, Lord Davies and Lord Sikka, in terms of additional powers. DOTAS has been in play for several years, which has led to many promoters leaving the avoidance market. However, a small number of determined promoters continue to sell tax avoidance schemes and use delay and obstruction to frustrate HMRC action against them. The new powers modernise DOTAS and allow HMRC to tackle these promoters at an earlier stage. They also allow HMRC to better inform taxpayers of potential schemes through earlier publishing of scheme and promoter details. This will better inform taxpayers of the potential risks that they face and help them to steer clear of these schemes.
The noble Lord, Lord Tunnicliffe, linked with the noble Lord, Lord Sikka, asked about the gains expected from the change in each tax year. The aim of DOTAS is to ensure that HMRC gets the information about the schemes, so that it can take appropriate action. Those who devise and sell avoidance are always looking for new ways to sidestep the rules, so legislation needs to be refreshed to stay ahead of them.
The noble Baroness, Lady Kramer, asked about the NICs relief attracting low-value-added, labour-intensive jobs. I can give a fairly full answer to that, which is that the free ports policy, taken overall, aims—as I said earlier—at regenerating deprived areas through investment and job creation; that means quality jobs in high-value-added industries.
Free ports will offer a number of benefits for firms, including specific issues such as: simpler import procedures and suspended duties in customs sites to help businesses trade; planning changes to green-light much-needed development; spending to invest in infrastructure; and a free port regulatory engagement network to help regulators and firms work together to test new technologies safely and effectively. As well as enjoying enhanced structures and buildings allowance, and generous stamp duty and business rates relief, employers in capital-intensive sectors will benefit in particular from enhanced capital allowances that relieve 100% of qualifying expenditure in the first year on plant and machinery for use within free port tax sites.
Baroness Kramer (LD)
The Minister may not have the answer to this but I want to repeat the question. As I say, port operators reported to the European Affairs Committee of this House that they had been told by government that they would bear the full costs of putting in place the facilities for the new checks that are required to export to the EU. Within the free ports, people will presumably intend some of that product to be for export to the EU, so they will therefore need to have facilities for these new checks. If the Government do not intend to pick up that tab, will the operators in the free ports do so or will the cost be passed to operators of other ports as a kind of additional cost that will fall on them in order to subsidise the free ports? I am just not clear about that.
Viscount Younger of Leckie (Con)
I was not aware of the first part of the noble Baroness’s question but I will certainly look into that and write to her on the specific issue.
On the report of the Delegated Powers and Regulatory Reform Committee, which was mentioned by a couple of Peers, I repeat what I said earlier on this, which is very important. The Government are carefully considering the recommendations made by the committee and we are taking what it said with the degree of seriousness that it deserves. As I said earlier, we will write to the committee and keep the House informed on progress there.
Lord Tunnicliffe (Lab)
Will that response come in time for us to take account of it as the Bill goes through?
Viscount Younger of Leckie (Con)
I asked about that, so I will say yes; we want to get a response as soon as we can. I do not yet have the dates for Committee but I should press to say that we want to get this as soon as possible, and certainly well before Committee.
I will conclude by talking about a point that was raised by the noble Lord, Lord Bilimoria, about investment in the UK, which is a bigger issue that he raised. There are very many reasons to be positive about the UK economy. We have been talking about free ports and NICs relief, but both the OECD and the IMF are forecasting that the UK will have the highest annual growth in the G7 this year. Decisions this Government have taken have provided around £400 billion of direct support to the economy during this year and last year, and the Bill helps towards that.
I thank all noble Lords for their comments. As the noble Baroness, Lady Kramer, said, this was a short debate but it has been quite intense and extremely helpful. I greatly look forward—
Lord Davies of Brixton (Lab)
Before the Minister concludes, does he have a reply on the salary sacrifice point? I will be happy to take a letter.
Viscount Younger of Leckie (Con)
Absolutely; I will look at Hansard to check on all the questions raised. I suspect that there were one or two that I have not responded to, and I will certainly write as soon as I can to respond to them. With that, I commend the Bill to the House.