National Insurance Contributions (Secondary Class 1 Contributions) Bill

Lord Mackinlay of Richborough Excerpts

2nd reading
Monday 6th January 2025 Lords Chamber

[Lord Mackinlay of Richborough (Con)]

My Lords, I refer the House to my registered interests. I am an employer. I admire the noble Lord, Lord Livermore, for his patience and stamina at these debates on tax matters—and I think that there will be many more.

I am fearful that the Government are heading us down what I would call the Corinth Canal conundrum. One might wonder how I can bring that marvellous wonder of the world and national insurance into a debate. In the early 1990s, I had the great pleasure of taking a small pleasure craft through the Corinth Canal—just 3.9 miles long. I was rather surprised when I got to the other end to find that it was £92 for a boat that was about 30 feet long. I asked the lock keeper at the other end how on earth it could be £92 for such a small pleasure craft, and he said, “Ah, because nobody is using this Corinth Canal very much these days, we keep putting the price up—and, funnily enough, fewer and fewer people use it, so we then put the price up again”. I fear that this is exactly what this Labour Government will be doing over the years ahead. They have had a very large Budget proposal of £40 billion, but it will not be enough, because in so doing they have shattered and damaged the economy. We have seen that in figures in terms of growth—or, should I say, the start of recession—and there is more of that ahead.

Manifestos matter. Why do they matter? They matter because at election time they are the bond that an incoming Government try to form with the electorate. There used to be an old saying that words are my bond. That seems to be long gone. I am sure that the Labour manifesto has been quoted this afternoon. It said:

“Labour will not increase taxes on working people, which is why we will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT”.


That sounds quite clear to me, and I am sure that the electorate were fairly clear that tax proposals would not affect them. For this Government to be wordsmithing now, at best, and saying, “Employers’ national insurance does not count—that is something rather different”, does not convince me. But you do not need to try to convince me—you need to try to convince the electorate that something else is being proposed. I suppose that we should not be at all surprised, when we heard the then shadow Secretary of State for Defra saying that there were no proposals for changing agricultural property relief—and here we are, to the dismay of the farming community and, under BPR changes, to the dismay of the business community.

What this has shown, more than anything else, is that this Cabinet has never run a business before. It thinks that tax simply comes out of thin air, nobody is affected and we can take £40 billion out of the economy with no problem at all. I shall give an example of what this measure will really mean to, say, the mythical shopkeeper, who perhaps earns just shy of £40,000 per year. That shopkeeper has an expectation to earn that type of money. This Government are going to hit them in two ways—on the employees that they have, particularly the lowest paid of their employees, starting at £5,000, where an increased tax will be suffered. Beyond that, their business rate relief will be reduced.

So what will the earnings of that shopkeeper go down to in the face of these two taxes? Will it be to £30,000, or perhaps even less? They have a choice—they can get rid of an employee, perhaps, so we will see a rise in unemployment. They can perhaps think, “Well, that pay rise I was thinking about for the year ahead, I just can’t afford to do that any more”. What is the next thing that that shopkeeper or small business owner may do? They will reach for putting prices up. So, uniquely, this measure will depress wages while increasing inflation. Very few measures that you can come up with are that bad, yet this Government have managed to do so.

National insurance has a long history. It goes back to 1911. In those days, it was considered to be a properly hypothecated type of levy on employment: a levy so that, if you were made unemployed, you had some sort of support. I suppose that, as the NHS was created, after the war, there was also an expectation that your national insurance was somehow a proper insurance that paid for such things. I have to say that that old hypothecation has long gone. The only two remnants I can think of that exist now are the added years towards your state pension—you need 35 years of NI record to receive a full state pension and you have to have 10 years, as a minimum, to get any at all. The benefits, I suppose, would be paternity and maternity benefits, which are still framed within a work environment that your NICs have paid for. Beyond that, it has become just A N Other tax, just part of the tax pool. To call it anything else is, I think, disingenuous.

Something a little similar came to us when I was at the other end of this Palace. In 2021, under Boris Johnson’s Administration, there was the health and care levy. Proposed as a national insurance measure, it was actually rather more widespread in its effects, in some ways, than this, because it would have hit class 4 national insurance for the self-employed, proper employees’ national insurance and employers’ national insurance. It was an all-encompassing national insurance rise. To that Administration’s credit, they were at least looking at how to solve the social care problem. This new Government, having had 14 years on the opposition Benches to think about such things, have simply batted this off until 2028 or 2029 with yet another consultation. We seem to be having a consultation most weeks of this Administration so far.

There was a big discussion in the other House at the time, which I took part in, in opposition to the national insurance rise, and that was for a few reasons. The first was that it was not in our manifesto. To me, the commitment that we made to our electorate, that I made to my electorate then in South Thanet, was an important one. It was not in the manifesto, so I was minded not to support it. I understand that things change, and things changed rapidly during and after the Covid period. I get that, but this was not in the manifesto.

Generally, I feel that we should tax things that are bad, and we do a lot of that in this country. We tend to tax alcohol and tobacco—excessively, some might say—because we are trying to reduce their consumption. That is what taxes generally do: they make us do less of those things because, frankly, we have not got enough money in our pocket to spend on them. We all generally accept that taxing alcohol and tobacco, perhaps excessively, is a good thing. But should we then think that jobs are similarly bad? That went through my mind in the other place: I would not support this because I was not prepared to accept an additional tax on good things, and jobs and employment are good things.

I served on the Public Accounts Committee for two years. We had the full muscle of the National Audit Office at our fingertips and there was an independent OBR. I say to the noble Lord, Lord Livermore, that I find it all a little bit last year, all a bit 2024, to be re-raising the fiscal black hole of £22 billion. I know very few countries around this planet that have such a transparent Government, with an independent OBR, a fully fledged Public Accounts Committee that is chaired by the Opposition and the full ambit of a very big institution, the National Audit Office, at their fingertips, publishing reports regularly for all to see.

One of the discussions we regularly had, with HMRC in the room, was about the tax gap. The tax gap is very interesting and I am sure that the noble Lord, Lord Macpherson, is well aware of it. The last HMRC report stated that the tax gap was now £36.7 billion. It is in the realms, strangely enough, of what the Budget was trying to raise, and certainly higher than these NIC proposals. I will give the House the following example, which we see on every high street in this country. Among the businesses we all face, there has been a massive proliferation of barber shops and we are all familiar with hand car washes. Most of us in this place take our car to them from time to time. We have restaurants and takeaways—any number of cash businesses. There are four potential frauds going on in those cash businesses. First, the cash is not rung up: no VAT. Secondly, that cash, not rung up, does not form the trading profits for income tax or corporation tax. Thirdly, that cash is possibly used to make up the salaries, in cash, of various employees, so there are no PAYE deductions and no employers’ or employees’ national insurance. I can but imagine what increasing that rate still further is going to do to those types of businesses, which may be tempted to do such things.

The fourth fraud is of course the depressed wages that are recorded, if they are recorded at all, on monthly returns to HMRC by the employer and will then be the basis on which universal credit or tax credits are paid out to those seemingly low-paid employees. So, there are lots of places we can look for the tax gap.

My worry, which was raised by noble friend Lord Jackson, is that the status of employees is a very grey area. We have full employment and self-employment and we now have the rather widening gig economy. HMRC does not always get it right. It loses plenty of status cases in the courts. There are status tools available for employers to use, but every employment is slightly different. My worry is that tax-compliant big organisations will be tempted to say to their service providers, “Ah, let us consider you to be self-employed, because we are in a grey area”. So, instead of 15% employers’ national insurance deducted and handed over to HMRC, there will be none. Given the extent of the tax gap and my experience on the Public Accounts Committee, HMRC does not have the resources to look into every nook and cranny.

So that is my main concern: we have a tax code that is becoming more complex and rates that are becoming excessive, and that will mean that behaviour will go against tax collection. But then, this Cabinet has never run a business, so I am not surprised that it has reached for this, the worst of the tax levers.