Social Security (Contributions) (Rates, Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2017

Debate between Lord Young of Cookham and Baroness Wheeler

Thursday 9th March 2017 Grand Committee

[Lord Young of Cookham (Con)]

My Lords, these two Motions relate, first, to the disability elements of tax credits, as well as the guardian’s allowance; and, secondly, to the rates, limits and thresholds that govern national insurance contributions. Many of these changes are made simply to bring rates into line with inflation, as measured by the consumer prices index, which put inflation at 1% in the year to September 2016.

I speak first to the draft regulations for the uprating of disability-related tax credits and the guardian’s allowance. In short, the regulations provide for an increase in line with inflation to the disability elements of tax credits. This means that we are maintaining the value of support for both the disabled children whose parents or carers are in receipt of child tax credits and the disabled workers in receipt of working tax credits. The rise in rates also covers the new element for disabled children who were born on or after 6 April this year, regardless of the two-child limit for claims of child tax credit. The regulations also increase the guardian’s allowance in line with inflation, to sustain the level of support for children whose parents are absent or deceased. The two things I just outlined—the disability elements of tax credits and the guardian’s allowance—are exempt from the benefits freeze. This is so that we can provide support to those who face the additional cost of disability and care.

Let me turn to the other set of draft regulations we are debating: those that make changes to the rates, limits and thresholds for national insurance contributions, and make provision for a Treasury grant to be paid into the national insurance funds if required. These changes will take effect from 6 April this year. Starting with Class 1 national insurance contributions, the level of earnings at which employees start to gain access to contributory benefits, known as the lower earnings limit, will rise in line with inflation. The primary threshold, which is the level at which employees begin to pay Class 1 national insurance at 12%, will also rise with inflation. The upper earnings limit, which is the level at which employees start to pay Class 1 contributions at 2%, is being raised from £827 to £866 a week. This reflects the Government’s commitment to align this limit with the higher rate income tax threshold, which is being raised from £43,000 to £45,000 for the 2017-18 tax year.

As the Chancellor announced at the Autumn Statement, the levels at which employers and employees start to pay Class 1 national insurance are being aligned. To do this, the secondary threshold, where employers start to pay, is being increased from £156 to £157 per week. This will be the same as the primary threshold for employees from 6 April this year, and will make it easier for employers, as they will no longer have to operate two similar thresholds at slightly different rates.

Finally, for the employed, the level at which employers of people under 21 and of apprentices under 25 start to pay employer contributions will keep pace with the upper earnings limit and rise from £827 to £866 per week. This maintains our commitment to reduce the costs of employing young apprentices and young people. This is an above-inflation increase and maintains alignment with the upper earnings limit, meaning that employers pay national insurance only for the highest earning young apprentices and those under 21.

Moving on to the self-employed, the level at which they have to pay class 2 contributions will rise with inflation to £6,025 a year, and the weekly rate of class 2 contributions will also rise in line with inflation to £2.85. Self-employed people who earn above the lower profits limit, currently £8,060, also pay class 4 national insurance contributions at 9%. This threshold will rise with inflation. Above the upper profits limit, the self-employed instead pay 2%. Like the upper earnings limit for the employed, this limit for the self-employed will rise from £43,000 to £45,000 per year.

Finally, for those making voluntary class 3 contributions, the rate will increase in line with inflation from £14.10 to £14.25 a week.

I note that these regulations make provision for a Treasury grant of up to 5% of forecast annual benefit expenditure to be paid into the National Insurance Fund, if needed, during 2017-18. This is a routine measure which does not impact the Government’s overall fiscal position. A similar provision will also be made in respect of the Northern Ireland National Insurance Fund.

I hope that has been a helpful overview of the changes the Government are making to increase rates of support and contributions to the Exchequer in line with inflation. Noble Lords will of course be aware that the Chancellor announced yesterday that the main rate of class 4 national insurance will be increased to 10% in 2018-19 and 11% in 2019-20. This, alongside the abolition of class 2 NICs, is a progressive change to the self-employed NICs system. Over 60% of self-employed people who have to pay national insurance will be better off as a result of these changes. However, the rate of class 4 is not affected by these regulations and there will be an opportunity for noble Lords to discuss this measure in the Budget debate next week. I commend to the Committee the draft regulations on tax credits and the guardian’s allowance, as well as on social security contributions. I beg to move.

[Baroness Wheeler (Lab)]

My Lords, I thank the Minister for introducing these two instruments. The first on the agenda, the Social Security (Contributions) (Rates, Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations, would enact the annual re-rating of national insurance contribution rates, limits and thresholds and allow for the payment of Treasury grant not exceeding 5% of the estimated benefit expenditure for the coming tax year to be paid into the National Insurance Fund. These come into effect in April this year. Given that we are dealing with national insurance contribution rates, I am sure the noble Lord will not be surprised by my first question, to which he has already referred. In view of the surprise announcement in yesterday’s Budget, which is attracting some controversy, is he able to clarify or provide further information on the proposed changes?

The second SI is on tax credits and guardian’s allowance upratings for the increase in working tax credits and child tax credits for individuals who are disabled or severely disabled. It would also increase the weekly rate of the guardian allowance, again with both changes taking effect in April 2017. Since 2011, the inflation measure used to determine the uprating of social security benefits is the CPI. The uprating is based on the change in level of the CPI from September 2015 to September, recorded at 1%.

A rise in support for working families, however small, is welcome, and we have no intention of opposing either of the orders this afternoon. However, although I do not want to rehearse the arguments that will be had during the Budget debate next week, it is important to consider on the record this 1% uprating in context. Inflation is rising, and indeed is expected to increase further still over the course of this Parliament. As the Resolution Foundation has recently reported, the result of that could mean that average earnings in 2020 will be only just higher in real terms than they were 15 years ago and, crucially, we could see a fall in real pay at the end of this calendar year as price increases outstrip pay rises.

The same report from the Resolution Foundation found that the Government’s benefit freeze will raise an extra £1 billion a year by 2020, or £3.6 billion over the Parliament, compared with what was expected in the 2016 Budget. My noble friend Lady Sherlock asked a question about this figure last week in Committee but was unable to get an answer, so I hope the Minister will be able to respond today. Is the figure accurate? If not, will the Minister tell the Committee the value of savings that the Chancellor expects to make?

The Resolution Foundation analysis has been supported by the Institute for Fiscal Studies, which has underlined that the Government’s approach represents,

“a shifting of risk from the Government to benefit recipients”.

The institute has also stressed that this risk is borne by low-income households and that, unless this policy changes, higher inflation will reduce their real incomes.

I have one final question regarding the Treasury grant. In what circumstances do the Government anticipate such a grant would be made; when was a grant of this nature last paid into the National Insurance Fund; and what does 5% represent in real terms? The economic outlook for working people is one of less disposable income. Although we do not oppose these instruments, it is clear from the Government’s overall approach that their priorities are not compatible with a society that truly wants to support the most vulnerable. I look forward to the Minister’s response.

[Lord Young of Cookham]

My Lords, I am grateful to the noble Baroness for her support for these measures. I will try to answer the three or four questions that she put to me, starting with the easiest on the provision of a Treasury grant. The provision in the estimates does not mean that it will be drawn down. Indeed, this year the provision is being made only as a precaution. The 5% provision is equivalent to £5 billion in the case of the GB National Insurance Fund, and £134 million in the case of the Northern Ireland fund. A Treasury grant was last paid into the National Insurance Fund in 2015-16. We do not anticipate a payment being made in the current year because the reserves in the fund seem at the moment to be adequate.

I turn to the question posed by the noble Baroness, Lady Sherlock, about the savings from the uprating freeze. I hope I can provide some helpful information. When we legislated for the four-year uprating freeze in the Welfare Reform and Work Act, we published an impact assessment of those rates included in the four-year uprating freeze. Both Houses debated the clauses and passed the Bill, which received Royal Assent in March last year. At Budget 2016, which was the last fiscal event before the change came into effect, the freeze was expected to save £3.5 billion in 2020-21 to help to deal with the underlying deficit. However, neither the Government nor the OBR has re-costed the freeze. The uprating freeze has already been implemented and is subsumed within the welfare spending forecast. I hope that gives the noble Baroness the information that she asked for.

On the report by the Resolution Foundation and the impact on household incomes and distribution, we considered the impact of the four-year uprating freeze when we announced the policy in the July 2015 Budget. The background was that we found that the majority of working-age benefits and tax credits had grown faster than earnings since 2008. As part of our commitment to make work pay, we introduced the four-year uprating freeze to reverse that trend of benefits rising faster than earnings. We introduced the uprating freeze alongside other measures to support work incentives such as the national living wage, and we exempted elements of benefits and tax credits that related to the additional cost of disability and care, in recognition of the additional costs that these claimants face. Indeed, the regulations today increase those elements of tax credits in line with prices.

With regard to the legitimate question the noble Baroness posed about inequality, income inequality is now lower than it was in 2010 and the share of total income tax paid by the top 1% is 27%. According to the latest data from the Office for National Statistics, income inequality in the UK is at its lowest level since 1986.

Finally, as I have said, there will of course be an opportunity to discuss yesterday’s Budget announcement in the Budget debate and when the necessary legislation comes before the House. I am not sure that I can add to what the Chancellor has said, not just in his Budget but in his many interviews during the day. The background is basically that, at the moment, self-employed people pay less in national insurance contributions than people in employment and, historically, this was because the self-employed received much less in state pension and contributory benefits. Since last year, because of the changes that we have made, self-employed workers now build up the same entitlement to the state pension as employees, which is an £1,800 a year pension boost for the self-employed. At the moment, someone who is employed and earning £32,000 will incur, with their employer, over £6,000 in national insurance contributions, while a self-employed person earning a similar amount will pay £2,300. That is why we needed to address the point of fairness in the national insurance contributions, which fund the NHS and pensions. That is the background which has given the noble Baroness, Lady Wheeler, the ammunition she needs to come back next week with her colleagues in the debate on the Budget. I welcome what she has said about these regulations and I beg to move.

Legislative Reform (Private Fund Limited Partnerships) Order 2017

Debate between Lord Young of Cookham and Baroness Wheeler

Thursday 9th March 2017 Grand Committee

[Lord Young of Cookham (Con)]

My Lords, the venture capital and private equity industries are important parts of the UK financial services cluster, and the limited partnership structure provided by the Limited Partnerships Act 1907 is a popular vehicle for establishing investment funds in these industries. Currently, approximately 250 fund managers operate some 780 venture capital and private equity schemes in the UK under this structure. This equates to around £142 billion in assets under management, and 20 to 30 new schemes are launched each year. These businesses are important contributors to the UK economy, providing high-wage direct employment and indirect employment through the use of professional services firms, as well as contributing tax take to the Exchequer. The venture capital and private equity industries play an important role in providing funding to start-ups and small businesses and in improving the UK’s productivity.

In 2013, the Government launched their investment management strategy—their comprehensive strategy to make the UK one of the best places globally for asset managers to do business. As part of the investment management strategy, the Government committed to consulting on amendments to the Limited Partnerships Act. While limited partnerships are a popular vehicle for private equity and venture capital schemes, the legislation was not originally drafted with its use primarily as an investment vehicle in mind. Rather, it was originally drawn up to apply to trading entities. The result is that some provisions in the Act are not suitable for the needs of investment funds.

The investment management strategy came at a time when the competing jurisdiction of Luxembourg was updating its own limited partnership regime. Further to this, since 2013, France and Cyprus have also introduced structures to compete with the UK regime. With the UK’s imminent withdrawal from the EU, there is even more pressure to maintain our status as a leading global financial services hub. Therefore, it is timely and urgent that the UK looks to update its structures for the private funds sector.

The Government propose by way of this order to create a new category of limited partnership, the private fund limited partnership, which will differ from the existing structure in areas that currently create unnecessary administrative burden and legal uncertainty for partners. The existing 1890 and 1907 partnership Acts were originally designed to apply to trading businesses rather than investment funds. When an investment fund is established as a partnership, extensive legal work is necessary, using powers of variation under the legislation, to clarify the respective roles of: the general partners, who are in practice the fund management entities who have wide powers to manage the affairs of a partnership but face unlimited liability in respect of its activities; and limited partners, in practice the investors who have no general powers of management over the affairs of the partnership but have limited liability in respect of its activities, up to an amount specified in the partnership agreement.

The proposed order will introduce a list of activities that limited partners are permitted to carry out without taking part in management, to increase legal clarity for partners on the current state of the law. It will also make some other minor changes to the Act to remove unnecessary administrative burdens for private funds structured as partnerships.

Limited partners in a private fund limited partnership vehicle will not be required to contribute paid-in capital to the partnership. This will make the administration of investments simpler. All capital requirements set out in Financial Conduct Authority regulations will continue to apply. Statutory duties which are inappropriate to the role of a passive investor will be disapplied in a private fund limited partnership. These statutory duties are already generally disapplied through the partnership agreement. The partnership will not be required to advertise changes in the London Gazette, Edinburgh Gazette or Belfast Gazette, with the exception of the requirement to advertise when a general partner becomes a limited partner. Limited partners will be able to make a decision about whether to wind up the partnership where there are no general partners, and to nominate a third party to wind up the partnership on their behalf.

These reforms will reduce administrative and legal costs associated with the establishment of a fund. The updated structure will increase investor confidence in the UK as a jurisdiction for fund domicile. This order will reduce the burden for businesses and make the UK a more attractive jurisdiction for funds. I beg to move.

[Baroness Wheeler (Lab)]

My Lords, I thank the Minister for introducing this order. As he has outlined, this instrument would enable a limited partnership which is an investment firm to be designated as a private fund limited partnership. It also amends some of the provisions of the Limited Partnerships Act 1907 as they apply to PFLPs and to partners in PFLPs. This change has been in the pipeline for over a decade, since the Law Commission and the Scottish Law Commission published proposals in 2003. In 2008, the then Labour Government published a consultation on limited partnerships. However, in response to the stakeholder responses, the decision was taken that it was not possible to continue with those reforms.

We will not be opposing this order. However, I wish to put a number of questions to the Minister, and perhaps the most sensible place to start is with the Labour Government’s objections. The consultation response in 2009 stated that concerns were raised about particular issues in Scotland, as well as how the order was drafted. I appreciate that the order has undergone revision since then, but have stakeholders raised objections on the instrument in front of us today? Furthermore, has the draft been altered to reflect the concerns raised by funds with client interests in Scotland?

One of the changes made following the latest consultation was the removal of the strike-off procedure. The original proposal would have removed dissolved PFLPs from the partnership register. However, concerns were raised that limited partners would lose their limited liability status. We therefore now have a two-tier system for limited partnerships and PFLPs. What consideration was given to delaying introduction of this instrument until all the cracks surrounding the strike-off procedure are ironed out? The explanatory document promises that the Government will look into further steps that could be taken in relation to this issue “in due course”. Can the Minister say what further steps are being taken and when we can expect to be informed about them? There have been strong concerns raised about the burden that this two-tier system will create.

The Government’s stated aim is to,

“reduce the administrative and financial burdens that impact these funds under the current limited partnership structure”.

However, as the BLP law firm identifies, there is a chance that the reduction in the compliance and administrative burden under the new PFLP regime may be short-lived and may well be replaced by other initiatives to increase accountability for limited partnerships more generally. What measures are included in the instrument to ensure that the Government’s stated aim is achieved?

The introduction of a white list brings with it much- needed clarity on the activities of a limited partner, but there is real concern around whether the Government have achieved the right balance in the role of limited partners in the new PFLPs. The proposed changes allow a limited partner to take part in the committee and to vote on proposals by the general partner, while at the same time maintaining limited liability status. Do not the Government consider that this is an inappropriate power for a limited partner? I would certainly be interested to hear what criteria the Government have used to determine the content of the white list. Getting the balance right is vital, so do they intend to conduct a review of the white list and, if so, to what timescale?

Page 8 of the explanatory document—which I found very helpful as someone coming new to this issue—makes a forceful defence for the reforms, stating that:

“Without such changes to current legislation, the UK risks becoming a less attractive domicile for funds when compared to other jurisdictions”.


That is a strong claim, but I could not see any evidence in the document to support that contention, so I would be grateful if the Minister would address that issue. I would certainly be keen to hear his explanation of the role that PFLPs will be playing in making this a more “attractive domicile”.

Finally, I have two minor technical points. First, the impact assessment states on page 2 that 600 private equity and venture capital fund managers will be affected by this change. However, it states on page 8 that as many as 1,030 could be affected. Which of these figures is correct and what percentage of the current limited partnership landscape does that represent? Secondly, what discussions have the Government had with Companies House, which will be responsible for processing applications by firms wishing to become PFLPs, about the changes being made? Has it requested additional resources to deal with the increased administration costs of these charges? I look forward to the Minister’s response.

[Lord Young of Cookham]

My Lords, I am grateful to the noble Baroness for the welcome. To deal first with the typing error on page 2, it should read 250 fund managers, not 600. As I said in my opening remarks, we estimate that there are 250 fund managers managing 780 funds. I shall address some of the other issues that she raised. If I do not cover them all—some of them were quite technical—perhaps I may write to her to fill in the gaps.

She mentioned the concerns of stakeholders and Scottish funds. She is quite right: a range of stakeholders raised concerns which the Government listened to, and we amended the order in several areas in response to their feedback. We took into account the views of Scottish stakeholders, including the Law Society of Scotland, while developing the order. On the broader concern expressed about Scottish limited partnerships being used for fraud, the Government have listened to stakeholders’ concerns and the Department for Business, Energy and Industrial Strategy recently launched a call for evidence on the issue, covering all forms of limited partnerships, including these. The Government are committed to implementing any consequent reforms in respect of private fund limited partnerships, as well as other partnerships.

The noble Baroness asks why we did not postpone the order until we had the results of that survey. Strike-off procedure is an issue for wider limited partnership policy, and any process for removing partnerships from the register would need to apply to both private fund limited partnerships and other forms of partnerships. BEIS recently launched a call for evidence looking at the possibility of limited partnerships being used for criminal activity—a subject I mentioned a moment ago. The call for evidence closes on Friday 17 March, and BEIS will consider what further action is necessary. In answer to her direct question—why did we not wait?—the Government’s view was that it was important to press ahead with this package of amendments now because competing jurisdictions are acting quickly. Luxembourg updated legislation in 2013; France and Cyprus are introducing measures now; and UK withdrawal from the EU makes this reform timely. That is why we decided to go ahead now.