National Insurance Contributions Bill

Catherine McKinnell Excerpts

Monday 8th September 2014 Commons Chamber

[Catherine McKinnell (Newcastle upon Tyne North) (Lab)]

Before I begin my remarks, I should probably declare an interest as a member of the all-party parliamentary group on the freelance sector. As such, I am fully aware of the invaluable contribution that genuinely self-employed people, including freelancers, make to the economy. They play an increasingly prominent part in the generation of economic growth and prosperity.

As my hon. Friend the Member for Birmingham, Ladywood (Shabana Mahmood) and the Financial Secretary set out, the main aim of the Bill is to make life a bit easier for self-employed people in respect of the payment of their national insurance contributions. That is more important than ever, given the structural changes in our labour market over the past few years. There are 4.5 million self-employed people, which is more than at any point in the past 40 years, according to the Office for National Statistics. Welcome though the changes are, the Government need to go further in supporting the self-employed because, while we know that the majority of working people are not feeling better off in their pockets, it is becoming increasingly clear that the self-employed have been hit particularly hard by the cost of living crisis of the past few years.

The latest labour force survey figures from the ONS show that more than a third of the new jobs that have been created since the last quarter of the last Parliament—39%—are self-employed jobs. The self-employed make up one in seven people in the work force. The Institute for Public Policy Research recently described the UK as the

“self-employment capital of Western Europe”.

Although the Government like to boast that 2,000 businesses have been set up and have been “flourishing” in every month over the last year, that masks the true effect of the cost of living crisis on many self-employed people. Although self-employed people are included in the employment figures in the ONS labour force survey, they are not included in the pay figures. The Resolution Foundation has concluded that, were the 4.5 million self-employed people included in the labour force survey, average wages could have fallen by a further 20% due to the huge shift towards low-paid self-employment. Whereas the official figures show that working people are, on average, £1,600 a year worse off since 2010 after inflation, Labour’s analysis shows that the self-employed have been hit particularly hard and that their average incomes have fallen by £2,000 a year. According to the Institute for Fiscal Studies,

“the fall in average living standards was caused primarily by sharp falls in gross earnings and self-employment income.”

We know that the Bank of England’s Monetary Policy Committee has a range of views on the extent to which the growth in self-employment has painted a false picture of the strength of the labour market. We also know from a recent survey by the Resolution Foundation that more than a quarter of those who have become self-employed in the past five years—almost half a million people—would rather have salaried jobs.

It is for those reasons that the shadow Secretaries of State for Business, Innovation and Skills and for Work and Pensions have written to Sir Andrew Dilnot, the chairman of the UK Statistics Authority, to ask him to examine whether new measures are needed to take better account of the earnings of self-employed people. The truth is that they are working harder for less and that many of them are struggling to make ends meet. We must ensure that they get the support that they need.

My hon. Friend the Member for Birmingham, Ladywood set out the Opposition’s concerns about the Bill. The first relates to clauses 1 and 2 and schedule 1, which will simplify the payment of national insurance contributions that are currently paid by monthly direct debit or in six-monthly instalments, so that they will be paid under the self-assessment regime at the end of the tax year. Although that simplified process will be welcomed by many self-employed people, there are concerns that shifting all liability for NICs to the end of the tax year, potentially to be paid in one big lump sum, could be difficult for low-paid workers.

The Chartered Institute of Taxation recommended that the option of monthly direct debit is retained, and the Government’s tax information and impact note also anticipates that

“a small number may want to continue to make Class 2 NIC payments through a regular payment option.”

No such option is referenced in the Bill, however, so it would be helpful if the Minister cleared up that point and said whether there is any intention to include such a measure.

There are also implications for self-employed people who receive universal credit—I say receive, but I mean when, or if, universal credit is ever fully rolled out, given the current timetable. Because under universal credit income is reported net of expenses on a monthly basis, as my hon. Friend the Member for Birmingham, Ladywood said, if income falls below a certain threshold in a given month—the minimum income floor—the claimant’s income is treated as being a higher amount, and they therefore lose some of their universal credit entitlement for that month. NICs and income tax will count as such deductions, and in any one month liability may fall on both of those under self-assessment. That could result in universal credit claimants losing out in that month, which could set them back significantly for a longer period. The Low Incomes Tax Reform group has expressed its concerns that that shift could “spell misery” for some self-employed people, and create a system where

“payments will be made much later and could affect entitlements to benefits in the meantime.”

[Ian Swales]

I am following the hon. Lady’s argument with interest and she is making an excellent point. Does she believe that the annual assessment and payment of class 2 NICs will cause a big problem for people on universal credit? How does she think that could be dealt with? Clearly, it is part of their costs and deductions from income, which will not be known when they are claiming and receiving universal credit.

[Catherine McKinnell]

I think the hon. Gentleman very much agrees with the concerns raised by Labour Members, and I hope that the Minister will have some suggestions on how those potential pitfalls can be addressed. If not now, thought should certainly be given to that before the Committee stage to ensure that the most vulnerable self-employed workers, and those on lowest incomes, are not penalised by the change in processing national insurance contributions. We accept that there are clear benefits to reducing red tape and the administrative burden on self-employed people who would benefit from such a measure, but there are those in a more vulnerable position who could be forced into “misery”, as the Chartered Institute of Taxation puts it well.

There is also an increased administrative burden for those who are self-employed as a result of the introduction of universal credit. They will have to draw up two separate accounts—one for HMRC that they report yearly, and one for the DWP that they report monthly. Perhaps Ministers will provide some much-needed clarity about the provisions that they intend to put in place to support low-paid self-employed people, so that they are not disadvantaged by the Bill.

My hon. Friend the Member for Birmingham, Ladywood mentioned the 25,000 self-employed women who claim maternity allowance each year. Currently, class 2 contributions are the means by which a self-employed earner accesses entitlement to contributory benefits, including the standard rate of maternity allowance. In order to receive that, a self-employed woman must have paid 13 weeks’ of class 2 NICs within the previous 66 weeks. That shifting liability for class 2 NICs to an annual payment to cover the previous 12 months’ liability could mean that they fail to satisfy those criteria and are not able to access the standard rate of maternity allowance. HMRC’s consultation document from July 2013 flags those concerns. It states:

“The Government recognises that the proposals have implications for the way eligibility for”

maternity allowance

“is determined for pregnant self-employed women and will be considering how best to ensure the changes have no adverse impact for the small group who might otherwise be affected.”

Despite the promise of that wider review of maternity allowance eligibility for self-employed women, the Government have settled on what has been described as a “wholly impractical” solution, whereby women must pay their class 2 NICs throughout the year of their own accord before they file their self-assessment returns at the end of the year.

The Bill’s aim is to simplify NICs for the self-employed, but the proposed approach is anything but simple. In fact, it places a much greater burden on some 25,000 pregnant women each year who want to access their entitlement to the standard rate of maternity allowance. The Chartered Institute of Taxation has labelled that approach as “impractical”, and has suggested that a review should be carried out after two years to see what impact it has had on the claims of self-employed women for standard rate maternity allowance. Perhaps the Minister could respond to those concerns. Have the Government considered alternative approaches, and why have they settled on what has been described as an impractical approach for those women who could be affected?

My hon. Friend the Member for Birmingham, Ladywood spoke in depth about the anti-avoidance measures in the Bill, which were debated at some length in the Finance Bill Committee. However, I want to make the general point that the Opposition are committed to anti-tax avoidance measures. We believe strongly that everybody should pay their fair share. That is why we support the measures in the Bill, but what reassurances can the Minister provide for hon. Members that HMRC will be sufficiently resourced in order to implement the measures and the safeguards? My hon. Friend mentioned the demographic challenges that HMRC is likely to face in the coming years, and the challenge of the numbers of those available to ensure that the promised safeguards are put in place. Will the Minister provide reassurances on that? I am sure the matter will be debated at some length in Committee.

To conclude, we have only to look at the Government’s past record on tax avoidance to understand why the Opposition seek those reassurances. The Government have got it wrong in some respects, such as on the UK-Swiss tax deal, and have over-egged their tackling of tax avoidance and the tax gap, which the National Audit Office recently said is almost £2 billion lower than it should have been, and that the Government have mis-stated the situation. Ministers must provide reassurance for hon. Members and for those who are interested in the debate that they have learned those lessons, and that we will not experience tax avoidance in relation to measures in this Bill that the Government are similarly unable to deal with.