Employment Allowance (Increase of Maximum Amount) Regulations 2020

Lord German Excerpts

Tuesday 5th May 2020 Lords Chamber

[Lord German (LD)]

My Lords, I welcome the rise in the employment allowance from £3,000 to £4,000 because it will help many companies and charities, particularly at this difficult time. However, a number of issues stem from this change of policy that are worthy of examination in more detail, because they might have a negative consequence.

For the first time, as the Minister said, this allowance is being targeted. While there will be more for those within the scheme, there will obviously be less for the larger companies and charities that will no longer be eligible for the allowance for the first time and now fall outside the scheme. I would therefore be grateful if the Minister could confirm what the net financial effect of this change will be on the Exchequer. What is the impact, for example, of increasing the allowance this financial year by £445 million measured against the total of the allowances provided in the last financial year? The 2018 Red Book said that restricting the number of companies and charities eligible for the allowance would save the Exchequer £225 million in this financial year. Set against that, is the net effect of the change £220 million?

My second point relates to state aid. If I have understood it correctly, this allowance now falls within the ambit of state aid because the allowance is now a targeted rather than universal allowance. As a consequence, the restrictions on state aid come about because the allowance is largely targeted at certain groups of companies—those that make a national insurance contribution of less than £100,000 per year. This change has resulted in what might be described as some unforeseen circumstances. For example, companies within the scope of the allowance and in receipt of state funding for other reasons might find themselves affected. If a company exceeds the de minimis threshold of government funding, they breach European Union state aid rules—rules that we must stick to until at least the end of the transition period and probably well beyond. I will return to the future application of state aid in the UK shortly, but I will first explore the potential for companies and even charities to exceed the de minimis, although charities are of course excluded.

State aid rules determine that companies in the agriculture sector must not receive in excess of €20,000 of UK government aid. In the fisheries and aquaculture sector, that figure rises to €30,000, in the road transport sector to €100,000, and in the cover-all industrial sector, which covers virtually every other company, to €200,000. These ceilings are a cumulative total over a three-year period. Just for accuracy, I understand that the Government have now indicated an exchange rate figure of £1 equalling €1.1249 for the purpose of working out the ceiling figure. I hope that the Minister can confirm that exchange rate. That exchange rate would mean that companies could not receive the employment allowance if they had received government assistance amounting to £17,780 in the agriculture sector, or £177,794 in the industrial sector, over a three-year period.

Two matters arise from this. The first matter is the administrative burden on checking the amount of aid received and whether there is headroom for adding in the £12,000 employment allowance, which would be the maximum over a three-year period. The requirement to quantify amounts of state aid received could be difficult to achieve in practice, as where state aid arises in the form of a tax relief, it may not be as simple as identifying a gross figure which occurs in your accounting records or tax returns. Added to that is that those who are responsible for submitting the claims for the employment allowance may not be familiar with state aid rules and how they apply. In addition, the Government now require annual claims to be made for the employment allowance; relief will no longer be carried forward from one tax year to the next, as has been the case to date. Does the Minister recognise that this new burden poses some problems for companies? There is a danger, for example, that some companies might not bother to apply, given the level of paperwork that they will have to go into. I am sure that they would welcome some reassurance from the Minister on this.

The second matter I am very concerned about is state aid. Will the current support for businesses that are receiving it during this pandemic count towards the cumulative total for state aid? Apart from the grants to small businesses which we are seeing at the present moment, I am particularly interested in the payments that companies receive for furloughing staff. If these are to be counted, that could severely affect a small company’s ability to claim the employment allowance. For example, four workers on the minimum wage in an agricultural sector company who are now furloughed for two months could certainly tip the company over the ceiling level, or up to it, which would then rule that company out of seeking the employment allowance for three years. Similarly, a company in the severely affected hospitality sector that is furloughing most, or all, of its workers could also be affected. Add to this any other grant aid received because of the pandemic, and there is real potential for the ceiling to be approached or breached.

Since the employment allowance was created to stimulate employment, and given the Chancellor’s statement that he does not want to see a cliff edge or a surge in unemployment as furloughing comes to an end, I would be grateful for the Minister’s clarification on whether financial support during this pandemic counts towards the state aid ceiling, and, if so, what modelling the Government have done of the numbers of companies which would now reach that ceiling.

Finally, can the Minister confirm the Government’s intentions on the future of state aid? In August 2018, the Government said that, in the event of a no-deal Brexit, they would mirror EU state aid rules. Is that still the case? I have no doubt that this will feature in any deal to be done with the European Union, and indeed the matter of state aid within the United Kingdom is still to be resolved; as I understand it, that role is being passed to the Competition and Markets Authority. Whether we have a deal with the European Union or not, I think that state aid rules will still feature, and will probably mirror EU state aid rules. I would be grateful for the Minister’s comments on that matter.

Like many other noble Lords, I am anxious that the potential obstacles and hurdles I have outlined do not detract from the ambition of this policy, which is to promote jobs and job security. The employment allowance is very important at this very difficult time for companies. A fully functional employment allowance is one of the tools which can make the difference between an employee being let go at the end of this furloughing period or retained. This Government will have to do all they can to prevent that happening and to ensure that support is only gradually withdrawn as the financial health of companies improves. If it is withdrawn very suddenly, companies will certainly be looking at lay-offs rather than retention. I am sure the Minister will agree with me that the employment allowance and other support will be needed more than ever before, as this crisis comes to an end.