Lord Sassoon
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National Insurance Contributions Bill
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Lord Davies of Oldham
My Lords, presumably the Minister hopes that the Committee stage of this Bill will not be as protracted as another Bill that has been before the House over the past few weeks, and I think that I can give him that assurance. However, we want to debate whether Clause 1 should stand part for the obvious reason that this is by far the most significant clause in what is an important Bill.
As the Minister will appreciate, we support the increase in national insurance contributions but our proposals were very different. He must recognise that, during the course of the detailed discussion on the clauses of the Bill that we will have this afternoon, we will identify some of those points of difference. We hope that he will be in a position to answer some of the questions that were adumbrated in general terms at Second Reading and will be dealt with in rather more detail today.
To put the Bill in context, there is a difference in perspective between the Government’s strategy and the one that my party would pursue. The Minister and the Committee will recognise that last year there were three consecutive quarters of growth followed by a quarter of negative growth, which looked marginal when the first set of figures came out but rather more serious following the subsequent revision. We are concerned about the impact of the Bill and of the Government’s general strategy on the broader economy.
We would put jobs and growth first. That is why we are concerned that the increase in national insurance contributions will prove to be difficult for growth and particularly for the protection of employment, given that the increase in NICs is being supplemented by a very significant increase in VAT. Expert opinion identifies that the increase in VAT could result in the loss of three times as many jobs as might be lost by anything to do with national insurance increases, which were the subject of considerable debate at the last general election.
We are concerned that there is no protection for those earning less than £20,000 per year. We would have sought that protection by raising the primary threshold. The Government are imposing increases without fully increasing the secondary threshold for employers. That presents obvious difficulties. Can the Minister confirm that employers will suffer nearly £1.5 billion extra in terms of commitment of resources as against rather modest savings on the secondary threshold? The Minister will say that the secondary threshold is not meant to compensate for the impact on employers because personal tax allowances will help to some degree. The trouble with that argument, which the Minister vouchsafed to the House at Second Reading, is that it takes no account of the balance on personal tax allowances, namely the very severe benefits cuts and loss of income to many of the less well-off in our society. That is why the Bill needs to be put in that broader context.
We are concerned that the Bill is being promoted against a background of government policies that threaten the recovery. We had some indication of the difficulties just before Christmas. That coincided with adverse weather conditions, which was the reason given by the Chancellor of the Exchequer at the time and looks pretty threadbare now. One cause of anxiety about the recovery is the cuts in public expenditure, which will lead to significant job losses and a severe loss in confidence among employers and consumers. The Government propose—something that they criticised the previous Administration for—to increase national insurance contributions, but they have also increased VAT and have other strategies on the economy that are the source of great anxiety.
We look at the Bill in the context of the importance of growth in the economy and strengthening employment. Declining employment, when people lose their jobs, reduces demand severely in the economy and does enormous damage to the Government’s receipts from their various forms of revenue gathering. That is why we shall be using this Committee session for detailed examination of the Bill. However, we wanted to make this series of comments on whether Clause 1 should stand part because of its significance in the Government’s wider economic strategy, on which this side has very serious doubts. I hope that the Minister will be able to give some response. I beg to move.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, I am grateful to the noble Lord, Lord Davies of Oldham, for confirming that the Committee might move more expeditiously through this Bill than some other recent Bills.
I think that the noble Lord said that I would understand why he opposes Clause 1 standing part of the Bill, but I could not quite work it out and I am even more confused now that he says that the Opposition support the 1 percentage point increase, which is the import of Clause 1. However, I guess that I will eventually get used to the way that the House operates on these things. If the purpose of this discussion is to put the Bill into a bit of context, I am certainly very happy to do that.
The Government face the twin challenges of dealing with the inherited deficit and getting the economy growing again. In this wider context, the Bill goes to the heart of those challenges. I have repeatedly said that the recovery is likely to be choppy, and so it is proving. It is not easy to stimulate growth while bringing the deficit under control. The case of national insurance exemplifies the dilemma and the challenge. The 1 per cent increase in national insurance produces revenue of the order of £9 billion to £10 billion, which is necessary to deal with the deficit. Although we will put 70 to 80 per cent of the weight of deficit reduction on spending, nevertheless increases in taxation will bear part of the burden. Therefore, we start by accepting some of the changes that the previous Government proposed. We do not know what they had in mind on VAT. There were strong indications from Ministers in the previous Government that had they been returned to office they might well have increased VAT.
In the context of national insurance increases, offsetting measures that go hand in hand with the Bill—although they are not in the Bill—will increase the secondary threshold by £21 a week and the primary threshold and the lower profits limit by £24 a week. This will significantly offset the rises in the Bill. The increase in income tax personal allowances and the reductions in the basic rate limit and in the national insurance upper earnings and profits limit will, as a combined package, go a substantial way towards offseting the effect of the national insurance rises. Compared with the plans that we inherited, employers will be more than £3 billion better off next year, and that figure will rise in future years. As I said, we are fully compensating for the £9 billion increase in labour taxation that the rate rise represents.
The threshold rises will mean that the burden that the Government add to labour costs will lessen, and there will be more to share between employers and employees so that both will benefit. As a result of the way in which we are doing this, some of the benefit will be switched from national insurance contributions to income tax, so the net rise in national insurance contributions payments will be compensated for by a larger fall in income tax payments. Employers will be better off in respect of employees earning up to £20,000, while employers who have staff among the highest earners will pay more in national insurance contributions.
We are agreed that the 1 percentage point increase is appropriate. Where we diverge from the analysis of the noble Lord, Lord Davies, is in seeing the proposed increase as a significant tax on jobs at a time when the recovery needs to be encouraged and bolstered. That is why we have made the offsetting increases in limits, and the increase in the income tax personal allowance. I am grateful to the noble Lord for enabling us to start our discussion by putting the Bill in a wider context, because that is important. Having explored the issue, I hope that we will now move on to the detailed points that he intends to raise.
Lord McKenzie of Luton
My Lords, I shall speak also to Amendment 2. Amendment 1 seeks to probe why 50 per cent, rather than, say, 75 per cent, of the product of the additional primary rate and additional class 4 percentage rate form part of the health service allocation. Amendment 2 poses the same question for a 100 per cent—the existing percentage—allocation.
The main features of the contribution system are helpfully set out in appendix 2 of the Government Actuary’s Department report on the Social Security Benefits Uprating Order 2011. For the NHS allocation it sets out, as partly provided for in the Bill, the rates of 2.05 per cent of earnings between the primary threshold and the upper earnings limit and 1 per cent of earnings above the UEL. From April 2011, the UEL, as we have just heard from the Minister, has reduced and the primary threshold has increased. That would appear to mean that for any given level of earnings, the 2.05 per cent of the allocation will be lower because the band is narrower, and the 1 per cent will be greater because the starting point is lower. However, overall, with constant earnings, this part of the NHS allocation would appear to be reduced. Similarly, the constant 1.9 per cent NHS allocation from employer contributions would appear to be less because it starts from a higher secondary threshold. The same issue arises in respect of class 4 contributions.
Given that GAD assumes the number of jobs to be the same next year as this year, with earnings increasing by just 2.1 per cent, what estimates have been made of the overall NHS allocation? Will the Minister let us know the estimated figure for the current year and how this would change if the percentage of the additional rates applied was variously 75 per cent and 100 per cent? These issues are important in seeking to understand the projected outcome on the National Insurance Fund in the context of the funding that has been allocated to the NHS. On this matter, in responding to the Second Reading debate, the Minister said:
“I hope it is completely clear to noble Lords that nothing in the Bill affects in any way the commitment to increase NHS spending in real terms in each year of this Parliament. We can afford to do this without additional funding from national insurance contributions”.—[Official Report, 2/2/11; col. 1429.]
Anyone who followed the debate in another place, which I will not replicate today because there will be other opportunities, will understand why the Government are effectively failing in this pledge; I refer to the switch in funding to cover social care budget shortfalls, the consequences of the VAT increase on the NHS given the inflation in the costs of treatment, and the costs of the reorganisation.
Perhaps the Minister will tell us, if the Government are to struggle to reach their NHS spending commitment, where the money will come from if the moneys allocated from the National Insurance Fund are not to be used. Will he also let us know how the additional moneys retained in the National Insurance Fund and not allocated to the NHS have contributed to its balance, which is projected now to be £53 billion by 2015-16? Clearly, if the NHS allocations were greater, the balance of the fund would be less and the investment income less—but what would the other ramifications be? We probe with these amendments. I beg to move.
Lord Sassoon
My Lords, I hope that I did not give too much encouragement with my remarks on Clause 1 to indicate that I would be in too accommodating a mode this afternoon. As regards the two amendments, I find this split of the proceeds between different allocated funds rather confusing and arcane. The relevant questions are the big picture ones asked by the noble Lord, Lord McKenzie of Luton, about the impact, if any, on NHS funding.
The point is that although for government accounting purposes—which are important—the moneys need to be allocated, the allocation does not and will not have any impact on NHS funding. It is absolutely not part of government policy to cut NHS funding automatically if, for example, global conditions lead to a reduction in national insurance contribution receipts. The Government would simply make up any shortfall from lower than expected national insurance contributions from other sources.
Even though the noble Lord questions it, the overriding commitment is the one that has been given on National Health Service spending. The amendments do not have any bearing on how much the NHS will have to spend because if the money does not come out of one fund it will come out of other sources of general government expenditure. We are maintaining the level of national insurance contributions allocated to the NHS and taking the additional revenues from rate rises to the National Insurance Fund. That is what is happening here although, as I have said, it will not have any impact on the NHS but merely maintain the previous level of funding. However, putting the additional revenue into the National Insurance Fund will help to ensure that plans for the payment of pensions and other contributory benefits will be sustainable in the long term. Through that funding we can protect pensioners by the new triple lock that guarantees a rise in the basic state pension every year in line with earnings, prices or by 2.5 per cent, whichever is the greater. In ordinary circumstances we would expect contributions to rise broadly in line with earnings, and therefore to rise in real terms.
Under the Government’s proposals, we expect allocations to the NHS to rise in real terms in a typical year. I do not have the breakdown of the split under different percentages. I could get my calculator and work it out but the main point, as I have tried to explain, is that the split itself is not relevant. We are maintaining the allocation and ensuring that the National Insurance Fund continues to grow, and National Health Service expenditure is protected by the commitments that the Government have given in their broader expenditure plans. I hope that I have adequately explained what is going on and that noble Lords will withdraw the amendment.
Lord McKenzie of Luton
My Lords, I thank the Minister for his reply. Of course we will withdraw the amendment; as he knows, that is the practice in the Moses Room. I understand the broad thrust of his point about funding for the NHS, but we shall have to agree to differ on the Government’s performance in that regard. We shall have the opportunity to debate that fully on other occasions.
The Minister said that in the event of a shortfall in contributions, the Government would make up the difference. One point that I was probing concerned the respective levels of the NHS allocation for the current year and for the year we are about to enter. I accept that the Government are preserving the 1 per cent and 2.5 per cent rates. However, the bands on which they are operating are changing; the bands for next year will mean that the UEL is reducing and the primary threshold is increasing. All other things being equal, if there were constant earnings between the two years, you would expect a lower contribution to the NHS allocation than was the case before the changes were introduced. With great respect, I do not think that the Minister has fully responded to that point—but it looks as if he may be about to do so.
Lord Sassoon
I apologise for not responding earlier, but I see that the noble Lord has the Government Actuary’s report, from which the Committee can see that the NHS allocation for 2010-11 will be about £20.5 billion, and pretty much the same for 2011-12. The figures in appendix 6, towards the bottom of page 25 of the GAD report, show that the expectation is £20,608,000,000 for 2010-11 and £20,437,000,000 for 2011-12. That is after the bands change; the amount is very close.
Lord McKenzie of Luton
I had not reached that appendix, so I thank the Minister for those figures. I accept that they are very close. Nevertheless, there is a reduction year on year. Had more than 50 per cent been allocated, the outcome would have been different. It is not just a matter of comparing one year with the next. Dealing with the rates is one thing, but if the bands are changed there will be consequential effects in subsequent years as well.
I will press another point that I raised concerning the impact on the balance of the National Insurance Fund. The actuary’s report shows an increase to some £53 billion over the years to 2014-15. The effect of not allocating more to the NHS is to build up that balance, which will also have implications for the investment in the fund. If more were allocated to the NHS, what would be the effect, other than reducing that balance and changing the investment income?
Lord Sassoon
My Lords, clearly, if there was more in the fund, a greater part of NHS expenditure could come via that route, but I am not clear that there would be any significant consequence in terms of the outcomes we are talking about. NHS expenditure will be determined by the allocation that has been given in the spending review. The noble Lord may quibble about the nature of the numbers and what is covered by them, but they are set out with great clarity in the review. For this purpose we are talking about some relatively simple arithmetic in terms of what would happen if there were to be any shortfall. If there is a surplus, funds that do not go to the NHS go to the National Insurance Fund; that is what has led to the considerable current balance. We are talking about a process where a fund has accumulated over the long term and we need that surplus, although it is predicted to fall, in order to fund future pensions.
In summary, one way of looking at it is that in the short term a high balance will help to tackle a deficit. Indeed, as the noble Lord heard from his officials in the past, and as has been explained to me, that balance is invested with the Commissioners for the Reduction of the National Debt.
Lord McKenzie of Luton
I am grateful to the Minister and beg leave to withdraw the amendment.
Baroness Kramer
My Lords, I apologise if my newness to the institution shows in my bobbing up at the wrong time. I wish to make a couple of small comments on the amendments in this group, although my comments are less about the detail and more, in a sense, about questioning the underlying principle.
For all of us, the notion that new business can be stimulated to be a fountain of growth and of new jobs is obviously highly desirable, so an effective take-up of the programme would, I suspect, be met with pleasure on every side of the House. However, given the potential for a review period as we move through the Bill, might it not be good to keep in the back of one’s mind that even new jobs that come from existing businesses can be valuable, even if the take-up does not reach the targets of the initial programme? It strikes me that that would not be a failure, given that economies are volatile and take-up can take time but that jobs are beneficial even if they originate from business that is already under way. It might be important to ensure that this whole category of issues is critical in any review that might come one year after the initiation of the programme so that the Government can consider whether they would be wise to expand the categories in order to achieve the underlying intention of the Bill.
Lord Sassoon
My Lord, those two interventions go to the heart of why it is necessary to strike a difficult balance—this is where judgments have to be made—between, on the one hand, providing some tight and suitable anti-avoidance provisions and, on the other, ensuring that we do not make it excessively difficult for people to take up the holiday in the Bill. Of course we need to ensure that the scheme is affordable. That is why it has been targeted at new businesses, with a cap on the number of employees. Yes, we want to stimulate and encourage employment right across the areas of economic activity, but to do so through an across-the-board national insurance holiday would be extraordinarily costly. That is why we have come up with a scheme that is targeted in this way. On the other hand, as has been pointed out, we need to have appropriate anti-avoidance provisions.
When I first saw the amendments in this group, I had considerable sympathy with Amendment 3, which seems to be aimed at ensuring that new businesses that benefit from the holiday must not only have their principal place of business in an area that is not excluded but remain outside the excluded areas for the entire period during which holiday deductions or refunds are claimed. The amendment seeks to prevent a new business that relocates to an excluded area from enjoying any further holiday. The Government certainly agree with that objective. In fact, the Bill already provides that if the new business, having made a successful application for a holiday, relocates to an address within an excluded area the holiday will cease automatically.
The necessary provisions are found in Clause 7, which provides for the appropriate amount of secondary class 1 contributions that a new business can deduct or request to be refunded under the holiday. The appropriate amount is calculated by reference to a qualifying employee’s relevant earnings. Clause 7(3) provides that:
“‘Relevant earnings’ are earnings paid to”,
an employee who is employed,
“for the purposes of the new business, at any time during the holiday period when the principal place at which the business is carried on is not in any of the excluded”,
areas. Therefore, if a new business were to move to an excluded region, any earnings paid to a qualifying employee would cease to be relevant earnings and there would be no appropriate amount to be deducted or refunded, so the protection sought by the amendment has already been provided within the Bill.
Lord Sassoon
My Lords, I am very grateful to my noble friend Lady Kramer for answering the main thrust of the questions put by the noble Lord, Lord McKenzie. This measure does need to be targeted. It cannot be targeted in a way that picks out pockets of deprivation—of which there are a significant number in London and elsewhere. However, the basis on which we came up with the holiday includes a relative regional effect. Of course, if we were to sweep away all the geographic exclusions, the thrust of the holiday, which will be to have a relative regional effect, would disappear. On the other hand, as my noble friend says, unlike other measures, this would not be an appropriate measure to target in a subregional way—that would not be feasible.
We have gone with a broad regional analysis. The simplest way to explain the basis for doing this is through the numbers for public sector employment as a percentage of total employment by region. The latest available data when the policy was formulated showed that against a national UK average of 25.1 per cent public sector employment, the three lowest regions were the south-east with 22 per cent, London with 22.5 per cent and the eastern region with 23.1 per cent. That was the principal basis on which the exclusions were made.
My noble friend made the critical point that I was going to make about cost and targeting the money. If the three excluded regions were included, that would increase the total cost of the holiday by some two-thirds. To put it another way, out of the total holiday cost, two-fifths of the benefit of the holiday would go to those regions that are least dependent on government employment, and only three-fifths would go to those regions that are more dependent—in some cases considerably more—on government public sector employment. At the heart of this measure is the belief that the funds available should go to the regions that most need them on this metric.
Indeed, the evidence in the public evidence session on the Bill supported that. For example, representatives from the Federation of Small Businesses and the British Chambers of Commerce made it clear that the south-east is more resilient than the rest of the UK and new business formation would not be significantly harmed because the holiday was not available in these regions. It is worth reminding the Committee that all new and existing businesses in the south-east will benefit from the increase in the employer national insurance contribution threshold and in the reduction in corporation tax rates. Therefore, considerable benefits go to the region through our wider package of measures.
There were questions about the different definitions of regions and so on. The LEPs do not have geographic boundaries that equate to the regions and, in theory, could cross the regional boundaries that we are using. In effect, they are groupings by local authority boundary. Yes, there are other ways of doing it. We have taken the regions as defined for the purpose of public sector employment, which we think is the most cost effective way of targeting the benefit.
Lord McKenzie of Luton
I thank the Minister for that response and the noble Baroness, Lady Kramer, for her contribution. I do not think that we will totally see eye to eye on this issue. The noble Baroness referred to better-off regions, but that does not address the point that regions are not homogeneous. For example, there are huge disparities across the eastern region, but because of areas of particular prosperity in aggregate the area is counted out. As a result, those areas where there is deprivation and high unemployment lose out. I agree that it is to be hoped that there are other arrangements which would enable jobs to be created via one mechanism or another, but I believe that the regional focus is producing unfairness in the scheme.
The Minister said that the measure could not operate at a sub-regional level. I am not quite sure why not. Exactly the same rules will apply. There simply will be a different set of boundaries and descriptions. He referred to the fact that all businesses are benefiting from the national insurance changes to the threshold and corporation tax deductions. I guess that they are all equally suffering or all suffering from the impact on consumer demand of the VAT increase. But that is probably a debate for another day. I do not think that we will make progress on this issue. Accordingly, I beg leave to withdraw the amendment.
Lord McKenzie of Luton
My Lords, Amendment 10 focuses on the inclusion within the term “business” of “property business” and “investment business”. Section 263(6) of the Income Tax (Trading and Other Income) Act 2005 includes a UK property business and an overseas property business within the definition of “property business”. This would seem to open up the possibility that the principal place at which a new business is carried on is overseas with subsidiary business activities in the UK. Obviously, those overseas operations would not be within an excluded area.
Furthermore, even if those subsidiary activities were in the excluded regions, the national insurance holiday would still seem to apply. I ask myself whether this was what was intended. I looked again briefly at Clause 7(3), which the Minister prayed in aid in response to an earlier amendment. If you have a business where the principal place of that business is outside the excluded region, but nevertheless there are employees operating in excluded regions, what in the Bill would stop a holiday applying to them? Having just argued that I do not want any excluded regions, I might seem to be arguing against myself. However, in terms of the integrity of what is proposed here, it may be that I am missing something. Perhaps the Minister would respond to that. Even if the subsidiary activities were in the excluded region, the national insurance holiday would, I suggest, still seem to apply. There seems to be nothing which precludes a new business being carried on in any of the excluded regions or indeed for the national insurance holiday to be available to employees based in the excluded regions so long as the principal place at which the new business is carried on when it started is not in any of the excluded regions. Is that how the Minister reads the legislation?
The principal place at which the business is carried on will often be very clear, as the HMRC’s very helpful note suggests. However, for an investment business or a property business, it might be much less certain. The core of such businesses might be based on the judgment of a few individuals; it would not necessarily be where the portfolios, especially investment portfolios, are located or indeed where the back-office functions are located or where the contracts for the investments or property portfolios are executed. Where the business is primarily carried on could be quite nomadic or easy to place in a favourable location, perhaps where the guiding minds of the business meet periodically to receive investment reports and make decisions about changes to the portfolio. Does the Minister have a view on this? The noble Lord may feel able to say that it has to be determined on a case-by-case basis and I accept that that may be so. Would he accept that this probing amendment highlights a layer of potential complexity which is introduced into the scheme again by having excluded regions? I beg to move.
Lord Sassoon
My Lords, in relation to what we are trying to achieve through the holiday scheme, it is important to create employment. The question of the nature of the activity which is being engaged in is one where again we want to be as permissive as we can be, consistent with the nature of the scheme. Although the noble Lord raised a number of other points going back to the question of boundaries between excluded and non-excluded regions, what we are principally talking about in the amendment is the type of trade or business which the activity is engaged in.
In that context, as well as making the general point that what we are focusing on is maximising employment growth from a broad range of sectors, it might be worth saying a word or two about what property business includes. It covers activities including property rental, land rental and furnished holiday lettings; for example, I believe that the holiday could be particularly valuable in relation to furnished holiday lettings which, of course, would typically operate in rural areas and often provide employment where there are not other significant job opportunities. I would certainly like to think that the noble Lord, in proposing this amendment, was not intending to remove businesses from relief if that could, for example, prevent people or discourage people from providing holiday lettings, furnished cottages, apartments and so on.
Similarly, on investment business, the Government’s view is that making investments and deriving profits from them is no less inherently a business than buying and selling any other tradable item. As the noble Lord says, there will be case-by-case determination by HMRC if there are questions about the validity of the trade or of boundaries.
Lord Newby
My Lords, I have a factual question to ask the Minister on this. During my life, I have been involved in setting up one or two charities where the legal basis of the charity has been a company limited by guarantee which has then got charitable status, so that we have been filling in returns to Companies House as well as to the Charity Commission. What I do not understand is: if a charity’s legal basis is corporate and that charity is then employing staff, whether trading or not, why does it not mean that it would be covered by the normal income tax and national insurance rules?
Lord Sassoon
My Lords, in answer to my noble friend Lord Newby’s point, my understanding is that there is indeed no distinction within the normal income tax and national insurance rules but that it is all a question of trading versus non-trading. I believe that is a test which is independent of whether it would be a company limited by guarantee with share capital, a partnership or anything else. If I am wrong on that point, I will correct myself but my understanding is that the question is independent of the structure of the business.
That trading/non-trading question—to express the issue in another way—goes to the heart of what we are trying to achieve by this holiday: an objective to encourage new businesses and new entrepreneurs and for those individuals to set up businesses, as we have already discussed, in areas with a high proportion of public sector employment. It is not that it could, in a wider sense, be a good thing to provide all sorts of other benefits to worthy causes, including non-trading charities. The fundamental purpose of the Bill is to encourage new entrepreneurs to set up businesses. In that context, if those business activities are structured and are charities, it is important and quite appropriate that the trading activity should benefit from the holiday in the Bill.
Of course, the Government value the important work that charities do. I heard the noble Lord, Lord Davies of Oldham, talk about the Government in their benign moments valuing the big society. We value the big society at all times. Therefore, by extension, this is indeed a benign Government and I am grateful to him for recognising that. Nevertheless, very tough choices have to be made, benign or otherwise. One of the choices we have made is to continue to provide substantial support to charities. So the total relief which charities and charitable giving get are something of the order of more than £3 billion each year. Of course, charities will also benefit from the increase in the employer’s national insurance contribution threshold.
We certainly do not forget charities in many other ways. They are a critical component of the big society. For a scheme that is intended to target a particular direction, we believe that it is appropriate for the holiday to apply to, say, a new charity business, which may be setting up a charity shop or an entrepreneurial activity, but that it should apply only in those particular circumstances. I am sure the noble Lord did not intend this, but the tone of his remarks sounded, at some points, as if we were depriving charities of something. It is not that charities in regions of the country, whether the eligible regions or the excluded regions, are being deprived of anything that they now have; it is simply that, with the resources that we now have, we believe that it is appropriate and indeed the purpose of the Bill to encourage the setting up of new businesses in areas with a high proportion of public sector employment.
Lord Newby
It is a pity that Amendment 14 is not grouped with these two amendments as they clearly fall together. While everybody supports promoting apprenticeships, it seems to me that the Bill is simpler than what the noble Lord proposes. While it is a good thing to promote apprenticeships, if I am starting up a new business and am not necessarily going to employ apprentices, I could envisage a situation in which I might well employ 10 people. I raise this while declaring an interest. I formed a community interest company a year ago, which will start trading in this coming financial year. It is likely to be based in Birmingham. I do not know whether the company will qualify for this measure, given it was formed but not trading last year, but we will be employing both part-time and full-time people in the area of education and sport. It may well be, if we are successful, that we will be employing more than 10 people within three years. If some of those are coaches or if some of them are already qualified as teachers, they will have skills. They will be working for us where they would not otherwise be working in an area covered by the Bill, but technically they will not be apprentices.
I think that you would lose the opportunity to encourage companies which are employing people who would not be eligible for apprenticeships by reducing the limit down from 10 to five. Of course, if the limit stays at 10, Amendment 14 has virtually no impact because the number would go up only from 10 to 12. Therefore, partly in a self-interested sense—I have no idea whether our company would qualify and this is not the reason that I am doing it—it seems to me that you may damage employment prospects by these amendments in a way that is not really intended.
Lord Sassoon
My Lords, as ever, I am grateful to my noble friend Lord Newby for pointing out some of the logic of what the Government are proposing. But in this case it is not principally to accommodate up to 10 employees that we have put the limit where it is. We recognise, as the noble Lord, Lord Davies, says, that the average number of employees that businesses typically hire in their first year is around two. Yes, it would be nice if a business, such as that which my noble friend Lord Newby may be starting, pushes up against the limit. We would welcome lots of that.
We have set the limit at 10 rather than five for two reasons. It would enable more flexibility to accommodate staff turnover, so that although most new businesses employ only two employees in their first year, those two employees may often be different and come and go on a temporary basis. This is a way of accommodating a rolling number even if at any one time there might be only two, three or four employees. Nevertheless, within the period of the holiday, we allow 10 within the Bill.
On a similar point, we need to think about part-time employees, a point to which we will come later. Certainly, it might have been helpful if a number of these amendments had been grouped. This is the Government’s proposed way of addressing the issue of part-time employees without the need to introduce potentially complex definitions of eligible employees based on full-time equivalents. For example, some employers do not remunerate their staff by reference to the number of hours they work, but they might be remunerated according to the amount of work that they produce—piecework. Again, providing for up to 10 qualifying employees ensures that employers with part-time staff or with staff whose hours are not predictable are not disadvantaged and that such employers can take full advantage of the holiday.
As I anticipated, the noble Lord, Lord Davies, is thinking about where savings might be made in order to extend the scope of the scheme in other directions. It is perhaps worth saying that because of the distribution of new employers’ staff numbers, restricting the number of eligible employees from 10 to five would make a disproportionately small reduction in the cost of the scheme. That is not the main reason, as I have explained, for resisting the amendment. The benefit of the amendment would not be anything like what it might seem on the face of it—relevant to the headline numbers. On that basis, I would ask the noble Lord to withdraw this amendment.
Lord Davies of Oldham
My Lords, apprenticeships are a good thing. I know that I will get nods from all sides of the Committee when I say that. We have made progress in recent years and it is important that we make greater progress. One dimension that ought to worry us all is unemployment. It is a potentially greater problem across wide ranges of our society but unemployment visited on young people is a particularly pernicious burden. We should not be surprised if we have difficulties with the attitudes of young people to our society if it is impossible for them, whatever their talents, to land a job. Apprenticeships are an important way in which people can come within the framework of work, and I suggest that our modern society will reflect rather more the significance of old-style apprenticeships.
When I say “old-style”, I refer to our great and glorious industrial past. A predecessor of mine in Oldham used to boast of there being 20,000 engineering employees in plants in the Manchester and Oldham area, and of hundreds of apprenticeships being available. Young people streamed out of education—in some cases, they might have been better advised to stay on to earn different qualifications—into guaranteed opportunities as apprentices in those big engineering works. Those days are long past; we all appreciate that. However, what may be becoming more significant in our society is the development of skills and crafts that mirror a period prior to the great industrialisation. I refer to small-scale businesses and crafts that often do not need many full-time employees to justify an apprentice who in his or her turn learns their role. That is of very great importance.
In all my time when I was greatly involved in further education, one thing that drove me to distraction was our inability to sell work experience in relation to the education experience in college. This was particularly true for young women. There might be a course leading to a career with the cleanest, most attractive technology imaginable—for example, providing the electronic back-up for pop groups, which should lighten up the heart of every youngster—but one would see engaging in those activities exactly the same proportions of men to women and boys to girls as we had in our traditional pattern in the world of work. We have to move away from that.
Apprenticeships, particularly those in small companies relating to the operations that we are defining in the Bill as worthy of support, potentially provide opportunities to break the mould of some dated employment practices. The Minister will tell me that this is a limited Bill and that the gains that will come from it are necessarily limited when viewed against the broader perspective of the Government’s policies. I recognise that all too clearly but the Bill nevertheless seeks to help a particular sector of small businesses. We should surely try to link that to the importance of developing apprenticeships in our society and, accordingly, I beg to move.
Lord Sassoon
My Lords, apprenticeships are certainly important to this Government. Since the noble Lord, Lord Davies, has talked about them at some length, as he may know, it was National Apprenticeship Week three weeks ago. I met electronic engineering apprentices working on the rebuilding of Blackfriars station and its railway bridge. It was enormously encouraging to see the enthusiasm of those apprentices, who fully understood how their apprenticeships could be the start of a very worthwhile and remunerative career path and that they had a very supportive employer—a much bigger employer than in the scheme we are discussing. However, when I asked them whether their south London schools had encouraged them down this path, it was depressing to be told that there had been absolutely no mention of apprenticeships as a route to go down on the part of those schools. Therefore, I can see that there is work to be done on fully encouraging young people to take up apprenticeships, but it will not be for lack of government money. In 2011-12, we will provide £799 million for apprenticeships in the 16 to 19 age range, which is an increase from the £780 million in 2010-11. This money will fund 230,000 apprenticeship places for that age group. Therefore, the importance of apprenticeships is absolutely not lost on me.
Apprentices and their national insurance are covered by the Bill in the same way as any other employee. On previous amendments we have talked about the number of employees that small businesses typically take on. That is a critical point. The ceiling that we have left in the Bill of 10 employees provides sufficient headroom to take on apprentices. A feature of apprentices is that there is not normally the turnover that we talked about and it is not a question of part-time work. One or two apprentices being taken on by a business should be accommodated within that headroom limit of 10. We think that is a sufficient and appropriate way to accommodate what I completely agree is a critical part of the thrust needed to rebuild the nation’s workforce with the appropriate skills base for a thriving economy in the 21st century. With that explanation, I again ask that the noble Lord follow the convention of withdrawing his amendment.
Lord Davies of Oldham
My Lords, I am grateful to the Minister for that concerted response and, of course, I withdraw the amendment.
Lord Sassoon
My Lords, I echo my noble friend Lady Kramer’s view of the importance of job sharing. I, too, could introduce a small reminiscence. I have had job-sharing personal executive assistants working for me, and I know that the arrangement can work extremely well. It gives people who, for example, have children, more opportunities to work. I have seen this in action and I and the Government encourage it.
The difficulty in this Bill is that they will be working in the technical framework of tax and national insurance legislation. One feature of the NICs and tax framework is that there is no distinction in the HMRC construct between full-time and part-time work. Therefore, we decided that the way to accommodate this was through the relatively high limit on the total number of employees. Putting together a construct for this piece of national insurance legislation that distinguished between full-time and part-time staff would be enormously challenging. This was recognised in the public evidence session by the Federation of Small Businesses, which concluded that it would add complexity for the employers who were affected.
There is nothing here that discourages part-time employees, and the 10 employee limit should fully accommodate the likely demand, except in the very marginal case of the few thousand firms—perhaps 2 per cent—that would be restricted by the limit. Again, I ask noble Lords to withdraw the amendment.
Lord McKenzie of Luton
My Lords, I will certainly withdraw the amendment in due course. I am grateful to both noble Lords who have spoken. The noble Baroness, Lady Kramer, spoke with authority and passion about the importance of part-time work and of job sharing. She made a hugely important point about cultural change and recognising that part-time work is not simply temporary work in low-level, low-paid jobs. As she explained, very senior job shares will increasingly form part of the system.
I accept what the noble Lord, Lord Sassoon, said about the difficulty of constructing this within the Bill, and I take the point about NICs and the tax system not making a difference between part-time and full-time employees. We will have some debates tomorrow on the Pensions Bill, and on the attempt to get some aggregation of people in part-time jobs for national insurance purposes so that they get credited at least for pension purposes—but that is a debate for another day.
I recognise that the level of 10 employees gives some headroom to deal with this, although I am disappointed that the Minister could not explicitly cater for part-time workers if for no other reason—it is not really the one that I had thought about—than to push the issue of the cultural change that is needed so that we properly value and encourage, where appropriate, part-time working and job sharing. I beg leave to withdraw the amendment.
Lord Davies of Oldham
My Lords, I have no doubt that Amendment 16 may cause a slight flurry in the dovecotes. I hope that the Administration recognise that we are seeking to guarantee the success of the scheme by offering protection for the administrative resources devoted to it. However, I also see significant figures in the Treasury, not least the Minister himself, looking somewhat askance at the fact that we might have in public statute a definition of who should do the job of the Inland Revenue with regard to this issue.
This is a probing amendment and I do not expect the Minister to accept it on this occasion, although in due course he may be persuaded. The intention is to identify one obvious factor. We fully recognise that the public service is under considerable challenge at present, that lots of posts will be lost and that an awful lot of people are under pressure. Yet this scheme not only requires additional resources but has particular complexity built into it. There is no doubt that the Bill would be regarded as a matter-of-course administrative exercise if it covered all regions of the country and the excepted areas were brought in. We all appreciate the complexity and difficulty of the position, and the amount of resources that will be required to ensure that the scheme works. Of course we share with the Minister the ambition that this will prove to be successful. However, there are clear administrative implications. I am sure that the Minister has thought about these very seriously and will give me all the reassurances that I could possibly want.
Lord Sassoon
It is a high bar to be able to give the noble Lord, Lord Davies of Oldham, all the reassurances that he could wish for, but I will attempt to give him some reassurance. The way in which HMRC is going about administering the holiday is that it has devised new processes for dealing with the holiday alongside the other day-to-day tasks in its casework. Additional steps have been incorporated already in its day-to-day caseworking, so it has not been necessary to employ new staff. The training has already been done. It shows how HMRC is able to adopt a flexible approach to allocating its resources as and when schemes in tax and national insurance change. HMRC staff have been engaged in this work since September. It would not be possible to use new employees, if that was being suggested. I understand the probing nature of this discussion but using new employees would not technically work as staff are already trained and running the scheme alongside their other responsibilities without the need to employ additional staff.
I hope that the noble Lord has the reassurances he seeks, such that he might be minded to withdraw Amendment 16, as I think he said that he would.
Lord Davies of Oldham
I am grateful to the noble Lord. I feel somewhat encouraged. I did not have the slightest doubt that the issue was expressed entirely in his own words and was not drafted for him by a senior official. If that had not been the case, I would have had a few doubts. I am very grateful for the response that he gave. I beg leave to withdraw the amendment.
Lord Newby
My Lords, I support the principles behind these amendments. This is a very specific scheme and it should be possible to tell whether it has worked. If it does not work—we hope that it will—the Treasury will be in the happy position of not forgoing revenue that it had expected to forgo. There would be an unused pot, as it were. If, as I fear may be the case, the scheme as outlined does not yield the number of new jobs that the Government hope, it would be very useful, after a year, to see how—to the extent that funding is available for job creation in the regions—it might be more effectively deployed.
As I mentioned at Second Reading, an obvious extension to the scheme would be to provide a modest ability for existing businesses in the designated regions to employ additional staff and qualify for a holiday. In those circumstances, it would be perfectly possible to say that every small business in the designated areas could employ an additional person and qualify for the holiday, so that the scope of the scheme is extended but keeps within the expenditure envelope already set aside for it. Whether that is possible will depend on whether the scheme works as intended. The only way we will know that is if we have a report as set out in these amendments.
Lord Sassoon
My Lords, we certainly agree that generally tax policy-making and the effects of tax measures should be more transparent. It is for that reason and because of the commitments given in another place, which I shall run through in a moment, that we do not believe that Amendment 17 is necessary. However, we completely share the commitment to transparency. Therefore, it may be helpful to the Committee if I echo the undertaking given by my honourable friend the Exchequer Secretary in another place to provide Parliament and the public with updates after the end of the tax year on the operation of the scheme, including information at regional level, although the precise requirements set out in the amendment could raise legal issues, for example on confidentiality of taxpayer data.
The factual report that we envisage would cover, regionally and nationally, the number of new businesses applying, the number of applications rejected, the number of qualifying employees for whom a holiday has been claimed and the amount claimed. The main difference between the commitment that the Government have made and this amendment is that the latter would require a constituency level breakdown even though the scheme is regional in England and will not cover every English constituency.
I remind the Committee that during proceedings in Committee in another place, amendments put forward with the aim of altering the holiday to a constituency basis were discussed at some length. My honourable friend the Exchequer Secretary said then that the Government do not believe that a constituency-based scheme is either appropriate or feasible. Since we have a regional scheme including the whole of Wales, Scotland and Northern Ireland, it does not seem logical to provide a constituency level breakdown even if it was possible to do so. A regional scheme and a regional analysis at the end of each tax year will be available for scrutiny. Therefore, we do not think that it is necessary to enshrine that in an amendment to the Bill. I refer to Amendment 18—I said Amendment 17 at one point, and will come to that in a moment.
A technical point in the amendment refers to a budget for the scheme. For the avoidance of doubt, businesses can be confident that there is no budgetary constraint. The holiday will continue as proposed, regardless of the number of applicants. The expected costs of the scheme were set out in the policy-costing documentation at the time of the Budget last year.
Amendment 17 is aimed at providing flexibility to modify the holiday. As I have explained, the Government want to target available resources on the regions most dependent on public sector employment. We want to do so in the way that we have discussed at length with regard to the qualifying businesses, the numbers of employees and so on. However, introducing flexibility to change the details of the scheme, as proposed in the amendment, would increase uncertainty for those who might potentially benefit and would risk inhibiting decision-making for those who need to know with some certainty what the holiday permits. I hope that I have provided considerable reassurance on the questions of transparency and of the ability of the House to scrutinise the way that the scheme will operate in practice, and that noble Lords will withdraw their amendment.
Lord Davies of Oldham
I am grateful to the Minister; half a loaf is better than none. The extent to which he defined how far he was able to go in response to the amendment was some consolation. I appreciate his remarks. I am well aware of the fact that no one in Committee is particularly concerned about constituencies. I am also well aware that the issue was raised in the other place, where concerns were extensive. The Minister will forgive me for seeking to identify that this might be the basis for a degree of transparency that would be welcomed by all those who are directly answerable to the electorate. I am grateful for his response and beg leave to withdraw the amendment.