National Insurance Contributions Bill

Lord Sikka Excerpts

2nd reading
Wednesday 1st December 2021 Lords Chamber

[Lord Sikka (Lab)]

My Lords, this Bill hangs on the failed concept of free ports, which are effectively a state within a state where vast amounts of money are showered on few, with little, if any, tangible benefits for the public at large.

We have had free ports before. They were created under Section 100A of the Customs and Excise Management Act 1979. Seven operated at various times between 1984 and 2012. In July 2012, the Government let the enabling statutory instrument lapse. Freeports morphed into enterprise zones, and many of those still exist.

In May 2014, the House of Commons Public Accounts Committee’s report, Promoting Economic Growth Locally, concluded that the Government’s claims of job creation in enterprise zones were “particularly underwhelming”. The Government promised 54,000 new jobs in these zones. BBC-commissioned research found that by 2017, only 17,307 jobs had been created against that claim of 54,000. These jobs were created in 24 zones, and in two others, the number of jobs actually fell. The Government seem to forget that it is investment in education, healthcare, social infrastructure and equitable distribution of income that gives people the spending power with which to buy goods and services. All these things are neglected by the Government. Unsurprisingly, these jobs were never fully created. I look forward to having a debate with the noble Lord, Lord Bilimoria, about the Laffer curve, one of the overstated theories that I would love to debunk. However, that will have to wait for another day.

This history of failures of the enterprise zone and freeport zones informs the OBR’s assessment. Page 211 of its commentary on this year’s Budget, it says that there is

“broader uncertainty around how much of the economic activity that takes place within a freeport will have been displaced from other UK regions and how much is genuinely additional”.

In the light of that, it would be helpful if the Minister can provide an impact assessment of the Bill assessing the gains, or the assumed gains, in freeports, and the losses that will be caused to other parts of the economy. What will happen to the towns that lose some of their economic activity to freeports?

The zero-rate contribution mentioned in the Bill is available to an employer other than a public authority. This is very strange. The Bill says that “public authority” includes any person whose activities involve the performance of functions which are of a public nature. It is hard to think of any entity which does not do anything of a public nature these days. This definition is not helpful at all. Many public functions are outsourced these days. Would a company performing public functions be precluded from making zero-rate contributions? An energy company located in a freeport zone can enjoy the benefit of the zero-rated national insurance under the Bill, but if a local council becomes an energy supplier, as many have in recent years, I do not think that it would then qualify under this Bill for the zero-rate national insurance contributions.

The Bill does not provide any clarity on the concept of public authority, and it is also utterly unfair. I hope the Minister can shed some light on this. Why is it that a company that might provide energy, cleaning, lighting and other services can somehow get zero-rate contributions, but if a local authority does the same, it will not?

The Government have not published a full impact assessment of the Bill. What will be its impact on the national insurance revenues, a point already touched on by my noble friend Lord Davies of Brixton? On page 11, the Explanatory Notes accompanying the Bill estimate the cost of the

“zero-rate secondary Class 1 Contributions for armed forces veterans”

over the next three years to be £55 million. However, for the zero-rate secondary class 1 contributions for freeport employees, which is a major part of this Bill, the Explanatory Notes say:

“This measure is expected to decrease receipts. The final costing will be subject to scrutiny by the Office for Budget Responsibility and will be set out at a future fiscal event”.


This is not satisfactory. Do the Government not have any idea of the cost of this policy? Why are they giving national insurance concessions to a select few without knowing the full cost?

The Treasury Red Book shows that the cost of free-port tax perks, which includes

“reliefs on Stamp Duty, Enhanced Capital Allowances … NICs and Business Rates”

over the next five years is £270 million. These numbers could not have been calculated without some assumptions about the number of jobs, the details of national insurance and other things. What assumptions did the Government make in coming up with these numbers? I invite the Minister to share the information with us, so that we can see how realistic the Government’s numbers are.

The Bill is offering a national insurance holiday to employers, which will result in lower revenues in the National Insurance Fund account. However, the Bill does not require the Government to remit or repay the cost of the national insurance concessions to the National Insurance Fund account. The net result is that this Bill will reduce the amount deposited in the National Insurance Fund account, or the surplus in it, and will reduce the ability of the account to pay state pensions and other benefits in the future. The cost of the Government’s ideological experiment is being borne by the poorest and vulnerable sections of our society. There is a wealth transfer from the poor and the vulnerable to a select few corporations. What is the justification for this wealth transfer? If the Government want to give a holiday, then please pay directly into the National Insurance Fund account.

The disclosure of tax avoidance schemes—DOTAS—was originally introduced in 2004, and the new measures are outlined in Finance Bill 2021. As the Minister said, they will now apply to cases of national insurance avoidance. But in the absence of robust enforcement, it is unlikely to yield significant results. That has been the case with tax abuses. The Government have been very soft on big enablers of tax abuses. Ministers constantly refer to laws tackling tax abuses, but it is the enforcement which is a big problem. If the Minister disagrees with my assessment, then I invite him to name any big accounting firm which has been investigated, prosecuted or fined after the courts judged that it had peddled unlawful tax avoidance schemes. One example will do, and if the Minister gives me an answer, I think that will be my lucky day and I will rush out and buy a lottery ticket—I can assure you of that.

The Government actually reward these firms with public contracts. The partners of the big four accounting firms have chaired and sat on the board of HMRC, while they have been simultaneously selling unlawful—that is what the courts have decided—tax avoidance schemes. Their partners sit on the general anti-abuse rule advisory panel, often known as the GAAR panel. They determine what counts as abusive. When I look at these arrangements, the phrase “foxes guarding the henhouse” comes to mind. I would like to hear what exactly the Minister is going to propose to deal with this.

Perhaps nobody will go out to avoid national insurance contribution payments because the Government already facilitate luxuries for the rich. The wealthy can easily convert their income to capital gains. Capital gains are not only taxed at a lower rate than earned income, but there is no national insurance payable on them at all. This favour to the rich, just on capital gains, costs us around £8 billion a year. We can see that the Government are enabling the rich to avoid paying national insurance. Why are these concessions given? Could the Minister please tell us why there is no national insurance on unearned income at all in this country?

--- Later in debate ---

[Viscount Younger of Leckie (Con)]

My Lords, this debate was initially down to have at least a dozen speakers. I am sorry to say that, as the day has worn on—for a very good reason, I am sure—the number of speakers has somewhat diminished. I am sure that they will reappear in Committee and we will have a greater number of Peers interested in this important Bill.

I will start by addressing some of the remarks of the noble Lord, Lord Davies. He gave me due warning of his remarks at the beginning of his speech but, as he will expect, I do take issue with quite a lot of the overly pessimistic comments he made. He said that this was not to do with national insurance and indicated that it was very much a PR exercise and simply a presentation. He is nodding at that. I am afraid that I do take issue with that, but of course it is up to me to prove today and particularly in Committee that this is not the case and that the matters we are bringing forward on this Bill are serious and have serious points and facts behind them.

I gently point out to the noble Lord that the Bill passed through the Commons with just one minor government amendment, which corrected a reference to another Act. On his point about the evidence of free-port clauses working, he will know that Labour tabled some amendments but ultimately withdrew them. That was on the basis that the Government argued they were unnecessary, as we have already indicated that we will review the effectiveness of the NICs relief before deciding whether to extend it.

On that, to answer the point made by the noble Lord and the noble Baroness, Lady Kramer, on whether the NICs relief will be an effective use of taxpayers’ money—which frankly is a fair question—the relief will significantly reduce the cost of taking on new employees and doing business in a free port. This, along with other reliefs being offered as part of the wider package that I mentioned in opening, will support businesses setting up and expanding in free-port tax sites.

The take-up and use of NICs relief in free ports will be monitored to ensure that it is having its intended effect. The Government have written a sunset clause into legislation that will allow us to review the relief’s effectiveness after four years and make a decision on its continuation accordingly. The noble Lord, Lord Sikka, asked about an impact assessment. I steer him towards the fact that a tax impact and information note—a TIIN—has been published alongside this Bill. If he has not seen it, I am more than happy to make him aware of it.

A number of questions, some quite technical, were raised in the debate and I will do my best to answer them. First, on free-port costing, which was very reasonably raised by the noble Lord, Lord Sikka, the OBR approved costings, including estimates, for all the tax and customs reliefs within the wider free-port offer. The programme is at an early stage of delivery, with the first sites beginning operations last month, but we have already seen significant investment. So there is more to come, but the noble Lord’s question is a fair one.

The noble Lord, Lord Davies, asked specifically about the link between NICs and benefits. The National Insurance Act and the National Assistance Act established the modern welfare state that continues today, as he may know. National insurance continues to fund contributory benefits, including the state pension. NICs receipts are paid directly into the National Insurance Fund and are kept completely separate from all other tax receipts.

The noble Lord, Lord Sikka, asked why NICs are not on unearned income. NICs is part of an earnings replacement scheme to provide help to workers when they are unable to work or retired. Unearned income is excluded as it does not rely on a person’s labour.

The noble Lord, Lord Davies, asked about the design of free ports and whether they will displace economic activity from other local areas. Our focus is on encouraging new investment from around the world and within the UK to create new businesses and new economic activity in free ports. This will create jobs in deprived communities across the country rather than harmful displacement. Employer NICs relief can be claimed only for new employees, encouraging employers and businesses to grow and create new jobs rather than relocate existing ones.

Finally, when designating free ports, the Government require bidders to explain how their choice of tax site location minimises displacement of economic activity from wider local areas, especially other economically disadvantaged areas. Displacement will be assessed in greater detail as part of the formal tax site approval process. Tax sites will be designated only once mitigation of displacement and other factors has been demonstrated by the successful bidder.

[Lord Sikka (Lab)]

The Minister just said that we do not charge national insurance because unearned income is not the result of labour. Many a person, instead of taking wages, draws dividends, which are inevitably the outcome of the investment of human capital—labour—yet there is no national insurance on dividends either, which is another example. Could it be that there are other ideological reasons why the Government do not levy this, rather than simply the investment of human capital? I agree that from 1911 onwards, when national insurance appeared on the scene, the focus initially was on employment, but we have moved a long way away from that. I wonder whether we can have this debate another day, if not today.

[Viscount Younger of Leckie (Con)]

I would be more than happy to do that. The noble Lord takes a slightly cynical view of this. We need to go back to the basics of what the Government are trying to do with this, which is to encourage more jobs and investment into these free-port areas. It is really as simple as that. I am more than happy to debate the rationale behind the detail in Committee, but I hope the noble Lord takes me at face value on that point.

The noble Lords, Lord Davies and Lord Bilimoria, asked whether the policy will be effective in encouraging the employment of veterans and whether it is appropriate to target this type of support to veterans. The House will know that some veterans will face particular difficulties in accessing the job market due to injury or trauma suffered in the course of duty; the noble Lord, Lord Bilimoria, alluded to that. These veterans will benefit most from the measure. Given that securing stable and meaningful employment is a key aspect of a veteran’s transition into civilian life, the Government wish to reward employers who facilitate this.

The noble Lord, Lord Tunnicliffe, asked about the status of free-port sites in England. I hope I can address this with some detail. At the Spring Budget, the Chancellor announced eight free ports from eight regions of England following a fair, open and transparent assessment process outlined in the bidding perspective. That included East Midlands Airport; Felixstowe and Harwich, the so-called Freeport East; the Humber; Liverpool City Region; Plymouth and south Devon; Solent; Teesside; and Thames. The first free-port tax sites in Humber, Tees and Thames went live on 19 November. This ensured that those free ports were able to begin initial operations last month, meeting our commitment to get free ports operational in England this year. The Government will continue to work with the remaining free ports and expect the next set of free ports to begin operations in early 2022.

The noble Lord, Lord Sikka, asked how free ports differ from previous free ports. Prior to 2012, the UK had five free ports offering only customs and tariffs benefits, similar to the duty referral on customs warehousing schemes subsequently introduced by the EU. This did not offer any direct tax incentives, so stakeholders indicated that this policy offer was not a substantial enough incentive to invest in these free ports, given its widespread availability outside these free ports. The new free-ports offer provides a more attractive overall package of incentives for businesses. Businesses will be able to take advantage of five tax reliefs and a range of customs incentives, as well as to benefit from a package of other measures that support the development of free ports and make them attractive places to do business, including infrastructure funding and planning measures.

The noble Lord, Lord Sikka, asked why public bodies are excluded from the free-ports relief. I probably alluded to this earlier. The aim of the policy is to boost growth in undeveloped areas, not to subsidise public bodies.

The noble Lord, Lord Tunnicliffe, asked how the ongoing balance of opportunity and risk can be reviewed and reported, and whether Parliament would be given the information on the frequency of this. He essentially asked: if not, why not? This relief will significantly reduce the cost of taking on new employees and doing business in the free port, along with other tax reliefs, which I mentioned earlier, being offered. The take-up and use of NICs relief in free ports will be monitored to ensure that it is having its intended effect. I mentioned earlier that we have the sunset clause, which I have covered. More information on assessments will be available in the free ports monitoring and evaluation—M&E—strategy, which, to reassure the noble Lord, will be published in spring 2022. The Department for Levelling Up, Housing and Communities, as the department responsible for the delivery of free ports, is leading the monitoring and evaluation but working closely and collaboratively across government to ensure robust and rigorous evaluation.

The noble Lord, Lord Tunnicliffe, also asked about any delay in implementing the free ports recruitment. Our focus is on encouraging new investment from around the world and within the UK to create new businesses and new employment. The Government have been clear that this relief is available only on new hires from April 2022 and have set this out in the Freeports Bidding Prospectus published in the autumn of 2020. Having a clear start date is, I think, the answer to his question, as it is a simple approach that will support the free-port businesses. There are complexities with HMRC, I understand, so this cannot be set up earlier than the date the noble Lord mentioned.

I go back to veterans relief—I am chopping and changing slightly here. The noble Lords, Lord Tunnicliffe and Lord Bilimoria, and the noble Baroness, Lady Kramer, asked about veterans relief and why it was for only one year compared with that for free ports, which is, as we know, for three years. I think I can answer this by saying that the policy intent for the two reliefs is different, so the structures of those reliefs are also different. The aim of the free-port relief is to support new businesses in the free-port tax site with the cost of employment to boost growth in and around the free port. Therefore, the free-port relief provides more sustained support for the lower upper threshold. The aim of the veterans relief is to support veterans’ transition into civilian life through employment. The veterans relief therefore provides a greater immediate incentive for employers to hire a veteran

The noble Lord, Lord Bilimoria, asked why the free-port relief was only £25,000 but the veterans relief is up to £50,270. The veterans relief has been kept in line with similar reliefs that aim to boost employment of a particular group of people—for example, those aged under 21 or apprentices aged under 25. The free-port relief has been designed to support new businesses during their infancy. A policy decision was made to make the relief available for a prolonged period and therefore, in fairness to other taxpayers, the threshold of this relief is lower.

I move on to the DOTAS regime, raised by the noble Lords, Lord Davies and Lord Sikka, in terms of additional powers. DOTAS has been in play for several years, which has led to many promoters leaving the avoidance market. However, a small number of determined promoters continue to sell tax avoidance schemes and use delay and obstruction to frustrate HMRC action against them. The new powers modernise DOTAS and allow HMRC to tackle these promoters at an earlier stage. They also allow HMRC to better inform taxpayers of potential schemes through earlier publishing of scheme and promoter details. This will better inform taxpayers of the potential risks that they face and help them to steer clear of these schemes.

The noble Lord, Lord Tunnicliffe, linked with the noble Lord, Lord Sikka, asked about the gains expected from the change in each tax year. The aim of DOTAS is to ensure that HMRC gets the information about the schemes, so that it can take appropriate action. Those who devise and sell avoidance are always looking for new ways to sidestep the rules, so legislation needs to be refreshed to stay ahead of them.

The noble Baroness, Lady Kramer, asked about the NICs relief attracting low-value-added, labour-intensive jobs. I can give a fairly full answer to that, which is that the free ports policy, taken overall, aims—as I said earlier—at regenerating deprived areas through investment and job creation; that means quality jobs in high-value-added industries.

Free ports will offer a number of benefits for firms, including specific issues such as: simpler import procedures and suspended duties in customs sites to help businesses trade; planning changes to green-light much-needed development; spending to invest in infrastructure; and a free port regulatory engagement network to help regulators and firms work together to test new technologies safely and effectively. As well as enjoying enhanced structures and buildings allowance, and generous stamp duty and business rates relief, employers in capital-intensive sectors will benefit in particular from enhanced capital allowances that relieve 100% of qualifying expenditure in the first year on plant and machinery for use within free port tax sites.

National Insurance Contributions Bill

Lord Sikka Excerpts

Committee stage
Monday 10th January 2022 Grand Committee

I am really concerned about trouble ahead. The steps that the Government are taking are absolutely right, but I can see a lot of small businesses completely unwittingly falling foul of this entire process. I am begging to get a message through to the Government that they need much more communication with the small players, particularly when they are starting a new enforcement campaign on something like national insurance contributions which, frankly, every one of those entities is going to be paying.

[Lord Sikka (Lab)]

My Lords, I was not going to speak but the eloquent speech of the noble Baroness, Lady Kramer, has persuaded me to say a few words. I do not think the DOTAS legislation, on which this particular legislation in this Bill is modelled, has been that effective. I have challenged the Minister and his colleagues on a number of occasions to name even one big accounting firm that has ever been investigated, disciplined or fined after the courts have said that their tax avoidance scheme was unlawful.

When it comes to national insurance, the Government themselves have created avoidance schemes. For example, there is no national insurance payable on unearned income. Accountants are busy—as they will be in these cases as well—converting income to capital gains as it attracts absolutely none. I sense in this Bill that the Government are playing to the Public Gallery saying, “We are really serious—we are going to clamp down on this kind of avoidance”, but they do not have the means to do so. There is no logic whatever as to why unearned income should be exempt; it is simply a way of avoiding.

When the Government talk about avoidance, I wonder, first, what they mean by that. We have had numerous disclosures, whether in the Paradise papers, Panama papers, or other leaks, which show that many of the national insurance tax avoidance schemes have been marketed by offshore entities. The Government are in absolutely no position to go after those enablers and have not done so.

I am just giving more fuel and ammunition to the arguments put by the noble Baroness, Lady Kramer, that the Bill is all about public impression management. That is why I have stayed silent for so long and why I did not table any amendments—because fairly soon after this is implemented, we will hear, just as with the previous free port legislation, that it will not achieve very much.

[Lord Tunnicliffe (Lab)]

My Lords, I welcome the tabling of this amendment and hope the brevity of my contribution is not taken as evidence to the contrary. Amendment 7 asks the Government to publish guidance relating to the operation of Clause 11. It is my understanding that such guidance will indeed be published later this year; I would be grateful if the Minister will confirm that and perhaps give us some idea of when this year. I hope that, with the guidance, there will be a more general update on the Treasury’s and HMRC’s work in this area.