National Insurance Contributions Bill

Shabana Mahmood Excerpts

Monday 4th November 2013 Commons Chamber

[Shabana Mahmood (Birmingham, Ladywood) (Lab)]

I salute the Minister’s valiant effort to gloss over recent history and his record. I can tell Government Members that the reason their Minister was not making any predictions about the impact of the policy in the Bill was that he got all his previous ones wrong.

[Nick de Bois]

Given the Opposition’s dreadful predictions about how many jobs would be lost under the Government, does the hon. Lady agree that it would be wise for her to tread carefully on predictions?

[Shabana Mahmood]

That was a valiant effort to change the subject, but today we are talking about this Minister’s record and the regional national insurance holiday plan. I note that the Minister could not bring himself to admit that the Opposition were right and that he was wrong about that. Perhaps we can return to that point later.

The Minister sought to focus as much as he could on the employment allowance and desperately tried to forget its predecessor scheme that the Government introduced in their 2010 emergency Budget—the regional national insurance holiday, which was enacted in the National Insurance Contributions Act 2011. The national insurance holiday was an abject failure, so I am not surprised that he wants to pretend it never happened, but it did, and it failed utterly. He has wasted three years clinging to that policy rather than doing what Opposition Members told him to do, which was to rip it up and design a new scheme that took account of the criticisms made by us and others.

The Bill introduces the employment allowance, which we support, so perhaps we should give the Minister credit for getting there in the end, but it is somewhat difficult to do so, because it has taken him far too long to rectify the flaws of the previous scheme, which we warned him about from the beginning, as my hon. Friend the Member for Nottingham East (Chris Leslie) has reminded him. As a result, businesses desperate for help have struggled in the meantime.

Those businesses, particularly small and medium-sized enterprises, which are the engine of our economy, have continued to suffer. Bank lending to SMEs is still contracting, and analysis published by the Department for Business, Innovation and Skills shows that tightening credit has disproportionately affected low and average-risk SMEs. Last year, Project Merlin missed its target for lending to SMEs by more than £1 billion. In 2010, the Office for Budget Responsibility predicted that lending to businesses would have risen 34% by now, but in fact it has fallen by 10%.

Given this climate of the past three years, action has been necessary to support business, but, on national insurance, it has taken the Government too long to get there.

[Richard Fuller]

The hon. Lady is making some fair criticism of the national insurance holiday, but does she agree that one problem with the holiday was that it was a one-off, and that businesses are so smart in their planning that they ignore one-off schemes and go on previous predictions? Does she agree that a steady basis for policy is better than one-off, one-year schemes?

[Shabana Mahmood]

The hon. Gentleman makes a fair point, but there were many other problems with the national insurance holiday, which I shall return to later.

[Ian Swales (Redcar) (LD)]

As we are having a national insurance history lesson, what does the hon. Lady think the impact would have been of a 1% increase for employers and employees in April 2011?

[Shabana Mahmood]

I thank the hon. Gentleman for that intervention, but I prefer to look at the record. When the Government came to power, they inherited a growing economy. They choked off the recovery, resulting in three years of flatlining and stagnation, and the current cost-of-living crisis that affects businesses and people up and down the country.

[David Rutley (Macclesfield) (Con)]

The new version of events on the Government’s legacy is interesting. We received a dismal legacy. We had a huge deficit, but Opposition Members—deficit deniers—cannot recognise that. They should apologise for proposing the jobs tax. Will the hon. Lady apologise for putting that on their policy platform? It was a complete disaster.

[Shabana Mahmood]

I do not think that an economy that was growing was a bad legacy to leave. The legacy of three wasted years, caused by the Government pursuing a failed economic plan that has delivered a cost-of-living crisis for millions of people, is not one to write home about.

[Jonathan Edwards]

The key point about the national insurance measure in the emergency Budget was that it was a statement of intent that the UK Government wanted to rebalance the economy geographically. Under the last Labour Government, wealth polarised geographically at an incredible rate. If the hon. Lady is in the Treasury after the next election, what will she and her colleagues do to rebalance the UK economy geographically?

[Shabana Mahmood]

We have been speaking a great deal about rebalancing the economy and our proposals on regional banking, for example, are proof that we take the issue seriously. The hon. Gentleman described this Government’s policy as a statement of intent, but it was an absolute failure, and that is the subject of the debate today.

The national insurance holiday was a flagship policy of the Government’s first Budget, which is why they are so desperate to forget that it happened. They created a scheme that ran from 6 September 2010 until 5 September 2013 and applied to new businesses only. They were eligible only if they were created after 22 June 2010. Under that scheme, new businesses would not have to pay the first £5,000 in national insurance for each of their first 10 employees during the first year of the business. Greater London, the south-east and the eastern region were all excluded from the scheme. The Government said that 400,000 businesses and some 800,000 employees would benefit from the national insurance holiday, at a cost of £940 million over the three years of the scheme. In their impact assessment, the Government confidently predicted that the average benefit per business would be about £2,000, but by the end of the three years of the national insurance holiday in September this year, the scheme was shown to have been a comprehensive failure.

In the end, only 25,000 businesses received NICS relief—that is 375,000 fewer businesses being helped than the Government originally claimed. It was always highly unlikely to have ever been worth the maximum £50,000 to a new start-up business. To get the maximum relief available, the new businesses would have had to take on 10 people with salaries of up to £40,000, which does not exactly fit the pattern of how new start-ups behave and the sorts of choices that they make in their first year of business.

Of the £940 million set aside to pay for the scheme, only £60 million was ultimately paid out, a paltry 6% of the amount originally intended. To put that in context, the Government spent £12 million on the administration of the scheme. We repeatedly warned that the scheme was not working, that it was not helping businesses as intended and that the Government should reform it, expand it, review it or bring forward a new one, but they refused to listen.

It is not as though the Minister could not see the failure unfolding before his eyes. Take-up of the national insurance holiday was never anything other than dismal. In the first year of the scheme, there was not one month in which HMRC received more than 850 applications. In 2012, there was only one month when the total number of successful applications was more than 1,000—that was in May 2012, when there were 1,130 successful applications. For the Government’s scheme to succeed, they would have needed to hit that number every month for three years, and they got nowhere near that.

When the Treasury Committee conducted its inquiry into the June 2010 Budget, the Chair of the Committee said:

“For those of us who have been on the circuit a while it sounds like another case of the triumph of hope over experience.”

How right he was.

[David Mowat (Warrington South) (Con)]

A few moments ago, the shadow Minister was asked a question on regional focus. She has also said that one of the problems with the last scheme was that it did not include the south-east. Is it Labour’s position that the scheme should have applied in the south-east as well?

--- Later in debate ---

[Shabana Mahmood]

The hon. Gentleman is somewhat confused. As was pointed out earlier, we always said that one of the problems with the scheme was the regional element, and I am coming to that point.

During the passage of the National Insurance Contributions Act 2011, we told the Minister that he should drop the regional condition attached to the national insurance holiday and expand it to areas of the UK that had been excluded. Today, he brings to the House the employment allowance, which does exactly that. In fact, the Government’s analysis, published this morning, shows that more than 40% of the expected total number of employers who will not pay any NICs under the employment allowance are based in regions excluded from the previous scheme. At the time, the Minister said that extending the national insurance holiday across the UK would increase the cost by approximately £600 million to a total of £1.6 billion over three years. Today, his employment allowance is predicted to cost £1.3 billion in the first year, rising to £1.7 billion by 2017-18. We said that the national insurance holiday should be extended to cover all businesses, rather than simply new ones. Today, the Minister is introducing an employment allowance that covers all businesses, not just new businesses.

[Richard Fuller]

I am delighted to hear the hon. Lady talk about the virtues of expanding reductions in national insurance across the country and extending it in terms of time. Does she therefore think it was wrong for her, in the previous election, to stand on a manifesto that advocated an increase in national insurance?

[Shabana Mahmood]

I was proud to stand as a Labour candidate at the general election when the economy was starting to grow, but that recovery was choked off by the hon. Gentleman’s Government.

During the Committee stage of the National Insurance Contributions Act 2011, we tabled amendments to extend the national insurance holiday to charities. The employment allowance will do just that. This is effectively our policy, so we are of course delighted to support the Bill. Since the policy was announced in the Budget, we have been calling for it to be enacted immediately, rather than waiting until April 2014.

[Mr Gauke]

I note that the hon. Lady did not respond to the question from my hon. Friend the Member for Bedford (Richard Fuller) on whether she supported the Labour party’s policy of increasing employers’ national insurance contributions. Does she recognise that the Labour party’s policy has been to target the NICs scheme at small businesses—not all businesses, as she said—and only for new employees, not all employees? That substantially complicates the scheme, requires applications and shares many of the complexities of the NICs holiday.

[Shabana Mahmood]

I thank the Minister for that intervention. I am not surprised he wants to turn the attention away from his own U-turn. I remind him that our proposal was a refinement and an extension of his failed policy. We could see it was failing and, doing our job as a responsible Opposition, we were suggesting ways in which the Minister might be able to rescue his failed national insurance holiday. I must correct him: the scheme was not for small businesses only, but all existing businesses.

[Julian Smith]

This is a highly depressing speech. Should we not all be celebrating the fact that the economy is turning a corner and celebrating this policy, which will encourage the risk-takers, who are pushing the recovery on, to go further and faster and take on more people? This is a depressing speech. Let us get on with the opportunity that this policy brings.

[Shabana Mahmood]

I am sorry that the hon. Gentleman is so depressed that his Government’s policy has failed, but that is not a matter for me.

We will seek reassurance from the Government and test the Bill’s provisions to ensure that the new scheme does not suffer from the problems associated with the previous scheme. In particular, we will scrutinise its administration. The national insurance holiday was too complicated and the employment allowance should not suffer from the same problems. One problem affecting take-up of the previous scheme, in addition to its complexity, was the lack of publicity. Many businesses simply did not know what was available. This problem must not be repeated. This is particularly important when it comes to publicising the scheme to charities and amateur sports clubs, to which it now also applies. They are more likely to be unaware of what is available, and the Government should have a clear publicity strategy, subject to review, if take-up is, for whatever reason, lower than expected.

Clauses 9 and 10 apply the general anti-abuse rule to national insurance contributions, and enable the Treasury to ensure that the GAAR, as it applies to national insurance and to tax, is kept in line.

We support the application of the GAAR to national insurance, but we remain unconvinced that the current version is up to the job. It is the Government’s flagship policy for tackling tax avoidance, and their figures show that it will result in annual revenue of £60 million in 2014-15, which they expect to rise to £85 million by 2017-18, but that compares with a tax gap that was estimated, when the GAAR was introduced, to be £32.2 billion but which has now risen to £35 billion. Have the Government thought about reassessing their figures in the light of the slightly over-enthusiastic estimates made for the UK-Swiss tax agreement? Anyway, a dent of £85 million in a tax gap of £35 billion is nothing to write home about.

The House will recall that two months ago, a member of the GAAR independent advisory panel, which decides whether people have broken the rule, was forced to resign, shortly after the GAAR came into operation, having been caught advising people at a tax-planning conference how to keep their money

“out of the Chancellor’s grubby mitts”.

This was someone who was hand-picked to advise Ministers on the avoidance schemes the GAAR should catch. We remain concerned, therefore, that the GAAR is far too narrow, that there is no specific penalty regime, that no arrangements are in place to monitor its effectiveness and that, as a result, it has little credibility. We will continue to press these arguments when the Bill reaches Committee.

We welcome the introduction of a certification scheme for offshore employers of oil and gas workers. The extent of this problem is significant, with at least 100,000 individuals having been found to be employed through an intermediary company with no presence, residence or place of business in the UK. I note that this is the first of three measures aimed at tackling this issue. We await the introduction of the other two by way of secondary legislation and provisions to be included in the Finance Bill. We know from analysis published alongside the Bill that the changes, as a whole, are expected to result in Exchequer savings of £80 million to £100 million a year, and we will wish to review the effectiveness of these provisions as and when they come into force.

[Julian Smith]

Does the hon. Lady regret the Labour Government’s failure, over 13 years, to take the anti-tax avoidance measures that this Government are now putting in place?

[Shabana Mahmood]

I absolutely reject the hon. Gentleman’s point. We have a very good record on tackling tax avoidance, and as I said, at the moment I do not think that the GAAR is anything to write home about. We have significant issues with it, but we will return to those points in Committee.

Clauses 12 and 13 make provisions for partnership arrangements, which we support. We welcome the regulations that will prevent the misuse of partnerships for the purpose of tax avoidance by focusing specifically on two issues. The first concerns partnerships and the tax-motivated allocation of profits and losses relating to the alternative investment fund managers directive, and the second concerns limited liability partnerships and the nature of the relationship between partners and the LLP.

Focusing on the second issue, the current HMRC interpretation of the existing tax rules has meant that individuals who are members of an LLP are taxed as though they are partners in a partnership, meaning that low-paid workers taken on as LLP members have lost employment benefits and protections, while, at the other end of the scale, high-paid workers have benefited from a self-employed status and the resulting loss of employment taxes payable. It is time for the use of LLPs as a way to disguise employment status and avoid employment taxes to stop. We note that the Budget report estimated that the Exchequer gains would be £125 million in 2014-15, rising to £365 million in 2015-16, and we support action in this area.

In conclusion, key aspects of the Bill began life as Labour party policy, so I suppose I should thank the Exchequer Secretary for giving us the rare pleasure of enacting legislation from opposition. It is a first for me, but one that I hope will happen many more times. The national insurance holiday scheme was a complete failure, and it is vital that the employment allowance gives businesses the support they need, but it is unacceptable that they will have been waiting four years for this support. Three of those years were wasted while he and the Government clung to the national insurance holiday scheme, and almost another year has been wasted as they have failed to take immediate action, instead introducing the employment allowance only from next April. Even when forced to change course and do the right thing, they are still failing to go far enough and act quickly enough. Businesses up and down the country deserve better.