National Insurance Contributions Bill

Shabana Mahmood Excerpts

Monday 8th September 2014 Commons Chamber

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

I thank the Minister for his introduction to this short Bill, which, as he said, aims to simplify the administrative process of paying class 2 NICs for the self-employed; apply measures from this year’s Finance Bill, now the Finance Act 2014, to NICs; and introduce a targeted anti-avoidance rule, TAAR, to tackle disguised self-employment made possible through employment intermediaries and offshore employers. We support the measures and so will support Second Reading, but we will examine in detail some of the expected practical impacts of the measures in Committee.

As the House will know, national insurance benefits are funded by a system of compulsory contributions on earnings paid by employees, employers and the self-employed. Most of the income from NICs goes into the national insurance fund to pay for contributory benefits, including the state pension, contributions-based jobseeker’s allowance and bereavement benefits. Some NICs money goes directly into the national health service. NICs are the second largest tax after income tax, raising £108 billion in 2013-14.

The self-employed make two types of national insurance contribution. Class 2 NICs are paid by the self-employed at a flat weekly rate of £2.75. A self-employed person can apply to be exempted from liability if their annual profits are under a certain threshold—the so-called small earnings exemption—which is currently set at £5,885. Class 4 NICs are paid annually by self-employed persons on profits immediately derived from a trade, profession or vocation that are chargeable to income tax. Class 4 NICs are payable at a rate of 9% on profits between £7,956 and £41,865 and 2% on profits above £41,865.

Until now, payments of class 2 and class 4 NICs have had to be made separately. Individuals may pay class 2 NICs by direct debit either twice a year, in January and July, or monthly, paid four months in arrears. Alternatively, HMRC will issue two payment requests a year. In contrast, self-employed persons pay class 4 NICs with income tax on completion of their self-assessment tax return. From 2011, the dates on which payment of class 2 NICs is due have been aligned with the dates for tax and self-assessment—31 January and 31 July each year—but payment of both has continued to be made separately.

As the Minister said, when the Office of Tax Simplification looked at these matters in 2012, it suggested bringing class 2 NICs within self-assessment, and that this would bring administrative benefits to self-employed persons and businesses. In July 2013, HMRC published a consultation document in which it noted that the present system places significant burdens on small business, and that while class 2 NICs accounted for less than 0.3% of the £102 billion-worth of NICs collected by HMRC in 2012-13, they accounted for more than 40% of national insurance-related telephone calls to HMRC and the associated processing work that resulted. The Bill therefore changes the liability for class 2 NICs so that it arises at the end of the tax year and not weekly, as now, and moves class 2 NICs into self-assessment, so that self-employed people can deal with their class 2 NICs together with their income tax and class 4 NICs.

We support the aim of making the system easier for self-employed people and reducing the administrative burden caused by the current arrangement of having two separate systems for collection of class 4 and class 2 NICs. Almost one person in six is self-employed, so this is a significant issue affecting a large number of people. Making the system easier to navigate is therefore welcome and of genuine practical benefit for the self-employed.

A number of specific issues arise as a result of this change on which we will seek greater clarification from Ministers in Committee. However, it would also be helpful if the Exchequer Secretary offered some further comments on the points I am about to raise, as that could help to clarify the issues ahead of Committee. The first relates to the maternity allowance. At present, 25,000 self-employed women claim maternity allowance each year. Entitlement to maternity allowance is not assessed on self-employment and class 2 NICs paid in a particular benefit year. Instead, it is assessed over a test period of 66 weeks up to and including the week before the baby is due. Collecting class 2 NICs at the end of the tax year means that some women may find that it appears as though they have not been paying class 2 NICs during the period needed to make them eligible for the maternity allowance.

In order to address this problem, the Government have proposed measures in the Bill that would enable women who have not had the opportunity to file a self-assessment return and pay class 2 NICs to pay them early in order to secure maternity entitlement at the standard weekly rate. However, there is a danger that these proposals may be impractical. Women would have to make voluntary contributions before they filed their self-assessment returns, and this demands a very high level of forward planning on their part. The provisions may therefore require some additional clarification. If the Exchequer Secretary or the Financial Secretary have had any additional representations on these points—I know that some stakeholders have been raising such concerns—it would be helpful if they set out their thinking. The Minister will be aware that the Chartered Institute of Taxation has suggested that the Government should review these changes at the earliest opportunity—in two years, I think—to ensure that they have not resulted in a reduction in the number of claims for the standard rate of maternity allowance. Again, it would be helpful to have an indication of the Minister’s current thinking on this point.

For the 650,000 self-employed households that claim universal credit, these proposals will have a different impact. Universal credit regulations require the individual to report their income, net of certain expenses, on a monthly basis. That net income is then used to establish their entitlement to universal credit. Certain safeguards are built in so that if income from self-employment for an assessment period falls below a certain level, the claimant’s income is treated as being a higher amount called the minimum income floor. Because universal credit is assessed on a monthly basis, if a claimant has to pay all their class 2 NICs in one month, this could push their earnings under the minimum income floor, thereby reducing their universal credit for that month. Simplification should not come at the cost of hardship, We will press the Government for assurances that they have fully considered the potential impacts of this change along with the introduction of universal credit, and the interplay between both policies.

The tax information and impact note suggests that the option of monthly payments will still be made available to self-employed persons and businesses. However, there is no provision for that in the Bill. A number of stakeholder groups have suggested that the retention of a monthly payment system would be of particular value to those on very low incomes who may struggle with one lump sum payment. Even accepting that for many people the total amount does not seem large or too onerous, of course that is not necessarily the case for those on extremely low incomes, and retaining the monthly payment option would therefore be helpful. It is not clear why the note suggests something that the Bill does not touch on. I would be grateful for some further clarification on that.

The Chartered Institute of Taxation points out that there will be a gap of 22 months between the collection of class 2 payments for 2014-15 and the collection of payments for 2015-16 as liability moves from a weekly basis to arising at the end of the tax year. Thereafter, the payment of class 2 will be in arrears on 31 January following the end of the tax year. This could affect entitlements to benefits. Under the current system, the entitlement to many contributory benefits is based on the claimant having paid contributions and operating on a pay-as-you-go basis. Have the Government considered the cash-flow implications of class 2 NICs coming in up to 10 months after the end of the tax year, rather than being paid in-year as they are at the moment? Are they able to give us some more information on that today?

We will also seek reassurance and confirmation that moving class 2 into self-assessment will not adversely affect entitlement to contributory benefits. These are significant changes and the Government will need to ensure that they are properly advertised and that taxpayers are educated about them. We do not want a situation to arise whereby people have gaps in their payments. As I have said, NICs relate to eligibility for important benefits that people rely on. We need greater reassurance from the Government that they will have a full programme of education and information about the changes. It is also fair to say that we will need a relatively widespread publicity programme ahead of April 2015, as existing direct debits will need to be stopped. It would be helpful if the Exchequer Secretary could tell us what the Government have planned in relation to educating taxpayers who will be affected by the changes.

As the Financial Secretary said, the Bill also extends measures introduced in the Finance Act 2014 to cover NICs, particularly in relation to follower notices, accelerated payment notices and measures to tackle high-risk promoters of tax avoidance schemes. During the passage of the Finance Bill we had an extensive debate on the issues raised by the new provisions, which are the same as those contained in this Bill, and we will continue to press Ministers in Committee on the practical arrangements for the measures.

On follower notices, we welcomed the amendment made on Report of the Finance Bill, which brought in a right of appeal on three grounds where a follower notice has been issued. Outside of those three grounds, however, the only other option will be for taxpayers to seek a judicial review. What further reassurances can Ministers give that follower notices will be issued only in cases that are on all fours, as it were, with the precedent or lead case, so that occasions where a taxpayer may have to resort to a judicial review are kept to a minimum?

It is important that the internal systems operated by Her Majesty’s Revenue and Customs in deciding whether to issue a follower notice allow for the points of difference in a case to be considered, rather than the process amounting to a more straightforward box-ticking exercise to determine eligibility for a notice. Now that the Finance Act is law, I would be grateful if the Government could set out what further work has been done on the approach and methodology that will be adopted by HMRC staff and officials as they make important decisions about whether to apply a follower notice to a particular case.

As the Financial Secretary has noted, there has been considerable controversy and heated debate about whether accelerated payment notices amount to retrospection, as we discussed in Committee. Although we have put to him the concerns of stakeholders and constituents from all over the country, I agree with him that, from a legal perspective, they are not retrospective per se. The issue is more one of tax liability that has already been disputed and of where that liability sits. We have, therefore, supported the measures relating to accelerated payment notices. The Government have assured the House that decisions about whether to issue an APN will be made only by HMRC staff with sufficient seniority who are at a high grade. The Financial Secretary and I have had a number of discussions about HMRC staffing and resources, so he will not be surprised to hear that I will be taking up those issues again.

The Association of Revenue and Customs believes that HMRC faces a demographic time bomb, with more than half its work force aged over 45 and 18% over 55. That proportion is even higher at senior level, where about 30% of grade 6 employees are over 55. It is important to know how that will affect the implementation of APNs. We will need to be satisfied that there will be enough sufficiently experienced staff and that those who are due to retire are being replaced at the correct rate.

We have pressed Ministers on the resourcing of HMRC, and I note the Financial Secretary’s comments in our previous debates about the expansion of the counter-avoidance team at HMRC. Again, we will pick that up in greater detail in Committee. Now that the Finance Act is law, we must keep a close eye on implementation and resourcing. Especially given the high level of interest in such matters, the first decisions made about follower notices and accelerated payment notices must be robust and stand up to scrutiny if they are to inspire confidence within the population of taxpayers.

The Bill will introduce a new targeted anti-avoidance rule to cover the payment of national insurance contributions, which sits alongside the provisions in this year’s Finance Act aimed at tackling the issue of employment intermediaries who falsely label workers as self-employed to reduce their tax liabilities. The problem is widespread, and a Government review found that at least 100,000 individuals working in this country were employed through an intermediary company that had no presence, residence or place of business in the UK. In many cases, the employee was unaware that their payroll was located offshore and that tax was avoided on their earnings.

For workers falsely badged as self-employed, particularly those who do not know that that is the case, the impact is that they are not eligible for many of the benefits available for employed earners, such as holiday and sickness pay. This year’s Finance Act amended legislation directly to address the issue in relation to the payment of income tax. A worker will now be designated as an employee if they are under the supervision, direction or control of someone else, and in that case they must be paid through PAYE, rather than as self-employed people. That is a change from the previous designation, under which a worker was deemed to be an employee if they provided their services personally. It was found that many intermediaries could exploit the test by claiming that there was no obligation for the worker to provide their services personally, and to get around that, a clause was often inserted into a worker’s contract stating that they could send someone else to do their work, even though the employee in reality wanted that specific worker.

The role of the TAAR in this Bill is to ensure that the new measures cannot be circumvented, and that workers who would be employed earners if it were not for the intermediary arrangements are treated as employed earners. The TAAR will allow HMRC to consider both the motive for setting up such an arrangement, including whether it was set up with the motive of avoiding NICs, and what was achieved, including whether it resulted in less NICs being paid.

During debates on the Finance Bill, we supported the new measures and the corresponding TAAR for income tax, but we stressed the importance of considering the resource that HMRC would need both to implement the changes and to ensure that sufficient guidance was provided to those affected. The same applies to this Bill. In addition, we will continue to press, as we did on the Finance Bill, for further examination of the case for having deeming criteria to combat disguised employment in the construction industry, particularly where such practices are a significant problem, with self-employment levels at 40% compared with an average of 14% across all industries. However, the TAAR envisaged in this Bill takes us forward in dealing with the problem, and we will support it.

With those points, I hope that I have given Ministers sufficient notice of the debates that we will have as the Bill progresses, and I look forward to picking up those issues in greater detail in Committee.