Social Security Act 1975 (Hansard, 24 May 1985)

§ Mr. Chris Smith (Islington, South and Finsbury)

I wish to raise the issue of the implementation or non-implementation of section 152(4) of the Social Security Act 1975. Before I deal in detail with the matter, I wish to make it clear that it is a pleasure to be sparring with the Under-Secretary of State on this issue. The last time that we met in the Chamber we were dealing with matters further afield—human rights in Turkey. I hope that his response to this debate will be a little more fruitful than his response on that occasion.

At first sight the matter may seem to be highly technical, but it is not merely a technical matter, because it relates to the national insurance contributions of many hundreds of people. Section 152(4) relates primarily to contributions that are paid by individual employees, but not then paid on by their employer to the Department of Health and Social Security. It relates to the means by which the Department can seek redress against those employers. It may be helpful if I sketch in the background.

The Social Security Act introduced a system under which the collection of national insurance was passed to the Inland Revenue under the PAYE system. Before 1975, everyone had a card which had to be stamped. Since then only the self-employed and non-employed have had such cards. Under the Act, responsibility for deducting and paying national insurance for employees was put squarely on the shoulders of the employer. If the contributions were either not deducted or not remitted because of negligence by the employer, he could be prosecuted.

Obviously, problems arise if a business has no assets. Ordinarily, the owners of the business would be liable, but the position of limited companies excludes that possibility. As non-payment of contributions can lead to a prosecution through the criminal or civil courts, section 152(4) allows for criminal prosecution of a limited company followed by civil proceedings against negligent directors.

In November 1984, Ministers made it clear that they wished to remove this provision from the Act. What is more, even before its removal has passed through the House, they have ceased to apply that section. I shall return to that point because it is important, but I shall deal first with the reasons which Ministers have advanced, and which doubtless will be advanced again this afternoon, for the repeal of that part of the Act.

The reasons are openly stated in the information that was sent out by Ministers to individual local offices of the DHSS. The reasons were twofold. The first was that other revenue collection departments did not have the facility of prosecution under this section and they wished to bring the DHSS into line with other departments. Secondly, they feared that the threat of action under the section would be a disincentive to directors striving to save their companies or to people willing to become directors of companies.

Those two reasons are unsound. Although other Departments do not enjoy those special powers, other measures are available to them, such as extensive powers to enter and search premises and seize records, which the DHSS does not possess. Those powers are much more daunting to directors of businesses in financial trouble. Indeed, many more staff are employed by Departments in those areas than were employed by the DHSS in following up action under section 152(4). Therefore, to have any 1319 effective counter to the possibility of deliberate negligence by employers in forwarding their employees' contributions, and to have any effective weapon, such power should rest with the DHSS, in the absence of the draconian powers granted to other Departments.

Another point that must be made about the disincentive to become directors is that action can be taken by the DHSS only when deductions made from employees' wages are not remitted with the appropriate employers' contributions, or where no deductions were made when they should have been. The latter case is extremely rare, except with regard to directors' liability to contributions. However, the fact that some employers deduct money from their employees' wages and then do not pass it on to the DHSS acts not just against the DHSS but against the employees. Furthermore, the DHSS can act only against negligent directors—those who were aware, or could reasonably be expected to have been aware, of the offence.

It should be remembered that, although section 152(4) may dissuade some from becoming directors, its removal allows directors to deduct contributions from their employees' wages and pocket the money by way of increased remuneration, knowing that they cannot be touched under social security law. A responsible director would not wish or intend to act in such a way. The argument that the threat of social security law prevents or discourages such people from becoming directors is nonsense. If they act within the law, take money from their employees and pay it to the DHSS in the proper, lawful manner, they have nothing to fear from the section. The two arguments that the Government have advanced, and which they will doubtless advance again today in favour of the removal of the section are groundless.

I should make some further points. First, and most important, the withholding of deductions must be regarded as theft or fraud or both, whether from the point of view of the DHSS or, more important, from the point of view of the employee. The deductions are a personal contribution credited to a personal account where details of contributions are recorded and used for calculating the individual's benefit position, including his pension rights. Therefore, if an employer does not pass on money contributed by himself and the employee, it acts to the detriment of the employee's pension record in the national insurance system.

Secondly, the general trend of DHSS policy towards companies and large contributions is becoming increasingly lenient, while individual directors and claimants alike are harshly treated. The priorities that the DHSS seems to attach to chasing the small fry while letting the big fry go loose, are wrong. Since April 1983, the authority to write off large amounts of arrears in any individual case can be given without reference outside the local office of the DHSS. Therefore, the decision can be taken locally by local managers.

Thirdly, while it is true that most cases of section 152(4) action arise in cases of liquidated companies, they are the most difficult to deal with because of the time lapse involved in getting to see records. In future, with this part of the legislation gone, directors will have plenty of time to distribute the assets of the company knowing that they may not be touched, and may even be in a position to blackmail the DHSS into writing off arrears with the threat of putting the company into liquidation. It will be much 1320 more difficult when this power is no longer on the statute book, to ensure that the DHSS can follow up money that is owed to it by employers under the national insurance system.

Recently, some figures were reported to me. Will the Minister tell me whether they are correct? They show that over the past year about £1 million was collected due to section 152(4) action taken by the DHSS. In addition, at the time that the DHSS officers were told by the Minister to stop taking action, the solicitors' office had a backlog of cases worth some £4 million.

The decision by Ministers to remove this power from the statute book was bad enough, but even worse has been the fact that since they made the announcement of their intention to stop this power, Ministers have been instructing the DHSS to stop taking action under section 152(4). That is presumptive of the decision that might be taken by the House of Commons on the future of the legislation. The removal of that section of the Social Security Act is only now being considered in the Committee on the Insolvency Bill. It is also strange that a Government who constantly advise the populace to maintain and uphold the law have unilaterally, without legislative backing, taken a decision to stop taking action that they are advised to take by the law in particular cases.

Only a few days ago the Prime Minister spoke in the House about local authorities that found themselves in an extremely difficult position because of legislation passed by this Government. The Prime Minister berated them for failing to observe the law to the letter. It is strange and ironic that in those circumstances, in this social security legislation concerning individual contributions to national insurance, the Government have seen fit to take unilateral action not to implement the law.

A clear instruction has been given by Ministers to local DHSS offices. The instruction from the DHSS to its local offices states baldly: When the decision was announced LOs were told to stop proceedings on current cases immediately and it will now be necessary to inform Courts, liquidators, receivers and directors. Yet section 152(4) of the 1975 Act is still on the statute book. The law still stands and the Government have a duty to implement it, but they are deliberately and openly failing to do so. It will be interesting to hear what justification the Minister has to offer for the Government's failure to uphold the law.

The next time the Prime Minister stands at the Dispatch Box telling us that the law is sacrosanct and must be obeyed, she should consider the way in which Ministers at the DHSS are behaving. She might also consider the way in which the DHSS spends enormous amounts of time, effort and resources chasing small individual claimants suspected of defrauding the system in some way. Any fraud is inexcusable, but the extravagance of the DHSS in pursing the small malefactor stands in strange contrast with the way in which it is not just failing to pursue the big fish — the large contributors who, as employers, fail to pass on the contributions of individuals—but in so doing is abrogating legislation passed by the House and still on the statute book.

I shall listen with great interest to the Minister's attempts to justify the actions of the DHSS.

§ The Parliamentary Under-Secretary of State for Health and Social Security (Mr. Ray Whitney)

As this 1321 is the last debate in this series before we enter our all too short Whitsun recess, I should normally, on the last day of term, approach it full of good will and charity. The hon. Member for Islington, South and Finsbury (Mr. Smith), however, referred to previous exchanges between us on the subject of human rights in Turkey and I must tell him that his comments on the impact of ceasing to implement section 152(4) of the Social Security Act 1975 were even more misguided than his comments on human rights in Turkey. There are three issues at stake but, sadly, the hon. Gentleman seems not to have understood any of them.

First, there is the need to protect the workers and their national insurance payments. Secondly, there is the absolute need for the DHSS to take all proper steps to ensure that contributions due under the national insurance system are paid and collected. There is also a third duty and responsibility on the Government which the Opposition entirely fail to appreciate. It is to bring about the conditions in which businesses can go on creating more and more jobs in our economy. In the past two years, no fewer than 613,000 more jobs have been created. We intend to go on improving the situation so that businesses can continue to create jobs. That was one of the most remarkable lacunae in the hon. Gentleman's speech today.

The history of the matter—not surprisingly, given the fact that it has been raised by an Opposition Member—dates back many years, to the situation that obtained in 1928. The National Health Insurance Act 1928 was introduced at a time when employees would lose their benefit rights and suffer financial hardship if their employer failed to stamp their cards despite having made the necessary deductions from wages.

In consequence of that intolerable situation, section 18 of that Act was introduced as a deterrent to such employers. They would know that they might become personally liable for outstanding debts if the contributions were not paid at the right time.

The provisions survived in the National Insurance (Contributions) Regulations 1948. In 1949, however, an important change was made, that restored the position of workers in such firms. Regulation 21 of the National Insurance (Contributions) Amendment (No. 2) Provisional Regulations of 1949 provided for unpaid contributions in respect of employees to be deemed as paid when the employee himself was in no way at fault for their non-payment and recovery of the contributions from the employer was not possible or was likely to be delayed.

The first essential point, therefore, was guaranteed as far back as 1949. Whatever may go wrong with the company or the employers, and however the directors may fail to meet their responsibilities, the rights of the worker are protected by that regulation of 1949. However, the effect of the 1928 legislation making action possible against employers remained on the statute book, eventually re-appearing as section 152(4) of the Social Security Act 1975. It came under careful scrutiny during the proceedings of the Cork committee on insolvency law and practice, whose report concentrated the mind of the Government upon the whole subject of insolvency practice and provoked many strong and well-founded representations about the effect of the application of section 152(4) in cases involving insolvent companies.

It became clear that the original justification based upon the interest of the worker disappeared with the impact of the regulation made in 1949. Given that no discretion was allowed under the law, action was taken indiscriminately 1322 under section 152(4) against the directors, regardless of the effort or finance that they had put into a company in an attempt to keep it viable. The section did not require the Department to prove the directors' culpability in running the company's affairs and therefore was clearly contrary to natural justice. Even more seriously, its use discouragedcompany doctors" from stepping in to help companies in trouble, for fear that they might become personally liable for any outstanding national insurance debts.

The use of the section led to the premature winding-up of companies by directors who were rightly apprehensive that if they failed to save the company their own personal assets would be put at risk. In other words, what began as a well-meaning provision, and had ceased to be really necessary, came to work against the interests of workers themselves. Directors were under heavy pressure not to persevere with their efforts to save a company. The section added to the discouraging prospects of anyone contemplating setting up his own firm.

Therefore, my right hon. Friend the Secretary of State for Social Services called for a review of the operation of section 152(4) and came to the conclusion that, as soon as the parliamentary opportunity arose, he would endeavour to have that section repealed.

Apart from the factors that I have outlined, which are powerful in themselves, it was clear that, in terms of recovery of national insurance contributions, the Department of Health and Social Security was out of line with other revenue departments — the Inland Revenue and the department responsible for VAT. The DHSS was the only one that had the special powers contained in section 152(4), which was particularly incongruous because the other revenue departments were frequently pursuing much larger debts than the DHSS, but did not have the same powers to do so. Particularly important was the disincentive effect that it had, which my right hon. Friend quite properly took into consideration.

There is another point that the hon. Gentleman did not mention; perhaps he is not aware of it. Recently, the Inland Revenue introduced provisions that will allow it to pursue companies that fail to pay their monthly pay-as-you-earn and national insurance contribution liability within a very short period of their due date without having to visit the employer to quantify arrears. The hon. Gentleman mentioned that the Inland Revenue has that power. Now there is no requirement for such a visit. There is no doubt that those provisions will prevent large debts accruing and ensure that employers keep up to date with their payments. That reinforces all our other powerful reasons for seeking to repeal section 152(4) in that, by definition, the new arrangements will prevent the accrual of large debts.

I emphasise that the real need for the repeal is that we must intensify our efforts to regenerate the spirit of entrepreneurism in Britain, precisely because we need those jobs. I understand the reluctance of Opposition parties to adopt that approach. The results of their efforts over the years are what we are living with today. The clear disincentive under which directors in particular labour was definitely harmful and deleterious.

The hon. Gentleman made a good deal of play of the fact that we had not yet completed the repeal of section 152(4). However, under the legislation that is now on the statute book, the Secretary of State is not obliged to take action, and the problem that the hon. Gentleman sought 1323 to pose does not arise. The hon. Gentleman suggested a figure of £4 million. My information is that the figure is about half that. However, we are talking not about a total waiving of the liabilities but about a removal of the special privileges—the incongruous position that section 152(4) gave to the DHSS in the recovery of those liabilities. The decision to change was taken on the basis that the employee was already well protected, and had been since 1949. There is an urgent need to ensure that citizens are encouraged to set up companies and to rescue companies that are in trouble. It is in all our interests that that degree of enterprise is encouraged and that the Government should continue to do all that they can to lighten the burden and remove the obstacles to such enterprise. The repeal of section 152(4) is a good example of the positive spirit of job creation in which the Government are approaching this matter.