§ 3.33 p.m.
§ The Parliamentary Under-Secretary of State, Department of Social Security (Baroness Hollis of Heigham)My Lords, I beg to move that the Bill be now read a second time.
I am sure that noble Lords listened with great interest to the Chancellor's Budget Statement in another place on 17th March this year. Some of the measures to reform welfare announced in that Statement led to the changes to the structure of national insurance 1037 contributions that noble Lords debated in the Social Security Act earlier this year. Amidst these more eye-catching measures noble Lords may recall that the Chancellor announced that the Contributions Agency is to transfer from the Department of Social Security to the Inland Revenue in April 1999. That transfer is provided for by the Bill before us today. Noble Lords may recall that we debated in the Social Security Act powers authorising expenditure in preparation for the transfer.
First, I would like to remind noble Lords of the context in which we are working. We have set out the key principle underlying our welfare reforms—work for those who can, security for those who cannot. With the New Deal we are making the biggest ever investment by government in jobs and training. This is changing lives and providing opportunities—by next April 300,000 people will have benefited.
We are introducing the working families' tax credit and the disabled person's tax credit so that every family working full-time will be guaranteed an income of at least £190 a week, and up to 1.5 million hard-working families will be better off as a result.
We are also reforming the structure of national insurance contributions to make work pay. We are removing the NICs "entry fee" and raising the threshold at which employers begin to pay NICs to the level of the single person's tax allowance. These changes will increase the incentives for the low paid to work and for employers to offer them jobs, without adversely affecting their entitlement to contributory benefits.
Many noble Lords will think of the Department of Social Security in terms of paying benefit to groups such as the unemployed, disabled people and pensioners. But the Contributions Agency and the system of national insurance contributions have been an important part of the department's existing work. The focus of this work is very different—principally towards employers, employees and the self-employed. These are much the same groups as the Inland Revenue deals with. Indeed, the Inland Revenue already collects 94 per cent. of NICs alongside PAYE tax.
In our Green Paper on welfare reform we stressed the importance of a modern system of delivering government which is flexible, efficient and easy for people to use. Too often government is designed in ways which best fit our bureaucratic structures, not which best meet the needs of the people who deal with us.
There have already been moves to bring the Inland Revenue and the Contributions Agency closer together. Noble Lords may recall the joint working programme between the two departments that was launched in 1995. This programme has led to a number of benefits such as the joint annual pack for employers and a single leaflet and registration form for the newly self-employed.
But joint working can take us only so far. Employers and individuals still need to deal with two separate departments. There is no single focus for employers to discuss improvements in process across tax and NICs. To bring out the real benefits for business and individuals we need to bring the two organisations together. Bringing the Contributions Agency and the Inland Revenue together is a good example of the way 1038 this Government are redesigning their services to deliver policies more effectively and to deliver a better service to taxpayers and contributors. That is what this Bill does.
Bringing the Contributions Agency and the Inland Revenue together will have many advantages. It will reduce the burdens on businesses and individuals as they can sort out taxes and contributions through a single organisation. It will help the two departments share experience, knowledge and skills, so making better use of resources, helping fairness in taxation and national insurance contributions and combating avoidance. It will enable the two departments to combine their efforts on customer service. It will give business and other representative bodies one focus for discussion of improved legislation, procedures and guidance, and so, over time, make it easier to achieve a gradual alignment of the tax and national insurance contributions rules.
The major benefits to business will come from aligning over time the tax and NICs rules. But some earlier benefits arise from bringing together delivery of the two systems in one organisation. Information on NICs will be available in Inland Revenue tax inquiry centres—to be renamed Inland Revenue inquiry centres. Tax and NICs leaflets will progressively be brought together from next April. And the process for making a complaint against theh Inland Revenue or Contributions Agency will be unified from next April.
It is estimated that there could be a loss of around 200 jobs countrywide in the combined organisation as a direct result of the transfer. Newcastle will remain an important site for government employment. The recently announced project to redevelop the Longbenton estate will go ahead as planned and the Inland Revenue sees Longbenton as one of its strategic sites for the future in the new combined organisation.
The transfer has been welcomed by representative bodies. In its October 1998 Budget submission the Institute of Directors welcomed,
the transfer of the Contributions Agency to the Revenue and the planned transfer of national insurance policy to the Revenue".And the British Chambers of Commerce said that,the merging of the Contributions Agency and the Inland Revenue has our full support and we look forward to working with the merged organisation over the forthcoming year to investigate the possibilities for aligning the PAYE and NICs systems".I am sure that some noble Lords will be looking to this Bill for signals as to the future direction of tax and benefits policy. Let me therefore make clear at the outset what the Bill does not do. It makes no changes to the structure of NICs. It does not affect the tax or NICs yield, nor benefit expenditure. It has no effect on individuals' entitlement to contributory benefits. And it makes no changes in pensions policy.Instead, the Bill provides for a technical transfer of functions—of the Contributions Agency to the Inland Revenue and of policy responsibility for collecting national insurance contributions to the Inland Revenue and Treasury. Over time these transfers will reduce the burdens on business and take a first step towards removing the technical differences between tax and NICs rules that employers fear will trip them up.
1039 However, this Bill does not itself provide for any major legislative tax/NICs alignment (subject to one point which I shall come to shortly). We can best work on that with representative bodies once the organisations are brought together. Our priority in the short term is to bring the organisations together to deliver a better service to employers, employees and the self-employed.
The Bill paves the way for long-term improvements. Perhaps I ought first to explain why a Bill is necessary to transfer the Contributions Agency to the Inland Revenue. As I am sure noble Lords are aware, most machinery of government moves between government Ministers are implemented by an Order in Council under the Ministers of the Crown Act 1975. That option was not available in this case. The Inland Revenue is a statutory board, not a department headed directly by a Minister. That means that it is not covered by the Ministers of the Crown Act 1975. So we need a Bill to transfer the operational functions of the Contributions Agency to the Inland Revenue.
We could then have transferred NICs policy functions to the Treasury under an Order in Council. But that would have left a Bill solely concerned with the operational functions. We concluded that that would be unsatisfactory since no single piece of legislation presented to Parliament would make our intentions clear. So the Bill contains the explicit provisions for the policy transfer as well. We need a Bill also because we are proposing some changes as well as the transfer of functions. I shall return to those.
It may help noble Lords if I start with an overview of the Bill before going on to describe what the Bill does. Part I of the Bill provides for the transfer of both operational and policy functions. It also deals with the use of those operational functions by the Inland Revenue. Part II of the Bill deals with the new arrangements for decisions and appeals, which I shall discuss shortly. Part III deals with the supplemental issues around the transfer.
Turning to Part I dealing with the transfer of functions, the first task of the Bill—in Clause 1 and Schedules 1 and 2—is to provide from an appointed day for the transfer of the operational functions of the Contributions agency to the Inland Revenue. The Chancellor has announced that that will be in April 1999. The Contributions Agency is an executive agency of the Department of Social Security and is responsible for the collection and recording of national insurance contributions which are paid into the National Insurance Fund. In addition, the Contributions Agency carries out a number of functions which are related to the collection of national insurance. These include employers' recoveries of statutory maternity pay and statutory sick pay and the administration of contracting-out of the state earnings related pensions scheme. These operational functions are all to be transferred to the Inland Revenue.
The second task of the Bill—in Clause 2 and Schedule 3—is to provide for the transfer of policy responsibility for national insurance contributions and the management of the National Insurance Fund to Treasury Ministers and the Inland Revenue from an 1040 appointed day. Policy responsibility for other areas administered by the Contributions Agency—statutory sick pay, statutory maternity pay and contracting-out—will remain with social security Ministers.
The next task is to ensure that the Inland Revenue has the necessary powers to collect and run national insurance contributions. Clause 3 therefore brings national insurance contributions within the care and management of the Board of Inland Revenue. I ought to sound a note of warning here. I know that many representative bodies are hoping that bringing national insurance contributions within this concept of care and management will give employers the opportunity to make simplifications in their record-keeping. However, payment of national insurance contributions builds entitlement to certain social security benefits. So, in exercising its duty of care and management over national insurance contributions, the Inland Revenue will bear in mind its duty to the contributor. So the Inland Revenue will expect employers to keep accurate records of individuals' contributions in the same way as the Contributions Agency does now.
Clause 4 and Schedule 4 deal with the powers of inspectors. There is scope for confusion between "tax inspectors" and "Contributions Agency inspectors", appointed under different law and with different roles. Today we are focusing on the latter category.
I know there has been concern among some representative bodies and employers that this Bill will provide for a levelling up of enforcement powers. Here I can reassure noble Lords. The powers of enforcement in the Bill simply provide officers dealing with National Insurance with the same powers as they have now. The one change that I expect noble Lords to welcome is that the offence of delaying or obstructing an officer for contribution purposes will cease to be a criminal offence and will instead attract a civil penalty. This will align with existing tax sanctions.
Clauses 5 and 6 deal with the use of information by the two departments to enable them to continue their business. Clearly the Department of Social Security will still need contributions information in order to pay benefits and to fight benefit fraud. So existing information flows will broadly be maintained.
Noble Lords will rightly want to be reassured that the transfer will maintain and build on work to improve the security of the national insurance system. It may be helpful if I take a few moments to explain what the situation will be after April 1999. The Department of Social Security will retain policy responsibility for the allocation and security of national insurance numbers, including checking identity. In practice this will mean that the Inland Revenue will be responsible for allocating and registering NI numbers and the DSS will specify the standards of security to be maintained. These specifications will ensure that at least the current best practices to verify identity are followed. A new service level agreement on national insurance number security between the DSS and Inland Revenue will be in place prior to the transfer to ensure that the necessary levels of security are met.
1041 The current procedures aimed at preventing fraud will be followed by the Inland Revenue. Applications for NI numbers will continue to be rigorously checked and activities to validate numbers already in the system will continue to be undertaken. Our Green Paper on fraud, Beating fraud is everyone's business, envisaged more data-matching in future to tackle benefit fraud. This Bill does not provide for that. Those are proposals that we shall bring forward in due course.
I turn now to Part II of the Bill, dealing with new decisions and appeals processes. I mentioned earlier that we were making one significant step towards tax/NICs alignment in the Bill. Noble Lords will recall that in the debates on the Social Security Act 1998 we considered new arrangements for making decisions and handling appeals on national insurance contributions. The Government gave an undertaking to review and revise this in the light of the transfer of the Contributions Agency to the Inland Revenue—I believe under legitimate pressure from the noble Lord, Lord Goodhart.
The first change we are making is a straightforward one reflecting the transfer. Contributions Agency staff will become officers of the Board of Inland Revenue from April 1999 and so the Bill provides for Inland Revenue staff to be responsible for making decisions on national insurance contributions, statutory sick pay and statutory maternity pay. Some decisions currently made by the Contributions Agency—on national insurance credits and home responsibilities protection—will continue to be made by the Secretary of State for Social Security, but the Inland Revenue will undertake the operational functions on behalf of the Secretary of State.
The second change relates to the appeals process. Noble Lords will be pleased to hear that, following the undertaking we gave to the House and to the noble Lord, Lord Goodhart, on the Social Security Act 1998, we have considered the appeals process further and have decided that, in the light of the transfer, it would be more appropriate for appeals on national insurance contributions, statutory sick pay and statutory maternity pay to be heard by the tax appeal commissioners. In many cases the same issue will arise in both a tax and NICs case—for example, a question over whether someone is employed or self-employed.
As for income tax, we envisage that the more, straightforward cases may best be heard by the local general commissioners, with the most important and technically demanding cases being heard by the special commissioners in the first instance. The Bill reproduces tax provisions for elections for appeals to be transferred to the special commissioners.
Most appeals about decisions on entitlement to statutory sick pay and statutory maternity pay raise questions about a person's employment status and their average weekly earnings. There are relatively few such appeals and we believe that the tax appeal commissioners are in the best position to decide those issues. In the very small number of cases where medical issues are raised, the commissioners will be able to hear medical advice.
Bringing the appeals process together will have distinct advantages for contributors and taxpayers, as well as for employers, since they will only need to deal 1042 with one appeals system. I am sure that this change will be welcomed by tax practitioners, such as the Tax Law Review Committee. I hope that the noble Lord, Lord Goodhart, will be able to welcome this change in principle, although I am sure he will want to look at the detail carefully in Committee.
So Part II contains the necessary detailed changes to bring appeals about national insurance contributions, statutory sick pay and statutory maternity pay within the jurisdiction of the tax appeal commissioners. Appeals against decisions on national insurance credits, home responsibilities protection, contracting-out issues and social security benefits will be to the social security unified appeals tribunals, once the provisions of the Social Security Act 1998 are in place.
I now turn to the miscellaneous and supplemental provisions in Part III, on which I do not need to spend much time. Part III deals with the supporting arrangements for the transfer, such as providing for the transfer of property and liabilities and for the continuity of contracts. But there are three points I should mention.
Clause 19 is a technical accounting provision which puts right a defect in the Pension Schemes Act 1993 as amended by the Pensions Act 1995. It has always been intended that rebates to money purchase pension schemes contracted-out of the state earnings related pension scheme should be paid from the National Insurance Fund. Unfortunately an oversight in the Pensions Act 1995 means that these can only be paid from money provided by Parliament, not from the National Insurance Fund. This is a slip that I and others in your Lordships' House should have picked up at the time. Clause 19 corrects this.
As noble Lords will have seen, we have had to make some judgments about the most appropriate home for some functions around the margins of the Contributions Agency's business. It is quite possible that in the light of operational experience, or your Lordships' warnings in due course, we may need to make some adjustments. Clause 22 provides the flexibility to make these adjustments at the margins by Order in Council, as is normal for machinery of government changes, rather than returning to the House with a Bill.
Clause 23 deals with arrangements in Northern Ireland. Noble Lords will know that Northern Ireland has its own social security scheme and its own National Insurance Fund, which runs in parallel with, and maintains parity with, the Great Britain scheme. National insurance contributions operations in Northern Ireland are managed by the Contributions Unit, part of the Northern Ireland Social Security Agency, although, as in Great Britain, the bulk of NICs are collected by the Inland Revenue alongside tax.
Maintaining the contributions records of Northern Ireland contributors and much of the "back office" work is already done by the Contributions Agency in Great Britain on behalf of the Northern Ireland Social Security Agency. Clearly it would make no sense to leave Northern Ireland out of the new arrangements for NICs envisaged by the Bill, so we intend that the Contributions Unit should transfer to the Inland Revenue at the same time as the Contributions Agency.
1043 Paragraph 10 of Schedule 2 to the Northern Ireland Act 1998 excepts NICs and related matters from the legislative and executive authority of the new Northern Ireland Assembly. Under the powers in Section 86 of that Act, policy and operational matters in respect of the matters excepted by Paragraph 10 of Schedule 2 are planned to be transferred, by Order in Council, to the Secretary of State for Social Security on the appointed day for the Assembly to take up its powers. Clause 23 of the Bill allows for these functions to be transferred on from the Secretary of State to the Inland Revenue and the Treasury at the same time as the corresponding functions for Great Britain. It does so by an Order in Council. It would have been possible to provide for this second transfer on the face of the Bill. However, since essentially we are talking about replicating line by line the provisions of this Bill but in terms of Northern Ireland legislation, this would have added half as much again to the length of the Bill, and perhaps much to the length of our discussions, while adding little to the clarity of our intentions.
In conclusion, transferring the Contributions Agency to the Inland Revenue is good news for employers. The Bill allows that to take place. But I hope I have explained that the Bill and the transfer from April are only the start of the process. This Bill is not the vehicle for major alignment of tax and national insurance contributions. We want to work through that in consultation with representative bodies. Instead, this Bill is about a safe landing of the Contributions Agency within the Inland Revenue and about making sure that the Contributions Agency can operate within the Inland Revenue from next April. That will provide a platform on which we can build service improvements and gradual alignment of tax and NICs over the forthcoming years. The Bill paves the way for a better delivery of the tax and national insurance systems. I commend the Bill to the House.
Moved, That the Bill be now read a second time.—(Baroness Hollis of Heigham.)
§ 3.56 p.m.
§ Lord HigginsMy Lords, the House will be grateful to the Minister for the explanation she has given of what is clearly a very complicated Bill. Since it is our intention on these Benches to approach the opposition to the Bill in a constructive context, perhaps I may begin by congratulating the Government on the publication of a volume of explanatory notes, itself bigger than the Bill, which will be of help to the House in carrying out that task. That is a relatively new innovation which is to be welcomed. I make only one point on it. The notes on the financial provisions of the Bill appear in the explanatory notes. They are usually printed in the Bill itself, although not formally part of it, and I hope that that practice will continue. It is perhaps a little inconvenient to have them separated from the Bill.
Since some of the measures in the Bill affect ordinary company pensions—though the Minister spent little time on that matter—I should declare an interest in that I am the chairman of a company pension scheme.
1044 The Minister stressed that the Bill is helpful in terms of combating fraud. That is certainly a matter in which she will have our support. At the same time, I am a little suspicious of any Bill which is described as "technical". One can often find in the details a number of things which may be sinister rather than technical. In that context, I am a little puzzled about the motivation of the Bill. The costs involved are not inconsiderable—£16 million one year, £17 million the next, £4.8 million the next, and so on—and savings are slow to come through. In terms of government efficiency, that does not seem a very good deal. As the Minister pointed out, though with a rather interesting Freudian slip, 200 jobs will be lost. I suppose that one might look at it more from the point of view of the Treasury and the Inland Revenue and say that 200 jobs will be saved.
§ Baroness Hollis of HeighamMy Lords, it was not a slip. Those jobs will be lost to the people holding them. It will, of course, be a saving to the Exchequer.
§ Lord HigginsMy Lords, absolutely; I agree on both points. Nonetheless, in terms of efficient allocation of the nation's resources, one might perhaps have described it as a saving since presumably the motivation of the Bill is that the Government should become more efficient, and in that context it is important that one should operate with as great a degree of efficiency and economic savings as is possible. Indeed, it is true that quite a few of the proposals in the Bill merely reflect the existing situation. As the Explanatory Notes point out, 94 per cent. of the revenue to which we refer is already collected through the system which involves the Inland Revenue.
I have looked up the position of the previous government. In June 1995 the Chancellor of the Exchequer was asked a question on integrating the national insurance and Inland Revenue systems. Sir George Young replied:
The relationship between the Contributions Agency and the Inland Revenue was examined last year. It was concluded that the overlap between the Revenue and the agency did not warrant an amalgamation of the two businesses. In addition, any efficiency gains would be outweighed by transitional costs and disruption to both departments".We all enjoyed the "Yes, Minister" series. The previous government's Ministers turned the proposals down. But the moment the present Government came to power the same proposals were submitted to them. In terms of efficiency, it is uncertain whether the Bill is as justified as the Minister seeks to argue.However, the Minister was at pains to say that this is a mechanical measure not related to other policy changes. That is difficult to accept. The whole thrust of the Government's social security policy over the past year or 18 months has been to undermine the contributory principle in a number of respects. That in turn undermines universal benefits. The effect of moving the Contributions Agency from the DSS to the Inland Revenue is to make the contributions more and more like a tax. In moving the purely administrative arrangements from one department to another, the Bill is clearly in line with the Government saying, "We shall now merge the Contributions Agency and the Inland 1045 Revenue". It will become more and more a tax, and therefore easier to argue that a contribution to a specific national insurance scheme does not have the same force of entitlement to benefits as was previously the case.
Therefore, contrary to what the noble Baroness argued, I believe that the legislation should be viewed in the context of that overall move. The contributory principle has been the bedrock of our national insurance and social security systems since World War II. We are concerned about this issue not least because of the implications of means testing the national insurance basic pension. In general the Government have moved more and more towards means testing. We believe that that is important.
I give some examples of the way in which the contributory principle is being undermined. On the one hand there are people who are not receiving benefits to which they were previously entitled. They believed that they would receive them because they had made their national insurance contribution. A few days ago the Government put forward a proposal with regard to widows benefits. In another context there are changes in incapacity benefits and the offsetting of those payments against pensions. On the other hand, people are receiving benefits for which they have not contributed. The so-called guaranteed minimum pension is a move in that direction.
Although the measure may be in many respects highly technical, we are concerned about the general thrust of the Government towards more and more means testing. We know that more means testing undermines thrift for the reasons spelt out clearly, for example, by Mr. Frank Field. Contrary to the proposals in the Bill, the move towards means testing—the Government have introduced a number of measures recently—are likely to increase rather than reduce fraud.
The front page of the explanatory memorandum states that,
policy responsibility for NICs would transfer to the Inland Revenue once decisions had been reached on a new benefit entitlement test".The Minister made no reference to that point. When the noble Baroness winds up, perhaps she will tell us when the new benefit entitlement test is to be specified in detail; and when it is likely that the transfer to which I have referred is likely to take place.On that issue, perhaps I may add one word of caution as regards timing. The integration of the two systems seems likely to take place during the millennium. We know that there are grave concerns, not least in the pensions industry, as to the effect of the so-called millennium bug on the ability of organisations, in particular large organisations such as the Contributions Agency or Inland Revenue, to cope with those problems. To impose on those two departments the added burden of this transition seems rather unwise. Since many pension companies are looking into the matter in great depth, perhaps the Minister will tell us to what extent, in deciding to make this change now, the Government have taken into account the problems that may arise with regard to computers, and so on.
I turn now to penalties. The Minister sought to reassure the House. However, there is a general feeling that the penalties imposed by the Inland Revenue are 1046 more severe than those imposed by the Department of Social Security. In order to reassure us further, will the Minster give a clear undertaking that nothing presented in the Bill as a mechanical or technical measure will result in anyone who commits an offence being subject to a heavier penalty than was otherwise the case. There may be an argument for a heavier penalty in a specific instance but it should not be achieved in that way.
The Minister did not refer to this point. I understand that some of the offences previously dealt with in this area of legislation will no longer be criminal offences. I am not clear whether that is so. I see the Minister indicates that that is so. However, in her opening remarks—I may have been distracted for a moment—I do not think that she dealt with that problem.
In Committee we may wish to examine in more detail the investigatory powers of the Government. The Bill is one among other recent Bills which include a disclaimer by the Minister that nothing in the Bill contravenes the European Convention on Human Rights. We had some problems last year on the Social Security Bill in that respect. It will be interesting to see how that operates now that the convention has been incorporated into domestic law. It is an innovation which on the whole is to be welcomed. But we shall need to establish that the undertaking given by the Minister is justified.
She also mentioned the relationship between the Inland Revenue and the Department of Social Security concerning the security of national insurance numbers. I was not entirely clear what she had in mind on that subject but I believe it is the case that there has always been a concern about the exchange of confidential information between one department and another. Certainly, the situation is now a lot better than it was some years ago. Indeed, there are statutory penalties for those in government who transfer information, contrary to statute, between one department and another. But inevitably the integration of the two departments seems to mean that there is a greater exchange of information at a lower level of authority than was previously the case. Indeed, there are references in the Bill to pooling arrangements and so on, particularly as regards Clause 6. Perhaps I may draw your Lordships' attention to that. Information which is held by the board or by a person providing services to the board can be transferred, as I understand it, from one part of the organisation to another. The expression,
a person providing services to the Boardwould seem to involve people outside government service who might then have access to confidential information. Perhaps the Minister can reassure us, if not now, then at Committee stage, as regards that particular point. It has always been a matter of concern as regards Parliament.There is a number of other very detailed provisions in the Bill and not least, as the Minister stated, concerning ACT and the rebates issue on which, as she rightly pointed out, there appears to be some problem in the existing legislation. Again, I hope we shall be able to probe that particular point.
Finally, I raise the question of the extent to which, under these new arrangements, there will be any change in the power of officials to carry out investigations at 1047 particular premises. In my opening remarks I declared an interest. I was rather intrigued to see that under these arrangements it is apparently possible for the Inland Revenue to "raid"—I believe that is the right expression—the particular premises of a trustee of a pension fund. There is an exclusion for a person's home, provided that it is not used for business. But it may be that the business which takes place at the person's home has nothing whatever to do with his function as a trustee of a pension fund. I am sure your Lordships will wish to have that provision, but it seems a little doubtful whether it is as secure as it might be.
As I say, generally speaking, our concerns about the Bill are more as regards the way in which it fits into the Government's overall policy regarding the integration of national insurance and taxation and the strength which that then gives to their policy, which seems to us to involve more and more a move towards means testing and away from universal benefit to which people have contributed and to which, until now, they have been entitled. But as I said at the beginning, it is certainly a complicated Bill. We shall do our best to ensure that when it finally moves from this House to another place it is in a shape which is more appropriate for the statute book than in its present form.
§ 4.13 p.m.
§ Lord GoodhartMy Lords, on behalf of the Liberal Democrats I give a warm welcome to the Bill. It is extremely technical and, to a large extent, non-controversial. I believe that that may be indicated by the fact that no-one has put down their name to speak in this debate other than the "usual suspects" and not all of them since my noble friend Lord Russell, who is sitting beside me today, has taken a vow of silence on this occasion.
As the Minister pointed out, the Bill contains two distinct parts. Part I deals with the transfer of responsibilities for the administration and collection of NICs from the DSS to the Inland Revenue. Part II deals with the transfer of decisions and appeals on questions of contributions from the DSS and the social security appeal tribunals to the Inland Revenue and to Commissioners for Income Tax. We strongly support both parts of the Bill.
Turning first to Part 1 of the Bill, we certainly agree that, as now proposed, national insurance contributions should be collected by the body responsible for the collection of direct taxes. Why is that? First, because national insurance contributions are not insurance contributions at all, but a hypothecated tax on earned income in the case of employees or a payroll tax as regards employers. The national insurance system has not for many years, if ever, been a genuine system of insurance. For example, retirement pensions make up more or less three-quarters of the total spending under the contributory system. In a proper insurance system retirement pensions would be paid for by retaining and investing the contributions in order to provide pensions for the contributors when they retire. But right from the start of the non-means-tested state pension system, under the Pensions Act 1925 pensions have been paid 1048 on a pay-as-you-go basis. Therefore, today's contributors are not saving for their own retirement pensions, but paying for the pensions of today's pensioners. In other words, the National Insurance Fund is not, as most people believe, a reservoir but a pipe.
It is true, of course, that people must have made contributions in the past in order to qualify for the right to a pension now. But, frankly, that is not so very different from saying that one has to pay vehicle excise duty before one is entitled to drive one's car on the public highway. Further, of course, there is no link between the amount of benefit payable and the amount paid in contributions. Contributors pay a percentage of their income between the lower and upper earnings limits or, in the case of employers, NICs without limit. But the benefits, with the only serious exception being the state earnings-related pension supplement (SERPS), are flat rate. The fact that the amount paid in contributions has no link to the amount paid in benefits is again a characteristic of tax rather than insurance.
Looking at administration, since we stopped buying stamps to stick on cards, which I believe occurred in 1981, national insurance contributions have been collected through the PAYE system along with income tax. The noble Baroness said that that collection now amounts to 94 per cent. of the total amount received by way of contributions. It is obviously sensible to collect NICs through the PAYE system and no one wants to go back. Furthermore, it is clear that further alignment between NICs and income tax is both possible and desirable. It is absurd that some forms of remuneration have been treated as income for income tax, but not for national insurance contributions. For example, that leads to many ridiculous schemes to avoid national insurance contributions by payment in gold bars or hay or various other tradeable commodities. It is quite clear that the test of income should be the same for both income tax and national insurance contributions. All this emphasises both the logic and convenience of treating NICs as a tax. One might say that if one owns a dog which quacks like a duck, waddles like a duck, flies like a duck and lays eggs, what one has got is not a dog, but a duck. NICs are not a dog, but a duck: they are not an insurance premium, but a tax. The sooner that is made clearer the better. I do not believe in trying to fool the public, which, frankly, is what the national insurance scheme sets out to do. I therefore welcome anything which leads to a closer integration between national insurance contributions and income tax.
§ Lord HigginsMy Lords, I am grateful to the noble Lord for giving way. What he says is true as regards insurance, but there is a crucial difference between a national insurance contribution and a tax. Paying your taxes does not entitle you to any specific benefit, but paying a national insurance contribution does. Until now, and subject to the erosion of the principle by the present Government that has been the case.
§ Lord GoodhartMy Lords, that has not been the case. For instance, it occurred not only under the present Government in relation to widows' benefits, but it happened twice under the previous government in 1049 relation to SERPS. It is clear that there is no guarantee that payment of a contribution buys you a right to any particular amount of benefit.
I welcome the Minister's statement that the process of alignment will continue. I should like that process of alignment to proceed to the point of open recognition that national insurance contributions are indeed a tax. If the Government were to replace SERPS with a compulsory funded second-tier pension—as we believe they should and we will hear soon whether they plan to do so—we can open up the argument as to whether we need to keep contribution records at all. That would lead to a substantial saving in administrative costs. It would provide help to those who do not have a full contribution record; for example, because their earnings are below the lower earnings limit or because they are women who do not qualify for home responsibility protection. It would greatly simplify record-keeping for employers which, as the Minister conceded, the present proposals do not.
However, it must be said that those are issues for another day and for another Bill. They cannot be included in this Bill. Having gone through the argument on Second Reading, it would not be appropriate to bring it back at a later stage in the Bill. For today, I am happy to say that Part I is a sensible and practical step in the direction in which we would wish to go.
I turn to Part II. When the Social Security Act 1998 was going through this House, we welcomed the fact that for the first time there would be an independent tribunal for deciding questions about contribution payments. However, the Social Security Act provided that contribution questions should go to the social security appeal tribunals. Many people, including members of the Tax Law Review Committee, felt that that was the wrong tribunal and that the proper tribunal was the Commissioners for Income Tax. The reason for that view is that contributions questions are very different from most questions decided by the social security appeal tribunals. The vast majority of the questions decided by that tribunal will concern right to benefit or disputes as to the amount of benefit to which somebody is entitled. Those questions are entirely different from questions related to liability to pay contributions.
However, contributions questions and income tax questions are often similar or identical. As the Minister pointed out, the question whether an earner is an employee or self-employed will decide whether he or she pays tax under Schedule D or Schedule E; it will decide whether the PAYE system is applicable; it will decide whether the individual pays contributions as an employee or as someone who is self-employed; and it will decide whether there is an employer who is liable for the employer's contributions. It is obviously right that there should be a single tribunal which decides whether an earner is an employee or self-employed for both tax and national insurance.
1050 As the Minister mentioned, we raised this issue by amendments in Committee on the Social Security Act. The Government replied encouragingly. They gave an undertaking that the matter would be reviewed in the light of the proposed transfer of functions which is taking place in the Bill. The Government have made good their undertaking and I can therefore give a very warm welcome to Part II.
I have only one doubt about Part II, which is technical. I understand from paragraph 170 of the Explanatory Notes that the effect of Clause 15 is that decisions on the contracting-out of SERPS by occupational pension schemes will be taken by an officer of the Inland Revenue, but appeals from that decision will go to the social security appeal tribunals rather than to the commissioners for income tax. At first sight, that seems rather odd. The Government's explanation is that it will enable pensions experts to sit as members of the social security appeal tribunals. My view is that while contracting-out issues are unsuitable for the general commissioners of income tax they would be entirely suitable for the special commissioners.
The commissioners decide questions relating to pensions; for instance, a question as to whether a scheme satisfies the conditions for approval under Section 590 of the Income and Corporation Taxes Act would go to the commissioners. Special commissioners are used to dealing with questions of great complexity and technicality and are perfectly capable of handling contracting-out cases. I believe that that is the tribunal to which the contracting-out issues should go, together with other contributions questions.
Although I said that that was the only point that I wished to raise, I am not giving an undertaking that at a later time I shall not find other points to raise. Indeed, I have not yet received a proper briefing from the Tax Law Review Committee, which may have other points it wishes me to raise in Committee. But that is all that I wish to raise for the time being.
I conclude with two comments. First, like the noble Lord, Lord Higgins, I found the new Explanatory Notes extremely helpful. They are a most desirable innovation. Secondly, I welcomed the meeting with the Minister and several civil servants from the DSS and the Inland Revenue in the Moses Room last week. It was most helpful and it satisfied me on two or three other issues which I might otherwise have had to raise in the course of debate. In extending a welcome to the Bill, I hope and expect that the remaining stages will not detain us for too long.