HL Deb 26 February 2004 vol 658 cc379-87

2.7 p.m.

Lord McIntosh of Haringey

My Lords, I beg to move that this Bill be now read a second time. The Bill continues the path that the Government have undertaken to work with employers on reducing unnecessary red tape and to improve the delivery of public services.

The Bill had cross-party support in another place and achieved the perhaps unusual distinction of passing without a single amendment being tabled by any party. However, a little bird has told me that the noble Lord, Lord Higgins, is considering tabling amendments here.

This is a technical Bill so it will perhaps help the House if I give an overview of the reasons for the changes that we are making and of what the Bill will do. Before the transfer of the Contributions Agency from the then Department of Social Security to the Inland Revenue in 1999, there was duplication of administrative effort and of burdens on employers and taxpayers. Both had to deal with two different organisations over their tax and national insurance affairs. This was especially a problem for employers who were visited regularly by the Inland Revenue and the Contributions Agency to check on their operation of PAYE and contributions. So the Chancellor of the Exchequer announced in his March 1998 Budget that the Contributions Agency and the Inland Revenue would be merged. That was widely welcomed by business and by members of Her Majesty's Opposition. The merger was given effect by the Social Security Contributions (Transfer of Functions, etc.) Act 1999.

When that Bill was debated in this House, the noble Baroness, Lady Hollis of Heigham, said: 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".—[Official Report, 10/12/98; col. 1038.] It has been nearly five years since that transfer, and we have done a good deal to work towards that in measures that have not required primary legislation. Officials in the Inland Revenue meet employers' representatives regularly. They discuss the issues that concern them and they see if they can put them right.

A lot has already been achieved. In the very swiftest summary, we have abolished the "entry fee"—the lower limit for starting to pay NICs—which was calculated as a percentage of all income. We aligned the primary and secondary thresholds with the income tax threshold. We radically simplified the number of rates of employers' NICs down to one. Where dispensations concerning the treatment of benefits in kind and expenses payments were agreed for tax purposes, they have also been agreed for NICs. We have made changes to regulations on foreign travel and foreign travel expenses of overseas employees. We have made changes in the way that the Inland Revenue is organised so that tax and NICs matters can be administered together, so that we have the joint employer compliance reviews covering both tax and NICs. We have introduced new teams for the joint handling of expatriates' tax and NICs affairs. However, there are some areas that need legislation, and this is that legislation.

If noble Lords will forgive me, I shall deal with the Bill out of order. I want to deal first with issues of alignment. In Clauses 7 and 8, the Bill aligns the powers that officers have for obtaining information when investigating national insurance contributions with those that they have for tax. This will bring clarity for employers and provide a consistent approach by Inland Revenue officers. That is what the House wanted when the transfer of responsibility to the Inland Revenue was debated in 1999.

In Clauses 5 and 6, there is alignment of the way in which the Inland Revenue recovers national insurance contribution debts. Some 97 per cent of contributions are collected with tax, and since 1975 any debt has been recovered under tax rules. The Bill aligns the debt recovery rules for the remaining 3 per cent of contributions with the tax rules and accepted best practice for debt recovery generally. Until now, some contributions payable by the self-employed—mainly the £2 per week flat-rate class 2 contributions—have been recovered under different rules from tax. That means that a person owing both tax and class 2 contributions could face two separate actions. We put that right by aligning the period of notice required for distraint action in England and Wales and application for summary warrant in Scotland with those which apply to tax debts; and by aligning the procedures which apply in Northern Ireland with those which apply in England and Wales. That is why the Bill is twice as long as it should be—it has to have extra clauses for Northern Ireland.

Clauses 5 and 6 also contain a new regulation-making power which will allow the Inland Revenue to apply tax legislation to the recovery of this type of national insurance contributions debt in the future, without having to come back to Parliament for primary legislation, so that they cannot become misaligned in future.

I come now to the measures in the Bill, in the earlier clauses, which help employers with their national insurance contributions obligations. Alignment of administrative rules for tax and national insurance contributions is important, but we are always mindful of areas where, because of structural differences between tax and national insurance contributions, alignment is not the answer. We need to make sure that we enable individuals and employers to meet their national insurance contributions obligations in a way that is fair and straightforward.

We have included in the Bill two measures which will offer employers greater flexibility in the way in which they meet their national insurance contributions obligations when they make payments of earnings in the form of securities. We believe that that will help employers who want to use shares to motivate and reward employees.

First, in Clauses 1 and 2, the Bill extends employers' ability to recover primary national insurance contributions paid on behalf of their employees and former employees when the earnings have been paid in the form of shares or other securities. That recognises the fact that employers may face difficulty in recovering national insurance contributions which they have paid on behalf of their employees who receive security-based earnings; for example, earnings derived from share awards. The clause recognises the value of share incentives and removes a disincentive to their use.

Secondly, the Bill addresses a problem faced by employers who pay earnings in the form of restricted or convertible shares. Restricted and convertible shares are subject to tax and national insurance liabilities when events occur after their acquisition which increase the value of the shares held by the employee. When employers award such shares to employees they cannot predict the amount of their (secondary) national insurance liability due when these events occur.

Clause 3 provides employers with an opportunity to ask employees receiving restricted and convertible share awards to fund the employer's (secondary) national insurance liability arising on post-acquisition earnings received from those shares. However, in doing so, the Bill will not be introducing a new facility, but will extend the scope of a facility introduced in 2000 which allowed this transfer of liability on unpredictable share option gains. Use of this facility is voluntary for both employers and employees and both stand to benefit from this measure. Both measures will remove disincentives employers faced when rewarding employees through shares or securities-based earnings.

I must emphasise that there are fundamental differences between Clause 1 and Clause 3. Clause 1 is only about the collection method for the employee's own contributions liability. It does not in any shape or form alter the amount of contributions that an employee must pay when they receive earnings in the form of securities. There is no transfer of liability. Employees are, and remain, liable for their own contributions. However, the employer is responsible for collecting that money from the employee and passing it to the Inland Revenue. If he fails to collect it from the employee at the time the earnings are made, he must make other arrangements to collect it, within the framework of rules set out in legislation. All this measure does is provide extra flexibility in that framework of rules. It guarantees that the extra flexibility cannot be abused by ensuring that there is a written agreement between employees and employers when the arrangements are made.

Clause 3, on the other hand, is entirely about employers' (secondary) national insurance contributions liability. The clause allows employers and employees to agree—they have to agree—that the employee will take over the cost of the employer's unpredictable future liability that may arise following certain types of share award to that employee. Use of this facility requires the employee's written agreement. This agreement is entirely separate from that required in Clause 1, but both are necessary to protect the employee against coercion.

Finally—I return to some semblance of order—in Clauses 9 and 10, the Bill makes important reforms to the way in which the Inland Revenue oversees the statutory sick and maternity pay schemes. This will have the effect of protecting the rights of people who are sick and of new mothers. Responsibility for the operation of statutory sick pay and statutory maternity pay was transferred to the Revenue from the then Department of Social Security at the same time as the responsibility for national insurance contributions. The compliance regime was transferred unchanged. Failures to comply with statutory sick pay and statutory maternity pay obligations are dealt with as a series of minor criminal offences. This is out of step with the Revenue's practice of imposing civil penalties for compliance failures, and is disproportionate to the nature of the failures.

The Bill aligns the statutory sick pay and statutory maternity pay regime with that which is in place for other parts of the Revenue's business. The regime which the Bill introduces is identical to that which was put in place for statutory paternity and adoption pay in the Employment Act 2002. By doing this we are putting in place a system of civil penalties that is proportionate to the failures. The penalties will be based on the scale of the failure that has taken place, and on whether there has been a previous failure by the same employer. But the penalties will not be used in cases where the employer has tried his best but has made a mistake. In those cases it is the Inland Revenue's role to help the employer to get things right for the future.

There is a very small minority of employers who seek to avoid their obligations, either deliberately or through inaction. That is unfair to employees and it is unfair to the employers who comply. The measures in the Bill will help to protect the rights of employees and ensure a level playing field for all employers.

As I said at the beginning, the Bill is technical. It is helpful to read it in conjunction with the Explanatory Notes which I thought were exceptionally good—I say that although I should not, not that I wrote them. By explaining it in reasonably common language, I hope that I have made it clear that it has a crucial enabling role. It completes the list of administrative measures that we have taken over the past five years to align tax and national insurance contributions in particular. I commend the Bill to the House.

Moved, That the Bill be now read a second time.—(Lord McIntosh of Haringey.)

2.20 p.m.

Lord Newby

My Lords, I congratulate the Minister on setting out the extremely detailed provisions of the Bill so clearly and concisely. As he said, it is an extremely technical Bill and I am pleased, after my strictures in the previous debate, that I am able to support it. He will no doubt be pleased to know that we do not intend to break the precedent of our colleagues in the Commons by, tabling any amendments to the Bill.

One of the broader issues that the Bill raises, and to which the Minister alluded, is the extent to which the tax and national insurance systems should be aligned, and the desirability or not of merging tax and national insurance. That issue goes much wider than the Bill, but it is one to which we should return at some point, not least because the Chancellor, in his decision to introduce the 1 per cent national insurance contribution to all higher-income earners, appears to be treating national insurance as a disguised form of income tax. At least at a macro-political level, there seems to be an alignment in his mind between the two, and I am not absolutely convinced that the arguments made to keep elements of the administration of the two taxes separate outweigh the benefits for employers of a common system across the piece.

The only other issue that I would like to raise—the Minister may be able to help us—is the problem that has arisen about the failure of the Revenue to send out reminders to people between 1996–97 and 2000–01 who had the scope to top up their national insurance contributions. The common practice is that those people are reminded to do it because, if they do not, they will not be entitled to a full state pension. Because the reminders were not sent out, apparently 10.2 million people by the Government's own admission were likely not to be reminded, and therefore might simply not make contributions of, I gather, upwards of £200 and on average about £425 a year.

I understand that the Revenue estimates that there are 10.2 million letters to be sent, which are going out at a great rate. However, there is also the suggestion that another 3 million people will not even be receiving reminders now, because they have moved address since the point at which the reminders should have been sent in the first place. That is obviously a major administrative failure by the Revenue, and it is extremely important that it be put right. I would be grateful for anything that the Minister could say today to reassure me on that point.

2.24 p.m.

Lord Higgins

My Lords, the House will be grateful to the noble Lord, Lord McIntosh of Haringey, for spelling out the features of the Bill so very clearly, and even going to the extent of reordering the sequence in which he thought the clauses might most logically be discussed, whatever the draftsmen might have thought. I am always slightly uncertain whether he or the noble Baroness, Lady Hollis, will introduce such debates, but the Bill is of course concerned with the integration of national insurance contributions and so on into the tax system. I shall say more about that in a moment.

I want to take up one matter from the seventh report of the Delegated Powers and Regulatory Reform Committee, which does such invaluable work on behalf of Parliament. It refers in particular, in relation to the Bill, to Clause 13 on commencement and raises some problems with it. Although it does not actually come down against the clause as such, it asks the House to take into account the comments that it makes on such powers, stating that, we refer the House to our general comments on such powers in paragraphs 31 to 33, below, of this Report". In the conclusion, the report states: Save for the comment made in paragraph 4 above, referring to paragraphs 26 to 28 of this Report, we take the view that the powers in this bill in each case are appropriately delegated and subject to an appropriate level of Parliamentary scrutiny". I presume that that is a straight typing error. Paragraphs 31 to 33, referred to in paragraph 4, do not appear to relate to the point that the committee is making. For the avoidance of doubt, as lawyers say, that might be clarified.

Lord McIntosh of Haringey

My Lords, it is not for me to respond about the report of the Delegated Powers and Regulatory Reform Committee.

Lord Higgins

My Lords, I understand that. No doubt the appropriate authorities will take note. The Bill is extremely complicated and it may be that I have not understood it. There may have been a typing error.

My noble friend Lady Noakes earlier expressed appreciation of the fact that, on the Bill discussed a few moments ago, the Government had provided draft statutory instruments. That is the case so far as this Bill is concerned, in relation to this House, and I also express appreciation of the fact that those statutory instruments have been provided in draft. It makes the whole comprehension of the Bill so much better when that is so.

The Minister rightly said in introducing the Bill that it is technical—one might say highly technical. I do not think that it will raise enormous passions on either side of the House. The only real matter of controversy about it in the other place was in regard to whether the reason for the Bill was that the Chancellor had made the increase of 1 per cent in national insurance contributions on an uncapped basis. There was quite a lot of to-ing and fro-ing in the other place about that. I want to say a word or two about the context so far as contributions into the National Insurance Fund are concerned.

The House will recall that the Chancellor said that the money was being raised to go to the National Health Service. It then disappears into the National Insurance Fund. However, it is not in the least clear how that allocation takes place. The report made each year on the fund states: The Social Security Administration Act 1992 requires that the Government Actuary apportion the national insurance contributions collected each year. The main focus of this exercise is to confirm the Class split in order to calculate the appropriate amount to he paid over to the National Health Service". Although the statement by the Chancellor was originally very simple and straightforward, its mechanics are vastly more complicated. As I propose to argue in our next debate, we have at some stage to look strategically at the whole issue of whether the present National Insurance Fund arrangement is really very sensible. The funds going to the National Health Service on the one hand and the whole benefit structure on the other no longer depend in any very coherent way on the fact that those funds are national insurance contributions. Of course there arc much wider considerations regarding whether payment of contributions entitles someone to the so-called contributory benefits. I shall return to that in another speech. It is a real issue which we ought to consider further—not necessarily on this Bill.

The noble Lord referred to the fact that there were no amendments moved in the other place. That is not without precedent, but it is unusual. It had the great advantage that, given the way in which Bills are so ruthlessly programmed in the other place and so many arrive in this House not scrutinised anywhere near enough by the other place, we have to deal with the matter. But in this case I was not clear why they had to rush it with such a tight programme—two sittings in one day. The measures have come hack, as the noble Lord pointed out, five years after the initial decision by way of a tidying-up exercise. None the less the matters were discussed in considerable detail in another place. It would appear from the debate at Third Reading in another place on 28 January and the response by the Paymaster General that further representations had been received from the Institute of Chartered Accountants. She appeared to say that those amendments did not find favour with her. But at Third Reading in another place one cannot move amendments, whereas in this House we can. It may be—and this is the point that the noble Lord was making about the Committee stage—there are still one or two loose ends which, given that the chance for primary legislation on such matters is so rare, we will need to clear them up at that stage.

The noble Lord pointed out that the Bill deals particularly with security-based earnings; and both sides of the House are in favour of share options, which encourage the wider spread of share ownership and are to some extent and incentive to savings. We welcome the way in which a number of the proposals tie up the loose ends that have been around for so long. We welcome the fact that the Inland Revenue, for example, is abandoning powers of entry and will treat the national insurance side in the same way as the tax side. I understand that it will be subject to third party scrutiny. The way in which they proceed is also welcome. The recovery of debt side, while never popular with those whose debts are being recovered, is none the less better done by a single action, rather than split between a debt for national insurance contributions and a debt for tax. The change from criminal offences on the national insurance side to civil offences on the tax side and the integration of those two on a civil basis is again welcome.

The question of recovery of national insurance contributions in relation to shares and securities and so on is complex. There may be some points to which we shall return in Committee. There are difficulties when the amount due is unpredictable and over the way in which the burden—or rather the payment—is split between employees and employers. We can return to those matters in Committee. That said, the Bill as a whole is welcome. We are grateful for the clear explanation given by the Minister and we look forward to discussing any further points which may arise, particularly in the light of the draft statutory instruments which the Government have provided for Committee stage.

2.35 p.m.

Lord McIntosh of Haringey

My Lords, I am grateful to both noble Lords for the way in which they have responded to the Bill. I suspect that the lack of Back-Bench contributions arises from the degree of technical complexity that is inevitable in such matters.

The noble Lord, Lord Newby, made a couple of points which he acknowledged were nothing to do with the Bill, but I am happy to try and respond to them. First, he talked about whether it was desirable to merge tax and national insurance contributions and he referred to the 1 per cent for the health service being a disguised income tax. The very fact that national insurance contributions are not being levied on the same basis as income tax is evidence that they are different. We have no plans for structural alignment of tax and national insurance and we do not propose to convert national insurance contributions to an annual charge, with allowances and reliefs, like tax which is collected cumulatively. That would be a major change and would be unnecessary and undesirable. What we have done in the Bill is to make sure that from the practical point of view of employers and taxpayers there are no unnecessary complications.

The noble Lord referred to the failure of the Inland Revenue under the previous administration to send out letters telling people about shortfalls in their national insurance contributions. I can best answer him by sending him selected extracts from Hansard in the name of my noble friend Lady Hollis, who explained the matter with great clarity to the House when the issue arose. This Government have been trying to put that right. We have issued over a million letters—indeed I received one only yesterday on behalf of my son who lives abroad, is some years behind in his payments and will now have the opportunity to make them up. No one needs to lose out. If they want to pay voluntary contributions to improve their basic state pension entitlement, they will have as much time as they would have had if the letters had been sent out on time—and they will be frozen at the original rate. So there is no question of 3 million people losing out. The only reason for the reduction in numbers is that the first number was an early estimate. Everyone who would have received a deficiency notice in 1998 will receive one. I do not think that the matter is a problem any more. Perhaps I shall withdraw my offer to send extracts from speeches by my noble friend Lady Hollis.

The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Hollis of Heigham)

My Lords, I believe in the diffusion of useful knowledge.

Lord McIntosh of Haringey

My Lords, my word should have been "threat", not "offer".

The first point raised by the noble Lord, Lord Higgins, was about consideration of the Bill in the Commons. In fact, four sittings were allocated but they were not used up because no one had enough to say. That should be fine—no one can say that the Commons did not do its job because the Bill was timetabled. The noble Lord referred to the Delegated Powers Committee. The committee did not criticise the commencement clause. It only noted that the department's memorandum had not drawn the power to the committee's attention—but it did so without criticism, as I understand it. The noble Lord is right in thinking that the paragraph reference was a typing error.

Regarding the issue of the use of money from the National Insurance Fund, I acknowledge that it is not always clear from its accounts where the money goes, but if it had not been in that fund, rather than the Consolidated Fund, these clauses would have been in the Finance Bill and your Lordships would have had no opportunity to do anything other than debate them in general terms. I commend the Bill to the House.

On Question, Bill read a second time, and committed to a Grand Committee.