National Insurance Contributions Bill 2014

These notes refer to the National Insurance Contributions Bill 2014

as introduced in the House of Commons on 17 July 2014 [Bill 80-EN]

Explanatory Notes

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introduction

1. These explanatory notes relate to the National Insurance Contributions Bill as introduced in the House of Commons on 17 July 2014. They have been prepared by HM Revenue & Customs (HMRC) in order to assist the reader of the Bill and to help inform debate on it. These explanatory notes do not form part of the Bill and have not been endorsed by Parliament.

2. The notes need to be read in conjunction with the Bill. They are not, and are not meant to be, a comprehensive description of the Bill. So where a clause or part of a clause does not seem to require any explanation or comment, none is given.

Structure of these notes

3. These notes begin with an overview of National Insurance contributions (NICs) and a summary of the measures contained within the Bill. This is followed by an outline of the structure of the Bill, its territorial extent and application and commentary on the Bill's clauses. The final part contains information about the Bill’s financial effects, compatibility with the European Convention on Human Rights and when the provisions in the Bill come into force. Annex A contains a brief overview of how NICs works for the self-employed and Annex B contains a glossary of terms used in these notes.

summary and background

Overview of NICs

4. The National Insurance Scheme was first established in 1911 and expanded in the late 1940s to provide funds for a more comprehensive and inclusive range of contributory benefits and to provide assistance with the funding for a new National Health Service.

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5. Receipts from contributions are paid into the National Insurance Fund (NIF). Money kept in NIF is separate from all other revenue raised by national taxes. NIF is used exclusively to pay for contributory benefits and operates on a pay as you go basis: broadly speaking, this year’s contributions pay for this year’s benefits.

6. Briefly, the scheme consists of a number of benefits financed by NICs payable by earners, employers and others. Employees pay NICs on their earnings, employers pay NICs on the earnings they pay to their employees and the self-employed pay flat rate NICs and NICs on their profits and gains.

7. An earner can be either an employed earner or a self-employed earner. An employed earner is a person who is gainfully employed in Great Britain or Northern Ireland either under a contract of service, or in an office (including elective office) with earnings. A self-employed earner is a person who is gainfully employed in Great Britain or Northern Ireland otherwise than as an employed earner. Provision is made within the scheme to allow those who are not compulsorily covered to protect their entitlement to state retirement pension and bereavement benefits by means of voluntary NICs payments.

8. NICs are currently divided into six classes:

• Class 1 contributions, which are paid by both employees and employers on the employee’s earnings, are payable at 12% and 2% by employees and 13.8% by employers.
• Class 1A contributions are payable annually, by employers only, on most taxable benefits in kind. Class 1A contributions are payable at a rate of 13.8%.
• Class 1B contributions are payable annually, by employers on items which are dealt with under a PAYE Settlement Agreement (PSA) for income tax. Class 1B contributions are payable at a rate of 13.8% on the value of items included in the PSA and on the total tax payable by the employer under the PSA.
• Class 2 contributions are paid by the self-employed at a flat rate of £2.75 per week for the 2014-15 tax year. Class 2 contributions are paid either monthly or six monthly. An individual whose earnings from self-employment are below a set level, which is £5,885 for 2014-15 (referred to as the small earnings exception (SEE)) and which is approximately equivalent to the exception limit that applies to employed earners Employed earners do not pay NICs until their earnings reach the Primary Threshold but they are treated as having paid NICs from a lower threshold referred to as the Lower Earnings Limit (LEL). Employed earners pay no NICs below the LEL. , may apply for exception from Class 2 contributions on the grounds of low earnings.
• Class 3 contributions are payable at a flat weekly rate of £13.90 per week for the 2014-15 tax year by people who are not otherwise liable to pay Class 1 or Class 2 contributions, to protect entitlement to State Pension.
• Class 4 contributions are paid annually by the self-employed on profits chargeable to tax as trading income. Class 4 NICs are payable at a rate of 9% on profits between a lower and upper profits threshold and 2% on profits above the upper threshold.

9. An additional class of NICs (Class 3A) was introduced in the Pensions Act 2014 (section 25) and will be payable on a voluntary basis for a limited period by those who reach state pension age before 6 April 2016.

Simplifying NICs paid by the self-employed

10. At Budget 2014 the Government announced that the collection of Class 2 NICs would be moved into self-assessment (SA) so that the self-employed could deal with their Class 2 NICs together with their income tax and Class 4 NICs. This followed a 2012 recommendation by the Office of Tax Simplification and a consultation published in July 2013 entitled Simplifying the National Insurance Processes for the Self-Employed, which sought views on proposals to simplify Class 2 NICs.

11. This simplification will:

• change the way in which Class 2 NICs are structured;
• change the means by which Class 2 NICs are collected; and
• change the means by which Class 2 NICs are enforced with changes to associated appeal rights.

12. An overview of the way NICs currently works for the self-employed is contained in Annex A to these Explanatory Notes, together with a summary of the changes being made.

Follower notices and accelerated payments

13. The Government confirmed at Autumn Statement 2013 that it would introduce a new measure where HMRC would send a ‘follower notice’ to users of avoidance schemes that have failed in another party’s litigation, setting out HMRC’s view that they should settle their tax dispute. If they decide not to settle the dispute they would risk a penalty.

14. The Government also announced at Autumn Statement that a taxpayer who chose not to settle on receipt of a follower notice would be require to make an accelerated payment of the tax in dispute.

15. The consultation paper Tackling marketed tax avoidance was published on 24 January 2014. It set out the proposals and draft legislation for the further stages of the accelerated payment measures.

16. A follower notice sets out HMRC’s view that a judicial decision determines a taxpayer’s case and will invite them to settle their case. They will face a tax-geared penalty if they unsuccessfully continue with their case and cannot show either it was materially different from the other party’s litigation or that they had reasonable grounds to continue the dispute.

17. Accelerated payments may be required from taxpayers in the following circumstances:

• Where a f ollower n otice has been issued and the taxpayer decides not to settle their dispute :
• Where taxpayers are involved in schemes subject to disclosure under the Disclosure of Tax Avoidance Schemes (DOTAS) rules ; or
• Where taxpayers have used arrangements that HMRC decides to counteract under the General Anti-Abuse Rule (GAAR) , and where the Advisory Panel gives its opinion that the arrangements are not a reasonable course of action .

18. This Bill will apply the Finance Act 2014 (FA 2014) provisions to NICs ensuring that there is a single follower notices regime and accelerated payments regime for tax and NICs.

High risk promoters of avoidance schemes

19. FA 2014 includes legislation that will allow HMRC to issue conduct notices to promoters of tax avoidance schemes and monitor promoters who breach them. This Bill will apply FA 2014 provisions to promoters of NICs avoidance schemes ensuring that equivalent provision is made in respect of NICs.

20. Monitored promoters will be subject to new information powers and penalties which will also apply to intermediaries that continue to represent them after the monitoring commences. The monitored promoter will be named by HMRC, details of the breach of the conduct notice will be published and the promoter will be required to inform its clients that it is being monitored by HMRC. Clients of monitored promoters will also be subject to certain obligations (with a penalty for non-compliance) and extended time limits for assessments.

Targeted Anti Avoidance Rule to prevent people from circumventing new legislation tackling avoidance involving employment intermediaries

21. The temporary labour market is quick to react to any legislative changes and to find new ways of reducing income tax and NICs. Stakeholders have indicated that intermediaries involved in the facilitation of false self-employment may use avoidance vehicles and set up structures specifically designed to circumvent the legislation introduced by amending existing regulations. This Bill includes a targeted anti-avoidance rule (TAAR) to deter such avoidance focussing on:

• the motive for setting up the arrangements – that they are set up with the motive of avoiding NICs under certain provisions themselves aimed at counteracting avoidance through false self-employment, intermediaries and structures involving overseas elements ; and
• what it achieves – does it result in less income tax being paid?

overview of the structure of the bill

22. The Bill has eight clauses and two Schedules.

23. Clauses 1 and 2 and Schedule 1 make provision for simplifying NICs paid by the self-employed.

24. Clause 3 and Schedule 2 provide for applying Part 4 (follower notices and accelerated payments) and Part 5 (promoters of avoidance schemes) of FA 2014 to NICs. Clause 4 provides a power to amend legislation, if Part 4 or 5 of the FA 2014 is modified and those modifications would otherwise only apply to tax, to take account of them for NICs.

25. Clause 5 inserts into the Social Security (Categorisation of Earners) Regulations 1978 (S.I. 1978/1689) (SS(CE)R) 1978) and Northern Ireland equivalent a new TAAR to prevent people from circumventing new legislation tackling avoidance involving employment intermediaries. Clause 5 also extends the scope of two existing regulation-making powers for (i) treating a person as being either employed or self-employed, and (ii) treating a person as a secondary contributor so as to enable regulations made under them to provide for TAARs.

26. Clause 6 makes provision for HMRC’s administrative expenses in relation to the provisions in this Bill.

27. Clause 7 defines abbreviations used in the Bill.

28. Clause 8 names the Act that would result from the Bill and makes provision about territorial extent.

territorial extent and Application

29. The National Insurance Contributions Bill extends to England and Wales, Scotland and Northern Ireland. But an amendment, repeal or revocation in the Bill has the same extent as the provision amended, repealed or revoked.

30. This Bill does not contain any provisions falling within the terms of the Sewel Convention. Because the Sewel Convention provides that Westminster will not normally legislate with regard to devolved matters in Scotland without the consent of the Scottish Parliament, if there are amendments relating to such matters which trigger the Convention, the consent of the Scottish Parliament will be sought for them.

Wales

31. The Bill does not contain any provisions relating to devolved matters. If there are amendments which relate to such matters, the consent of the National Assembly of Wales will be sought for them.

Northern Ireland

32. Under the provisions of Schedule 2 to the Northern Ireland Act 1998 (NIA 1998), NICs are an excepted matter. Social security, child support and pensions (including the basic state pension and the additional State Pension) are transferred matters under NIA 1998. The Bill contains consequential amendments to matters pertaining to Maternity Allowance (MA), which are transferred matters, arising from the provisions for simplifying NICs paid by the self-employed. However a legislative consent motion is not required as these provisions are ancillary to, and consequential upon, the provisions simplifying NICs paid by the self-employed which is an excepted matter. If there are amendments which relate to transferred matters which are not ancillary to, and consequential upon excepted matters, the consent of the Northern Ireland Assembly will be sought for them.

commentary on clauses

Clause 1: Reform of Class 2 contributions

33. Clause 1 introduces Schedule 1 to the Bill.

Clause 2: Consequential etc power

34. Subsection (1) provides the power to make consequential, incidental or supplementary provision in connection with the provision made in Schedule 1. This power would allow the Treasury to make consequential amendments to legislation. Any changes made using this power would be technical in nature, resulting from provision made in the Bill to simplify Class 2 NICs.

35. Subsection s (2) and (3) enable regulations made under this clause to modify any provision in primary or secondary legislation, including by amending, repealing or revoking it.

36. Subsection (4) allows, among other things, the regulations to make different provision for different cases or classes.

37. Subsection (5) requires the regulations to be made by statutory instrument.

38. Subsection (6) provides that a statutory instrument containing regulations under this section is subject to annulment by resolution of either House of Parliament (‘negative procedure’).

Schedule 1: Reform of Class 2 contributions

39. Schedule 1 contains the amendments required to the Social Security Contributions and Benefits Act 1992 (SSCBA 1992) and the Social Security Contributions and Benefits (Northern Ireland) Act 1992 (SSCB(NI)A 1992) to introduce the reform of Class 2 NICs. It also amends the Social Security Administration Act 1992 (SSAA 1992), the Social Security Contributions (Transfer of Functions, etc.) Act 1999 (SSC(TF)A 1999), the Social Security Contributions (Transfer of Functions, etc.) (Northern Ireland) Order (S.I. 1999/671) (SSC(TF)(NI)O 1999) and the Social Security (Contributions) Regulations 2001 (S.I. 2001/1004) (SS(C)R 2001).

40. Paragraph 2 removes the reference to Class 2 contributions being payable weekly from section 1 of SSCBA 1992 (outline of contributory system). This reflects the fact that Class 2 contributions will now be payable annually through the SA system.

41. Paragraph 3 replaces section 11 of SSCBA 1992. It also provides for a new section 11A.

42. The new section 11 of SSCBA 1992 provides as follows:

a) Subsection (1) applies section 11 to those who are self-employed earners in the relevant tax year.

b) Subsection (2) provides that a Class 2 liability will only arise where the earner has relevant profits of or exceeding the small profits threshold (SPT). This takes away the need for the earner to apply for a SEE. It also prescribes the weekly rate of Class 2 NICs which will be payable in respect of each week of self-employment in the relevant tax year.

c) Subsection (3) sets out the meaning of relevant profits and aligns the profits to be used when determining whether a Class 2 liability exists with that already used for Class 4 NICs purposes under section 15 of SSCBA 1992.

d) Subsection (4) provides the value of the SPT which has been set at the same level as the current SEE.

e) Subsection (5) aligns the payment method for those liable for Class 2 NICs to that which applies to Class 4 NICs (subject to provisions made under section 11A). At present Class 2 NICs are payable by either six monthly payment request or monthly/six monthly Direct Debit and Class 4 NICs are payable through the SA process alongside Income Tax. Under this new section 11(5), Class 2 NICs will also be payable through the SA process.

f) Subsection (6) provides for those who are not liable for Class 2 NICs, because they do not have relevant profits or their profits do not exceed the SPT, to be able to pay Class 2 NICs voluntarily. It also prescribes the weekly rate of voluntary Class 2 NICs which can be paid for each week of self-employment in the relevant tax year. The rate of Class 2 will be the same under both subsection (2) and (6).

g) Those covered under subsection (6) will include those who would otherwise be liable but for their profits falling below the prescribed threshold and those who would never be liable, despite their profit levels, because they are not chargeable to tax under Chapter 2 of Part 2 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) and who are not, therefore required to pay Class 4 NICs under section 15 of SSCBA 1992. This means that it covers those who fall into the category of a self-employed earner for NICs purposes but who are not operating a trade, profession or vocation. It will also include those who, for a variety of reasons are treated as self-employed earners for NICs purposes.

Example of a person with low profits who could pay voluntary Class 2 NICs The position pre Class 2 reform John becomes self-employed on 18 August 2014 and immediately registers with HMRC. He anticipates that his earnings will be below the SEE limit of £5,885 for the 2014/15 tax year. He completes the form CF10 to apply for a SEE certificate. HMRC are satisfied with John’s application and award the certificate. Depending upon his circumstances, John may need to apply to renew his certificate if his earning continue to be below the SEE limit in future years. Although he has an exception certificate, John can pay voluntary Class 2 contributions if he wishes to maintain his contribution record for contributory benefit purposes. The position post Class 2 reform John becomes self-employed on 18 August 2015 and immediately registers with HMRC. He does not need to take any further action until he is sent a SA return in April 2016. He chooses to file his SA return online and has until 31 January 2017 to file his return and pay. John files his SA return in December 2016 and declares profits below the SPT and is therefore not liable to pay Class 2 contributions. He is given the option to pay voluntary Class 2 contributions if he wishes to maintain his contribution record for contributory benefit purposes.

Example of a person without relevant profits who could pay voluntary Class 2 NICs Clare has been self-employed in South Africa since May 2012. She is entitled to pay voluntary Class 2 NICs as she was self-employed in the UK immediately before going to work in South Africa. In July 2015 she applies to pay Class 2 contributions. As she has no relevant profits (her self-employment is carried on wholly outside of the United Kingdom and she does not satisfy the conditions under section 15 of SSCBA 1992 for a Class 4 liability) Clare can pay voluntary Class 2 contributions. As she is not a UK taxpayer, Clare is not required to file a return under the SA system and arrangements are made for her to pay voluntary Class 2 contributions on an annual basis.

h) Subsection (7) provides that, as now, only those who are aged 16 or over and below state pension age will be liable for or eligible to pay Class 2 NICs.

i) Subsection (8) maintains the current position whereby the Treasury may make provision for a higher rate of Class 2 contributions to be payable by those who are employed earners but are treated as self-employed earners under SS(CE)R 1978 and the Northern Ireland equivalent.

j) Subsection (9)(a) provides the Treasury with the power to modify the meaning of "relevant profits" and would allow for certain exceptions to be applied when calculating the profit figure for Class 2 NICs purposes.

k) Subsection (9)(b) provides the Treasury with the power to exclude certain prescribed employments and certain prescribed earners from the scope of Class 2 NICs. The power can also be exercised to exclude payment of voluntary Class 2 in prescribed circumstances. An example of how this power could be used is provided at paragraph 32 of Schedule 1.

l) Subsection (10) provides for section 11 to be amended by regulations made under section 11(9)(a).

m) Subsection (11) provides that any regulations made under subsection (9)(b) are to be made with the concurrence of the Secretary of State in recognition of the fact that there may be an impact upon benefit entitlements if the scope of Class 2 NICs is modified.

43. Section 11A of SSCBA 1992 allows for the application of certain provisions of the Income Tax Acts (see Schedule 1 to the Interpretation Act 1978) in relation to Class 2 contributions under section 11(2) as if those contributions were income tax chargeable under Chapter 2 of Part 2 of ITTOIA 2005 in respect of profits of a trade, profession or vocation carried on in the UK.

a) Subsection (1) provides for the application of certain tax provisions, with the necessary modifications, to those individuals who are liable for Class 2 NICs under section 11(2). This will enable the administration of Class 2 NICs for those within the SA system to be more closely aligned to Class 4 NICs and Income Tax. In particular, the relevant provisions of the Taxes Management Act 1970 (TMA 1970) (as regards the making of returns, assessments and claims, appeals, certain criminal offences and the payment, collection and recovery of tax); the Finance Act 2009 (FA 2009) (concerning late payment interest on sums due to HMRC and repayment interest on sums to be repaid by HMRC; penalties for the failure to make returns or payments) and follower notices, accelerated payments and promoters of tax avoidance, will apply to Class 2 contributors within the SA system.

b) Subsection (2) specifically excludes section 59A of TMA 1970 from applying to Class 2 contributions payable under section 11(2). Under section 59A there is a mandatory requirement for the tax payer to make two payments on account of his liability to income tax for the year of assessment - the first on or before the 31st January in that year, and the second on or before the next following 31st July – when certain prescribed conditions are met. As explained at paragraph 24 of Annex A below, most self-employed people will be able to access a voluntary budget payment plan should they wish to spread the cost of their NICs.

c) Subsection (3), amongst other things, enables provisions to be made in regulations for the collection of Class 2 NICs from those who are liable but who are not within the SA system, for example, those who are self-employed in the EU and who remain UK insured but who are not subject to UK income tax and are therefore not within the SA system.

44. Paragraph 4 amends section 12 (late paid Class 2 contributions) of the SSCBA 1992. The effect of the amendments to section 12 is that the current higher rate charges that are applied to late paid Class 2 contributions will now apply only to voluntary Class 2 contributions that are payable under section 11(6). Contributions payable under section 11(2) that are late in being paid will be subject to the same penalties and interest charges that apply to income tax and Class 4 NICs payable under the SA system.

45. Paragraph 5 makes a consequential amendment to section 18 of SSCBA 1992 dealing with recoverable Class 4 NICs under regulations.

46. Paragraph 6 makes consequential amendments to section 35A of SSCBA 1992 to allow women to continue to become eligible for MA post reform. The amendments will allow women to continue to be eligible for the standard rate of MA where they have a record of Class 2 NICs paid through SA or have made voluntary contributions before they have filed their SA return (and so before their liability to pay Class 2 contributions has been established). Women with profits falling below the SPT who choose not to pay Class 2 contributions voluntarily will still be able to receive the lower rate of MA.

47. Paragraph 7 makes consequential amendments to section 35B of SSCBA 1992 to ensure that participating spouses or civil partners can continue to receive the lower rate of MA if their spouse or civil partner has made Class 2 contributions for the requisite length of time within the relevant period. These payments could be voluntary and paid before the SA filing date or dealt with via their SA return.

48. Paragraph 8 replaces the reference in section 176(1)(a) of SSCBA 1992 (parliamentary control) to section 11(3) with section 11(8) and (9). The effect of this is to require a statutory instrument containing regulations made using this power to be laid in draft before, and approved by, each House of Parliament (‘affirmative procedure’).

49. Paragraphs 9(1) and (2) make amendments to Schedule 1 to SSCBA 92 (supplementary provisions) in relation to the changes to Class 2 NICs.

50. Paragraph 9(3) provides for regulations to enable those women (or the spouse or civil partner of a participating spouse) who have not had the opportunity to file an SA return and to pay Class 2 NICs to pay them early to enable them to establish their entitlement to MA. It also makes provision for those Class 2 contributions that are paid early to be given their correct classification (either liable contributions or voluntary contributions) when the woman has filed her SA return and her actual Class 2 position has been established.

51. Paragraph 9(4) omits paragraph (j) and (k) which were powers enabling regulation to be made to deal with the former SEE process.

52. Paragraphs 10 to 18 amend SSCB(NI)A 1992 by making equivalent provisions to paragraphs 1 to 9.

53. Paragraph 19 provides for some consequential amendments to SSAA 1992.

54. Paragraph 20 relates to the annual uprating of NICs. The NIC rates and thresholds are reviewed and, where appropriate, changed each year by secondary legislation by reference to the consumer price index. Consequential amendments to section 141 of SSAA 1992 allow for this uprating to continue after the changes brought about by Class 2 reform.

55. Paragraphs 21 and 22 make consequential amendments to sections 143 and 145 of SSAA 1992 to take into account changes to Class 2 NICs. An order under section 141, 143 or 145 of SSAA 1992 (alteration of contributions) may also make corresponding provision for Northern Ireland (see section 129 of the Social Security Administration (Northern Ireland) Act 1992 (SSA(NI)A 1992).

56. Paragraphs 23 and 24 provide for changes to SSC(TF)A 1999 to reflect the fact that contributions payable under new section 11(2) will be recoverable through the SA system under the provisions of TMA 1970.

57. Paragraph 25 amends section 8 of SSC(TF)A 1999 in connection with decisions on National Insurance and related matters. Broadly speaking, paragraph 25 prevents a decision being made under section 8(1)(c) (liability to pay) or (e) (whether contributions have been paid) of SSC(TF)A 1999 in relation to anyone liable to pay Class 2 NICs until it is clear that there will be no appeal in relation to the same issues under Part 5 of TMA 1970. This will ensure only one appeal can be heard on any matter covered by both provisions.

58. Paragraphs 26 and 27 make further consequential changes to SSC(TF)A 1999.

59. Paragraphs 28 to 31 amend SSC(TF)(NI)O 1999 by making equivalent provisions to paragraphs 25 to 27.

60. Paragraph 32(1) amends regulation 127 of SS(C)R 2001 to maintain the current position that a married woman with a valid reduced rate election is neither liable nor entitled to pay Class 2 contributions.

61. The Social Security Act 1975 (or the Social Security (Northern Ireland) Act 1975) gave a married woman the right to elect to pay Class 1 contributions at a reduced rate from a specified tax year and not to pay Class 2 contributions from a specified year if she became self-employed. The election lasted for the whole tax year for which it was made and continued until the woman cancelled it or changed her marital status. Although the Social Security Pensions Act 1975 and associated regulations took away the right of a married woman to elect to pay reduced rate Class 1 contributions and not to pay Class 2 contributions where she married on or after 6 April 1977, there are still a small number of women with valid reduced rate elections. Even with a valid election, the woman is liable for Class 4 NICs.

62. Under the Class 2 reform, women with reduced rate elections would be liable to pay Class 2 NICs by virtue of the fact they have profits on which they are liable to pay Class 4 NICs. Paragraph 32 provides that these women will be excluded from Class 2 NICs to maintain the current position.

63. Paragraph 32(2) provides that the amendment to regulation 127 of SS(C)R 2001 is made without prejudice to any power to make regulations amending or revoking the provision inserted by paragraph 32(1).

64. Paragraphs 33 and 34 relate to the commencement of Schedule 1. More detail on the commencement dates is contained at paragraph 196 of these Explanatory Notes.

65. Paragraph 35 provides for Treasury to make regulations to do with transitional or transitory provisions or savings in connection with the coming into force of the new Class 2 system.

Clause 3: Application of Parts 4 and 5 of FA 2014 to national insurance contributions

Follower Notices and Accelerated Payments: Class 1, 1A, 1B and certain Class 2

66. Subsection (1) provides that Part 1 of Schedule 2 applies Part 4 of FA 2014 (follower notices and accelerated payments) to Class 1, 1A, 1B and certain Class 2 contributions.

67. Paragraph 1 of Part 1 of Schedule 2 applies Part 4 of FA 2014 (follower notices and accelerated payments) to relevant contributions with the modifications contained in the rest of that Part of the Schedule. Paragraph 22 provides a definition of ‘relevant contributions’ which applies to Part 1 of this Schedule. It includes Class 1, 1A, 1B and Class 2 contributions (to which section 11A of SSCBA 1992 and section 11A of SSCB(NI)A 1992 do not apply).

68. Paragraph 2 provides that references to tax or a relevant tax, other than references to particular taxes, include relevant contributions. Where the tax legislation deals with a specific tax (for example, Stamp Duty Land Tax or Annual Tax on Enveloped Dwellings) this does not have any effect on relevant contributions.

69. Paragraph 3 provides that references to a charge to tax include a liability to pay relevant contributions and references to a person being chargeable to tax, or to tax being charged, are to be read with this modification in mind.

70. The effect of the modifications described in paragraphs 2 and 3 above enables key concepts defined in Chapter 1 of Part 4 of FA 2014 to apply in respect of the relevant contributions. For example, the term ‘tax’ includes relevant contributions, ‘tax advantage’ includes a relevant contributions advantage and the meaning of this term includes the avoidance of a liability to pay relevant contributions (section 201(1) of FA 2014). Also, the term ‘tax arrangement’ includes a relevant contributions arrangement, that is arrangements where, having regard to all the circumstances, it would be reasonable to conclude that the obtaining of a relevant contributions advantage was the main purpose, or one of the main purposes, of those arrangements (section 201(3) of FA 2014).

71. Paragraph 4 provides that references to assessment to tax include a NICs decision relating to a person’s liability for relevant contributions. For the purposes of this Part of the Schedule a ‘NICs decision’ means a decision under section 8 of SSC(TF)A 1999 or Article 7 of SSC(TF)(NI)O 1999.

72. Paragraph 5 provides that references to tax enquiry include a relevant contributions dispute. This has been introduced to ensure that the tax and NICs rules work together satisfactorily. In particular, a regulation 80 determination under the Income Tax (Pay As You Earn) Regulations 2003 (S.I. 2003/2682) will often be issued earlier than the related ‘NICs decision’. Introducing this concept permits accelerated payments of avoided PAYE and relevant contributions to be dealt with together, rather than issuing separate notices at different times.

73. Paragraph 6 defines the term "relevant contributions dispute". Such a dispute will arise if, without having made a ‘NICs decision’ HMRC notifies a person in writing that they consider them to be liable to pay an amount of relevant contributions and the person informs HMRC in writing ("a notification of dispute") that they dispute liability for some or all the contributions ("the disputed contributions").

74. Paragraph 7 provides that a relevant contributions dispute is in progress in relation to a notification of dispute during the period which starts on the day when the person gives notification of a dispute and ends on the day which either (i) the disputed contributions are paid in full, (ii) HMRC and the person enter into a written agreement regarding the person’s liability for the disputed contributions and any amount of those contributions that a person is to pay under that agreement has been paid, (iii) an officer of HMRC makes a NICs decision in relation to the disputed contributions, or (iv) without making a NICs decision, HMRC notifies the person in writing that HMRC no longer considers the person to be liable to pay the disputed contribution.

75. Paragraph 8 provides that references to a return into which a tax enquiry is in progress include a notification of a dispute in relation to which a relevant contribution dispute is in progress.

76. Paragraph 9 provides that references to a tax appeal include a NICs appeal.

77. Paragraph 10 defines "NICs appeal" as an appeal under section 11 of SSC(TF)A 1999 or Article 10 of SSC(TF)(NI)O 1999 against a NICs decision relating to relevant contributions (‘the initial appeal’), an appeal against any determination of the initial appeal (‘a further appeal’) or an appeal against any determination of a further appeal.

78. Paragraph 11(1) provides that where a reference is made to Part 7 of the Finance Act 2004 (disclosure of tax avoidance schemes) (a "DOTAS provision") that reference includes the regulations made under section 132A of SSAA 1992 (disclosure of contributions avoidance arrangements) which either apply the DOTAS provision to, or make corresponding provision for the purposes of, NICs. Paragraph 11(2) enables contrary provision to be made by regulations.

79. Paragraph 12 modifies the definition of "relevant tax" in section 200 of FA 2014 ("relevant tax") to include relevant contributions within its list.

80. Paragraph 13 modifies the effect of section 204 of FA 2014 (circumstances in which a follower notice may be given). Section 204(3) sets out that there must be a return, claim or appeal made on the basis that a particular tax advantage arises from ‘chosen arrangements’. For the purposes of the relevant contributions that condition is also met if, in a relevant contributions dispute, a person disputes liability for relevant contributions on the basis that a NICs advantage results from the use of a NICs arrangement, regardless of whether the notification of the dispute was given on that basis.

81. Paragraph 14 applies in a case where a follower notice has been issued whilst a NICs dispute is in progress. Paragraph 14(2) specifies what necessary corrective action is to be taken by a person receiving a follower notice for the purposes of section 208 of FA 2014 (penalty if corrective action not taken in response to follower notice). These steps are:

a) in a case in which the denied advantaged can be counteracted by making a payment to HMRC, the person makes that payment and notifies HMRC that they have done so, or

b) in any case, the person takes all necessary action to enter into an agreement in writing with HMRC for the purpose of relinquishing the denied advantage.

82. Paragraph 14(3) disapplies subsections (4) to (7) and (9) to (11) of section 208 of FA 2014, which are specific to tax, and extends the reference in section 209(3)(a) (amount of a section 208 penalty) to amending a return or claim as including the making of the payment referred to in paragraph 14(2)(a).

83. Paragraph 15(1) modifies the application of section 212 of FA 2014 (aggregate penalties). It extends references to "relevant penalty provision" to include:

a) any provision mentioned in section 212(4), as applied in relation to relevant contributions by regulations (whenever made);

b) section 98A of TMA 1970, as applied in relation to relevant contributions by regulations (whenever made);

c) any provision specified in regulations made by the Treasury under which a penalty can be imposed in respect of relevant contributions.

84. Paragraph 15(2) allows for regulations to be made to disapply, or modify the effect of, sub-paragraphs (1)(a) or (1)(b). This is to cover circumstances where the application of provisions in regulations is no longer appropriate. Paragraph 15(3) allows for regulations to be made to modify section 212 of FA 2014 so that the aggregate penalty cap applies appropriately to the relevant contributions. Paragraph 15(4) applies the power to make various supplementary provision under section 175(3)-(5) of SSCBA 1992 to regulations made under this paragraph.

85. Paragraph 16 provides that for the purposes of section 219 of FA 2014 (circumstances in which an accelerated payments notice may be given) Condition B is met if in a relevant contributions dispute a person disputes liability for relevant contributions on a basis mentioned in section 219(3) regardless of whether the notification of dispute was given on that basis.

86. Paragraph 17 sets out the nature and recovery of an accelerated payment. Sub-paragraph (1) provides that the paragraph applies so far as it represents understated tax that consists of an additional amount that would be due and payable in respect of relevant contributions ("the understated contributions").

87. Sub-paragraph (2) provides that the accelerated payment is a payment of understated contributions, not a payment on account of them. This reflects the need for sums to be treated as contributions for the various purposes in the Social Security Acts, such as being held in the NIF and accounted for as National Insurance, and so that their payment can count towards the qualifying conditions for contributory benefits. Accordingly sub-paragraph (3) provides that subsections (3), (7) to (9) of section 223 do not apply in relation to the accelerated payment.

88. Sub-paragraph (4) specifies that the accelerated payment must be paid before the end of the payment period regardless of whether an individual ("P") brings NICs appeal.

89. Sub-paragraph (5) provides that section 117A of SSAA 1992 and section 111A of SSA(NI)A 1992 (issues arising in proceedings: contributions etc) do not apply to proceedings for the recovery of any amount of the accelerated payment that remains unpaid at the end of the payment period.

90. Sub-paragraph (6) provides that a certificate of an officer of Revenue and Customs under section 25A of the Commissioners for Revenue and Customs Act 2005 (CRCA 2005) (certificates of debt) that the accelerated payment has not been paid is to be treated as conclusive evidence that the amount is unpaid.

91. Sub-paragraph (7) deals with the repayment of an accelerated payment of contributions and the effect on a person’s entitlement to benefit. It provides that, for the purposes of determining a person’s entitlement to benefit, or the amount of a person’s benefit, if some or all of the understated contributions are repaid they are treated as if they had not been paid. Any payments of benefit made to a person before repayment would not be affected.

92. Sub-paragraph (8) defines "benefit" as meaning a contributory benefit or a statutory payment.

93. Sub-paragraph (9) provides that the terms used in paragraph 17 that are defined for the purposes of section 223 of FA 2014 has the same meaning as that section.

94. Paragraph 18 describes the effect of an accelerated payment notice where there is an existing appeal against a NICs determination. Sub-paragraph (1) provides that paragraph 18 applies where P has been given an accelerated payment notice which has not been withdrawn, and the appeal by virtue of that notice was given is a NICs appeal in respect of relevant contributions.

95. Sub-paragraph (2) specifies when P must pay the disputed contributions. The timings are in line with those for tax.

96. Sub-paragraph (3) provides that subsections (4) and (5) of section 117A of SSAA 1992 or section 111A of SSA(NI)A 1992 do not apply to proceedings before a court for recovery of the disputed contributions. The effect is that civil proceedings cannot be adjourned to await the outcome of an appeal against a NICs decision.

97. Sub-paragraph (4) provides that if proceedings have been adjourned under subsection (5) of the enactments specified in sub-paragraph (3), they cease to be adjourned so far as they relate to the disputed contributions.

98. Sub-paragraph (5) provides that a certificate of an officer of Revenue and Customs under section 25A of CRCA 2005 (certificates of debt) that the accelerated payment has not been paid is to be treated as conclusive evidence that the amount is unpaid.

99. Sub-paragraph (6) deals with the repayment of an accelerated payment of contributions and the effect on a person’s entitlement to benefit. It provides that, for the purposes of determining a person’s entitlement to benefit, or the amount of a person’s benefit, if some or all of the understated contributions are repaid they are treated as if they had not been paid. Any payments of benefit made to a person before repayment would not be affected.

100. Sub-paragraph (7) defines "benefit" as meaning a contributory benefit or statutory payment.

101. Sub-paragraph (8) provides that for the purposes of paragraph 18, "the disputed contributions" means the relevant contributions to which the NICs appeal relates.

102. Paragraph 19(1) applies the relevant paragraphs of Schedule 56 to FA 2009 (provisions which apply to penalties for failure to make payments of tax on time) as specified in section 226(7) of FA 2014 (penalty for a failure to pay accelerated payment) to NICs but that the reference in that subsection to tax is not extended to include relevant contributions.

103. Paragraph 19(2) confirms that in applying the relevant paragraphs of Schedule 56 to FA 2009 to relevant contributions those provisions have effect:

a) as if references to an assessment to tax were to a NICs decision relating to a person’s liability for relevant contributions,

b) as if a reference to an appeal against an assessment to the tax concerned were a reference to an appeal against a NICs decision,

c) as if sub-paragraph (3)(b) of paragraph 11 were omitted (subject to paragraph 20 of this Schedule), and

d) with any other necessary modifications.

104. Paragraph 20(1) provides that a penalty under section 208 (penalty if corrective action not taken in response to a follower notice) or section 226 of FA 2014 (penalty for a failure to pay accelerated payment) may be recovered as if they were an amount of relevant contributions which is due and payable.

105. Paragraph 20(2) provides that section 117A of SSAA 1992 or (as the case may be) section 111A of SSA(NI)A 1992 (decision of officer of HMRC not conclusive if subject to appeal and proceedings for recovery to be adjourned pending appeal) has effect in relation to proceedings before a court for recovery of the penalty as if the assessment of the penalty were a NICs decision as to whether the person is liable for the penalty. Accordingly, paragraph 20(3) disapplies section 211(4)(b) of FA 2014 (assessment of penalty to be enforced as if it were an assessment to tax) in relation to a penalty under section 208 imposed by virtue of Part 1 of Schedule 2.

106. Paragraph 21 provides that section 227(9) (withdrawal, modification or suspension of accelerated payment notice), has effect as if the provisions mentioned in that subsection included paragraph 18(2) of Schedule 2.

107. Paragraph 22 defines for the purposes of this part of Schedule 2 "accelerated payment notice", "contributory benefit", "the disputed contributions", "HMRC", "NICs appeal", "NICs decision", "notification of dispute", "relevant contributions", "relevant contributions dispute" and "statutory payment".

Promoters of Avoidance Schemes: Class 1, 1A, 1B and certain Class 2

108. Subsection (2) of Clause 3 provides that Part 2 of Schedule 2 applies Part 5 of FA 2014 (promoters of tax avoidance schemes) to Classes 1, 1A, 1B and certain Class 2 contributions.

109. Paragraph 23 of Part 2 applies Part 5 of FA 2014 (promoters of avoidance schemes) to NICs with the modifications made by the rest of that Part of the Schedule.

110. Paragraph 24 provides that where the promoters of tax avoidance schemes provisions refer to tax, such references include relevant contributions except where reference is made to a particular tax.

111. Paragraph 25 provides that references to a tax advantage include the avoidance or reduction of a liability to pay NICs.

112. Paragraph 26(1) provides that where a reference is made to Part 7 of the Finance Act 2004 (disclosure of tax avoidance schemes) that reference includes regulations made under section 132A of SSAA 1992 (disclosure of contributions avoidance arrangements) which either apply the DOTAS provision to, or make corresponding provision for the purposes of NICs.

113. Sub-paragraph 26(2) provides for exceptions to the contrary to be made by regulations.

114. Paragraph 27 extends the reference to a tax return in section 253 of FA 2014 (duty of a person to notify the Commissioners) to include a return relating to NICs that is required to be made by or under legislation.

115. Paragraph 28 extends section 255 of FA 2014 (power to obtain information and documents) so that references to a person’s tax position includes the person’s position as regards the deduction or repayments of relevant contributions or sums representing relevant contributions, that a person is required to make.

116. Paragraph 29 includes relevant contributions within the definition of tax in section 283(1) of FA 2014 (interpretation).

117. Paragraph 30 defines for the purpose of this Part of Schedule 2 "relevant contributions" as Class 1, 1A, 1B and certain Class 2 contributions to which section 11A of SSCBA 1992 or section 11A of SSCB(NI)A 1992 does not apply.

Application of Parts 4 and 5 of FA 2014: Class 4

118. Subsection 3 of Clause 3 provides that Part 3 of Schedule 2 applies Part 4 (follower notices and accelerated payments) and Part 5 (promoters of tax avoidance schemes) in FA 2014 to Class 4 contributions.

119. Paragraph 31 amends section 16 of SSCBA 1992 accordingly.

Commencement and transitory provision

120. Paragraph 32 relates to the commencement of Schedule 2. More details on commencement dates are contained in paragraphs 197 and 198 of these Explanatory Notes.

121. Paragraph 33 provides for the reference in paragraph 22 to jobseeker’s allowance to be treated as a reference to contributions-based jobseeker’s allowance pending the coming into force of the repeal to section 4C of SSCBA 1992 made by Part 1 of Schedule 14 to the Welfare Reform Act 2012 (WRA 2012).

122. Paragraph 34 provides for the references in paragraph 22 to employment and support allowance to be treated as references to contributory employment and support allowance pending the coming into force of the repeal to section 22(8) of SSCBA 1992 made by Part 1 of Schedule 14 to WRA 2012.

Clause 4: Provision in consequence etc of tax-only changes to Part 4 or 5 of FA 2014

123. Subsection (1) provides that where there has been a change to Part 4 or 5 of FA 2014 (follower notices, accelerated payments and promoters of tax avoidance schemes) that does not apply in relation to NICs ("the tax only modification"), the Treasury may make regulations to apply the tax only changes to NICs with or without modification, make provision for NICs that corresponds to the tax only modification or make consequential changes to that Part of FA 2014 in relation to its effect on NICs or changes that are supplementary or incidental to the tax only modification.

124. Subsection (2) makes further provision as to the regulations that may be made under this power. The regulations can amend other legislation, make consequential, incidental, supplementary, transitional, transitory or saving provision and make different provision for different cases, purposes or classes of NICs.

125. Subsection (3) requires the regulations to be made by statutory instrument.

126. Subsection (4) provides that a statutory instrument containing, with or without other provision, regulations that amend or repeal a provision of an Act is subject to the affirmative procedure. Any other statutory instrument made under this section is subject to the negative procedure (see subsection (5)).

127. Subsection (6) defines "national insurance contributions" for the purposes of the section.

128. Subsection ( 7 ) specifies that this section comes into force at the end of the period of 2 months beginning with the day on which the Act receives Royal Assent.

Clause 5: Categorisation of earners etc: anti-avoidance

129. Subsection (1) inserts a new regulation 5A (anti-avoidance) after regulation 5 of SS(CE)R 1978.

130. Paragraph (1) of new regulation 5A provides that paragraph 2 applies if 3 conditions are met:

a) a person (the earner) holds an employment in which they personally provide services to another person who is resident or has a place of business or is present in Great Britain.

b) a third person (therefore not the earner or the person having a service provided to them) enters into relevant avoidance arrangements (as defined in paragraph (3)), and

c) but for paragraph (2), the earner would not be or be treated as being within the category of an employed earner in regards to their employment.

131. Paragraph (2) provides that where all the condition in paragraph (1) are met the earner is to be treated as an employed earner in regards to their employment.

132. Paragraph (3) provides a definition for "relevant avoidance arrangements" used in paragraph 1(b).

133. Paragraph (4) provides that paragraph (5) applies if both of the following conditions are met:

a) a person enters into arrangements the main purpose, or one of the main purposes, of which is to ensure that the person is not treated as the secondary Class 1 contributor (commonly referred to as the employer) for payments of earnings to or for the benefit of the employed earner (commonly referred to as the employee or worker) in relation to an employment, and

b) in the absence of paragraph (5) no person who is resident or present or has a place of business in Great Britain would (i) be the secondary Class 1 contributor (commonly referred to as the employer) in respect of these payments or (ii) be treated as the secondary Class 1 contributor under provisions of SS(CE)R 1978 other than the provisions that provide for a person who has provided fraudulent documents to be treated as the secondary Class 1 contributor.

134. Paragraph (5) provides that if the conditions in paragraph (4) are satisfied and the person who entered into the arrangements described there is resident or present or has a place of business in the Great Britain, they are to be treated as the secondary Class contributor in respect of payments of earnings to or for the benefit of the employed earner.

135. Paragraph (6) provides a definition for "relevant provision" used in paragraph (4)(a). The definition is divided into:

a) provisions of Schedule 3 to SS(CE)R 1978 (with the exception of those that cause a person to be treated as the secondary Class contributor where they provided fraudulent documents) that apply where the deemed secondary contributor would be based in Great Britain, and

b) the provisions of Schedule 3 to SS(CE)R 1978 that apply where either the employer or certain intermediaries are based outside the UK.

136. Paragraph (7) provides a definition of "arrangements" for the purposes of new regulation 5A.

137. Subsection (2) of Clause 5 makes corresponding provision for Northern Ireland.

138. Subsection (3) inserts a new subsections (2ZA) and (2ZB) after subsection (2) of section 2 of SSCBA 1992 (categories of earner).

139. New subsection (2ZA) provides that regulations under section 2(2)(b) of SSCBA 1992 may provide for a person to be treated as falling within a category of earner in relation to an employment where arrangements have been entered into the main purpose, or one of the main purposes, of which is to secure that the person is not treated under regulations under that section as being within that category of earner in relation to that employment, or that another person is not treated as the secondary contributor in relation to that employment.

140. New subsection (2ZB) provides a definition of "arrangements" used in subsection (2ZA).

141. Subsection (4) inserts new subsections (2A) and (2B) after subsection (2) of section 7 of SSCBA 1992 ("secondary contributor").

142. New subsection (2A) provides that regulations under subsection (2) may provide that a person is the secondary contributor in relation to earnings paid to or for the benefit of the earner where arrangements have been entered into the main purpose, or one of the main purposes, of which is to secure that the person is not treated as the secondary contributor.

143. New subsection (2B) provides a definition of "arrangements" used in subsection (2A).

144. Subsections (5) and (6) of clause 5 make provision for Northern Ireland corresponding to that made for Great Britain by subsections (3) and (4).

145. Subsection (7) provides that subsections (1) and (2) are to be treated as having come into force for purposes of inserting regulation 5A(1) to (5), (6)(a) and (7) on 6 April 2014 and for the purposes of inserting 5A(6)(b) on the day the Act is passed.

146. Subsection (8) provides that paragraphs (4) and (5) of regulation 5A (inserted by subsections (1) and (2)) have effect in relation to arrangements entered into on or after 6 April 2014 where the main purpose or one of the main purposes is to ensure that a person is not treated under a provision mentioned in paragraph (6)(b) as a secondary Class 1 contributor (commonly referred to as employer).

147. Subsection (9) provides that where payments of earnings are made as a result of arrangements mentioned in subsection (8), regulation 5A(5) only applies to the payments of earnings that are made on or after the day on which the Act is passed.

148. Subsection (10) provides that references to regulation 5A in subsections (7) to (9) refer to that regulation inserted by (a) subsection (1) into SS(CE)R 1978 and (b) subsection (2) into the Social Security (Categorisation of Earners) Regulations (Northern Ireland) 1978 (S.R. (NI) 1978 No. 401).

149. Subsection (11) provides that the changes made by subsections (1) and (2) do not affect powers to make regulations amending or revoking the provision inserted.

Clause 6: HMRC administrative expenses financial provision

150. Subsection (1) amends section 165(5)(a) of SSAA 1992 by replacing the words from "other" to "Act 2014" with "relevant legislation".

151. This subsection also inserts new subsection (5B) which defines "relevant legislation" to mean legislation relating to ordinary statutory paternity pay, additional statutory paternity pay or statutory adoption pay. The National Insurance Contributions Act 2014, or the National Insurance Contributions (No.2) Act 2014 (that is, the Act that would result from the Bill). This subsection will enable any administrative expenses incurred by HMRC in relation to the Bill ultimately to be met from the NIF.

152. Subsection (2) makes an equivalent provision for Northern Ireland.

Clause 7: Abbreviations of Act

153. This clause defines abbreviations used in the Act.

Clause 8: Short title and extent

154. Subsection (1) provides for the Act resulting from the Bill to be known as the National Insurance Contributions (No. 2) Act 2014.

155. Subsection (2) provides that the Bill extends to England and Wales, Scotland and Northern Ireland, subject to subsection (3).

156. Subsection (3) provides that an amendment, repeal or revocation made by the Act has the same extent as the provision amended, repealed or revoked.

financial effects

Simplifying NICs paid by the self-employed

157. HMRC expect the Exchequer impact of these changes to be neutral but there may be a negligible positive impact as a result of timing (more customers paying their Class 2 NICs when it is due). It is not expected that this change will have significant wider economic impacts.

Follower notices and accelerated payments in avoidance cases

158. The Exchequer impact of these measures is set out in table 2.1 and table 2.2 of the Budget Report 2014. The follower notice measure is not expected to have any significant economic impact. The accelerated payments measure may impact the timing of saving and consumption decisions made by individuals using the affected avoidance schemes.

Promoters of avoidance schemes

159. The Exchequer impact is set out in Table 2.1 of Budget 2013. The measure is not expected to have any significant economic impacts. The cost to HMRC of dealing with the additional information and reporting of information is expected to be negligible.

Targeted Anti Avoidance Rule to prevent people from circumventing new legislation tackling avoidance involving employment intermediaries

160. The wider Exchequer impact of legislation aimed at preventing employment intermediaries being used to avoid employment taxes is set out in Table 2.1 of Budget 2013 and Table 2.1 of the Autumn Statement 2013. The TAAR ensures the strengthened Social Security (Categorisation of Earners)(Amendment) Regulations 2014 (S.I. 2014/635) relating to agencies and host employers is not circumvented and is not expected to have a significant Exchequer impact in addition to these measures. It is also not expected to have any additional operational impact on HMRC.

pUblic sector manpower

Simplifying NICs paid by the self-employed

161. HMRC estimate the cost of implementing the changes to be in the region of £5 million for I.T. changes. HMRC also estimate that once the new process is fully implemented there will be administrative savings of around £6 million per year.

162. The Department for Work and Pensions (DWP) estimate the cost of implementation to be around £300,000 with annual running costs expected to be around £100,000. The Department for Social Development in Northern Ireland estimate their costs for implementation of these changes to be approximately £14,000 and annual running costs to be approximately £5,000. These costs broadly relate to guidance and process changes that are needed as a result of this proposal.

Follower notices and accelerated payments

163. Under these measures accelerated payment notices may be issued to around 43,000 taxpayers involved in avoidance schemes currently under dispute with HMRC. The measures are expected to prompt a range of legal challenges, including judicial review proceedings, an increase in closure applications to the tribunal and disputed enforcement activity. Flexible legal resource options are being considered to meet the expected demands of the work. That legal resource will be increased and adapted depending on the scale and scope of any challenges. The Government will ensure Departments have the necessary resources to deliver this key policy successfully.

summary of impact assessment

164. Information on the Tax Information and Impact Notes (TIINs) that relate to the measures in this Bill are summarised in this section and are available on the HMRC’s website.

165. A TIIN has been prepared for the reform of the collection of Class 2 National Insurance Contributions. The legislation will change the mechanism for collecting Class 2 NICs enabling the self-employed to pay their Class 2 NICs through SA, alongside income tax and Class 4 NICs. The legislation will also change the structure of Class 2 NICs so that only those with profits above the SPT will be liable and those with profits below this SPT or without profits will be able to pay Class 2 NICs voluntarily.

166. This measure is expected to have a positive impact on the self-employed in terms of simplifying the collection process for Class 2 NICs by reducing the administrative burden of two separate collection mechanisms that currently exist. It is anticipated this positive impact on the self-employed could yield customer cost savings of £74m over a five year period, with an initial one-off compliance cost of £15m. The operational impacts for HMRC and DWP are estimated to be around £5.5m with administrative savings of around £6m per year.

167. A TIIN has been prepared for the accelerated payments provisions included in the Bill. The legislation will enable HMRC to issue an accelerated payment notice to any person for whom there is a NICs dispute, or the matter is under appeal, and who has claimed a NICs advantage by use of specified arrangements. The measure may impact the timing of saving and consumption decisions made by individuals using the affected avoidance schemes. The measure will not impact on individuals, business and civil society organisations who are undertaking normal commercial transactions. It is estimated that accelerated payment notices will be issued to 33,000 individual taxpayers concerning £5.1bn of tax and NICs under dispute. It will predominately affect individuals with above average incomes. It is also estimated that 10,000 notices will be issued to companies for £2.1bn of tax and NICs under dispute. Because the measure is expected to prompt a range of different legal challenges, the Government will ensure that Departments have the necessary resources to deliver the policy.

168. A TIIN has been prepared for the follower notice provisions included in the Bill. The legislation will enable HMRC to issue a follower notice to any person for whom there is a NICs dispute or appeal and has used a NICs arrangement that has failed before the courts in another party’s litigation. The notice will set out HMRC’s view that the person should settle their dispute. If they decide not to settle the dispute they risk a penalty. The measure will only impact on individuals who engage in avoidance schemes affected by the legislation. It will predominately affect individuals with above average incomes. It will have no impact on those undertaking normal commercial transactions.

169. The Promoters of Tax Avoidance Schemes legislation is aimed at changing behaviour of promoters of tax and NICs avoidance schemes and their clients. The TIIN considered the impact of the measure in relation to income tax, capital gains tax, corporation tax, petroleum revenue tax, inheritance tax, stamp duty land tax, stamp duty reserve tax, annual tax on enveloped dwellings and NICs. The measure is not expected to have any significant macroeconomic impacts. The measure will mainly impact on individuals who are, or work for, promoters of avoidance schemes. Individual users of avoidance schemes may also be affected (those users will generally be higher rate taxpayers). The impact on HMRC’s costs is expected to be negligible.

170. TIINs for offshore employment intermediaries and onshore employment intermediaries were published on 10 December 2013. The legislation ensures that the correct amount of tax and NICs is paid when UK and UK Continental Shelf workers are employed by offshore companies and also those who have had their employment disguised falsely as self-employed. The TAAR for both the tax and NICs has been factored in to the original impact assessments and therefore they do not need to be amended. Both measures are not expected to have any significant macroeconomic impacts. There is not expected to be a significant impact on businesses. It is expected that there will be some impacts for workers with some expected to gain although others may see a net loss in their take home pay. However, they may now also benefit from employment rights. The impact on HMRC’s costs is expected to be limited.

compatibility with the european convention of human rights

171. Section 19 of the Human Rights Act 1998 requires the Minister in charge of a Bill in either House of Parliament to make a statement about the compatibility of the provisions in the Bill with the Convention rights (as defined by section 1 of that Act).

172. The Chancellor of the Exchequer has made the following statement:

"In my view the provisions of the National Insurance Contributions Bill are compatible with the Convention rights."

173. A number of provisions in the Bill engage Article 1 of Protocol 1 ("A1P1") to the Convention, taken alone or with Article 14 ("A14"), and Article 6 ("A6") as well as potentially engaging Article 8 ("A8").

Article 1 Protocol 1

174. A1P1 of the Convention protects the enjoyment of property and it is inevitably engaged where national insurance is in point since it deprives the person concerned of a possession, namely the amount of money which must be paid. However, the courts have made it clear that "a wide margin is usually allowed to the State under the Convention when it comes to general measures of economic or social strategy". The rationale for this "wide margin of appreciation" is that States will have "direct knowledge of their society and its needs, the national authorities are in principle better placed than the international judge to appreciate what is in the public interest on social or economic grounds".

175. This means that the Court will leave a wide discretion to the State in how they design their taxation, social or economic systems, and only interfere where an individual’s rights are clearly breached. In ascertaining whether there has been such a breach, the Court will look at the aim of the measure, and then consider whether the measure is a proportionate way to achieve that aim. In doing so the Court will seek to discover whether a fair balance has been struck between interests of the community and protection of individual rights, and whether the measure imposes an excessive or individual burden. Within this wide margin of appreciation, States must still ensure that taxation and social strategy is imposed according to the law, that the measures pursue a legitimate purpose and that the means employed are not disproportionate to the ends involved.

176. Penalties imposed under the social security legislation will also engage A1P1.

Follower Notices & Accelerated Payments

177. Clause 3(1) and Schedule 2 apply Part 4 of FA 2014 to relevant contributions. The follower notice and accelerated payment regimes target the use of NICs avoidance schemes which exploit the social security legislation and pose a risk to the NIF.

178. Accelerated payment of contributions may be sought from users of avoidance schemes subject to disclosure under the DOTAS rules and arrangements that HMRC decides to counteract under the GAAR. The DOTAS rules and the GAAR apply to NICs under existing legislation. An accelerated payment may also be sought from a person who HMRC issues a follower notice to (see paragraph 182 below).

179. It is in the public interest for the disputed contribution to be held by the State, rather than the person participating in NICs avoidance and is well within the margin of discretion accorded to a State by the Convention.

180. The legislation applies prospectively but may be engaged in respect of existing NICs appeals. To the extent that the measure has any retrospective effect, the Department’s view is that the interference is compatible with A1P1 and would meet the principles of certainty and fairness that come into play in respect of the interference on the basis that it strikes a fair balance between the public and private interests involved, and does not impose an unreasonable burden on users of avoidance schemes. There is no unfairness as affected users of avoidance schemes would be in the same position had they decided not to enter into the avoidance scheme with the inherent risk that their tax / NICs position would be put in issue by HMRC and simply have paid tax and contributions due. Had they known that the appeal procedure would change during the course of the dispute the alternative course of action would have been to pay these sums into the NIF earlier. This is what will have to be done now in any event.

181. The power to impose a penalty for late payment of a disputed relevant contribution is also compatible with the Convention. It is proportionate to the policy aim of tackling avoidance behaviour and goes no further than is necessary in achieving this. The penalty is in the public interest and also within the State’s wide margin of appreciation.

182. The follower notice provisions allow HMRC to issue a notice to a person who has used an avoidance schemes that has failed before the courts in another party’s litigation. The follower notice will set out HMRC’s view that the person should settle their dispute. If they decide not to settle the dispute they risk a penalty.

183. The penalty is compatible with A1P1. The interference is justified as tackling avoidance and abuse of the NICs system is in the public interest and the measure is a proportionate way of achieving that policy aim.

Promoters of Avoidance Schemes

184. Clause 3(2) and Schedule 2 apply Part 5 of FA 2014 to relevant contributions. The provisions will allow HMRC to issue conduct notices to promoters of tax avoidance schemes and monitor promoters who breach a conduct notice. Monitored promoters will be subject to new information powers and penalties which will also apply to intermediaries that continue to represent them after the monitoring commences. In respect of penalties, the Tribunal will be able to determine a penalty assessment for up £1m. This is also likely to engage A6 (see paragraphs 192 – 193 below).

185. The Department thinks any interference with a targeted promoters’ business activities or the imposition of a penalty are justified; it is in the public interest to target behaviours which, although not unlawful, pose a risk to the NIF and comes within the wide margin of appreciation accorded to a State by the Convention.

Anti-Avoidance: Targeting the falsely self-employed and avoidance of Class 1 NICs through the use of intermediaries and offshore employment arrangements

186. Clause 5 engages A1P1 both in respect of the workers engaged through an employment intermediary, the employment intermediary and in cases where an end client engages a worker employed by an offshore employer, the end client. In all cases there will be a deprivation of property because if the provisions of SS(CE)R 1978 had been successfully avoided the worker would pay a cheaper class of NICs and the intermediary or end client would not pay any.

187. The TAAR in Clause 5 is part of the wider policy of ensuring the correct NICs treatment of those who are falsely self-employed or those engaged through an intermediary. It is intended to ensure that those workers who would be employees but for the imposition of artificially constructed intermediary arrangements are treated as employed earners. This policy falls within the State’s margin of appreciation for how it manages its social security affairs.

188. The retrospective element of the TAAR will only apply in situations where there has been an active attempt to remain non-compliant with NICs legislation by artificially exploiting loopholes. The changes to the NICs legislation came into force on 6 April 2014. A Written Ministerial Statement was issued on 3 April 2014 providing notice that where arrangements are put in place to artificially avoid the NICs provisions the TAAR will apply.

Article 14 taken with Article 1 Protocol 1

189. Consideration was also given as to whether A1P1 was engaged when taken with A14 if users and promoters of avoidance schemes are treated differently from compliant contributors or mainstream advisers on tax and NICs.

190. The Department considers that A14 when taken with A1P1 only prohibits differences in treatment based on personal characteristics and that such characteristics must be independent of the treatment complained of. It has been accepted in a number of cases that "other status" should be widely construed so a State will have a wide margin of appreciation in assessing whether and to what extent differences in otherwise similar situations justify different treatment.

191. The Department does not consider that using or promoting avoidance schemes is a ‘status’ for the purposes of A14 and it is unlikely that A14 is engaged. If A14 is engaged then, for the same views as set out above in respect of A1P1, the Department’s view is that any interference with A14 taken with A1P1 is justified and proportionate because it falls within the wide margin of appreciation afforded to a State by the Convention.

Article 6

192. A6 provides procedural guarantees, including a right to a fair hearing in the determination of a civil right or obligation or a criminal charge. Penalties imposed for offences relating to contributions may constitute a criminal charge for Convention purposes if they are punitive and deterrent in nature.

193. Clause 3(2) and Schedule 2 allow for the imposition on promoters of a penalty, of up to £1m, for a breach of new information duties. Only the Tribunal may determine a penalty assessment. The Department considers that the Tribunal embodies all the requirements of A6 in the criminal context. This is because the Tribunal is an independent and impartial tribunal established by law, the burden of proof in establishing that a penalty is due will be on HMRC and the Tribunal would be required to undertake a full review of the matter before making a penalty determination.

Article 8

194. A8 of the Convention protects the right to respect for a private life. It can apply in the context of information powers and the publication of personal information. The A8 terms "private life" and "home" have been interpreted as including certain professional or business activities or premises.

195. Clause 3(2) and Schedule 2 allow HMRC to publish names of ‘monitored’ promoters including details of how the conduct notice was breached. The Department thinks that it is unlikely that the publication will have a strong impact on a promoter’s business interests which have developed as a result of marketing high risk avoidance schemes. Even if there is an interference, the Department’s view is that this is justified as it is in the pursuit of a legitimate aim in the interests of the economic well-being of the country namely protecting the NIF. Publication would only come about after the Tribunal has approved designation of the promoter as ‘a monitored promoter’ ensuring appropriate safeguards are in place. The Department’s view is that any infringement would be justified on the basis that publication of names in the context of tackling avoidance is in the interest of the general public and that a fair balance is struck between this and the rights of the individual.

commencement dates

196. Clauses 1 and 2, and Schedule 1 come into force on the day on which the Bill receives Royal Assent. The amendments made by Schedule 1 have effect for the tax year 2015-16 and subsequent tax years apart from amendments made in respect of paragraphs 4, 9(2), 13 and 18(2) which have effect in relation to a Class 2 contribution in respect of a week in the tax year 2015-16 or subsequent tax years.

197. Clause 3 introduces Schedule 2. Parts 1 and 3 of Schedule 2 will come into force at the end of the period of 2 months beginning with the day on which the Bill receives Royal Assent.

198. Part 2 of Schedule 2 will come into force at the end of the period of 2 months beginning with the day on which the Bill receives Royal Assent except for the purposes of making regulations under Part 5 of FA 2014 where the application of those powers to relevant contributions will commence on the day on which the Bill receives Royal Assent.

199. Clause 4 comes into force at the end of the period of two months beginning with the day on which the Bill receives Royal Assent.

200. Clause 5(1) and (2) is to be treated as having come into force for purposes of inserting regulation 5A(1) to (5), (6)(a) and (7) on 6 April 2014 and for the purpose of inserting regulation 5A(6)(b) on the day on which the Bill receives Royal Assent.

201. Paragraph (4) and (5) of regulation 5A (inserted by subsections (1) and (2)) have effect in relation to arrangements entered into on or after 6 April 2014 where the main purpose or one of the main purposes is to ensure that a person is not treated under a provision mentioned in paragraph (6)(b) as a secondary Class 1 contributor (commonly referred to as employer).

202. Subsection (9) of clause 5 provides that where payments of earnings are made as a result of arrangements mentioned in subsection (8) of that clause, regulation 5A(5) only applies to the payments of earnings that are made on or after the day on which the Bill receives Royal Assent.

203. Clause 6 relating to HMRC’s administrative expenses in relation to the follower notices, accelerated payments and high risk promoters regimes will come into force on the day on which the Bill receives Royal Assent.

ANNEX A

1. This annex sets out how NICs for the self-employed currently operates and summarises the changes that are being made.

Background on National Insurance for the self-employed

2. The definition of self-employed for National Insurance purposes is a person who "is gainfully employed" in a trade, business, profession, office or vocation other than as an employed earner. The Bill proposes no change to the current definition of a self-employed earner for National Insurance purposes.

3. All self-employed earners in Great Britain and Northern Ireland are required to notify HMRC of the start and end dates of their self-employment and are liable for weekly Class 2 contributions unless they are excepted (see below) or exempt from payment. If they have UK profits that are chargeable to tax as trading income, they are also liable for Class 4 contributions on an annual basis .

Exception for low earnings from Class 2

4. Where a self-employed individual estimates that they will have earnings below the SEE level (currently set at £5,885) in the coming tax year they can apply to be excepted from Class 2 liability. If they do not apply for an SEE then they remain liable for Class 2 contributions.

Earnings for Class 2 purposes

5. The term ‘earnings’ for social security purposes includes "any remuneration or profit derived from an employment". The effect of this is that the definition of earnings for NICs purposes applies equally to the income of an employed and a self-employed earner although how such earnings are calculated or estimated differs between the two.

6. Since Class 2 contributions are a flat rate contribution, not earnings related, the question of a self-employed earner’s earnings only becomes relevant in the context of eligibility for the SEE, which is based on net earnings.

7. Net earnings for the purposes of the SEE is interpreted as meaning the figure which would normally appear in a profit and loss account prepared in accordance with normal accounting principles. Deductions are allowed for business expenses and depreciation but not for income tax or Class 2 or 4 NICs paid.

Collection of Class 2

8. Class 2 contributions are currently collected either by payment of a six monthly bill or by monthly Direct Debit. Where these collection methods do not secure payment, recovery proceedings may be taken. The methods of recovery are diverse but include collection through a person’s tax code, by distraint and county court and high court proceedings. Unlike Class 4 contributions, unpaid Class 2 contributions are subject to the Limitation Act 1980 which means that enforcement of a Class 2 debt is limited, in most cases to 6 years.

9. At present Class 2 has its own late payment regime which is wholly separate from income tax and Class 4. For example, if Class 2 contributions are paid after the end of the tax year following the one for which they were payable, they are due to be paid at a higher rate.

Class 2 and securing entitlement to contributory benefit and maternity allowance

10. Class 2 contributions provide the means by which self-employed earners can access social security benefits.

11. Entitlement to the standard weekly rate of MA (currently £138.18) is based on payment of Class 2 contributions in respect of a prescribed period (currently 13 weeks). A self-employed woman is treated as meeting the minimum earnings level if she holds an SEE certificate for the period in question, thus entitling her to the lower weekly MA rate (currently £27).

12. Class 2 contributions are also the means by which a self-employed earner accesses entitlement to contributory benefits such as the State Pension and the contributory strand of employment and support allowance. In addition, payment of Class 2 contributions allows access to contribution based jobseeker’s allowance for a limited group of people; namely self-employed share fishermen who pay a special rate for Class 2 contributions. A person needs to have a specific number of qualifying years (currently 30) in their working life to receive the full basic State Pension. Class 2 contributions will also count towards entitlement to the new State Pension which will be introduced on 6 April 2016.

Class 4 contributions

13. Those who are self-employed will normally also be liable to pay Class 4 contributions. A Class 4 liability will arise if a self-employed individual’s profits or gains are chargeable to income tax as trading profits.

14. Class 4 contributions do not secure benefit entitlements but are instead intended to equalise, broadly, the levels of NICs paid by both employed and self-employed individuals. They are charged annually as a percentage of the taxable profits (as opposed to earnings) above a lower profits limit (LPL) (for tax year 2014-15 the LPL is £7,956). They are assessed, collected and enforced through the income tax SA system, with some minor differences, for example, Class 4 liability does not arise for tax years after a person reaches state pension age. There are also certain matters which are dealt with outside of the SA system, for example, an application for deferment of Class 4 liability.

Special Groups

15. In addition to the self-employed in Great Britain and Northern Ireland, there are a small number of special groups who are either liable to pay Class 2 contributions or who have the option of paying them on a voluntary basis under EU law and bi-lateral Social Security agreements with non-EU countries.

16. These include people who are usually self-employed in the UK but go to work in another European Economic Area Member State temporarily and those who are self-employed in more than one Member State but who reside in the UK and carry out a substantial part of their activity here.

17. There are also some other groups who are liable for Class 2 NICs or have the option of paying voluntary Class 2 NICs, including:

• Mariners who are not liable to pay Class 1 contributions;
• Share fishermen who are liable for a special rate of Class 2 (currently £3.40 per week) which provides additional benefit entitlement, specifically access to contribution based jobseeker’s allowance; and
• Vol unteer Development Workers who can choose to pay voluntary Class 2 contributions at a special rate (currently £5.55 per week) which provides them with the same additional benefit entitlement as share fishermen.

Change to the structure of Class 2 NICs and the S mall Ea rnings E xception

18. The Bill will change the structure of Class 2 from the existing liability that arises in respect of each week, or partial week, of self-employment to an annual liability which is triggered by reference to a self-employed earner’s Class 4 profits (rather than earnings) and which is then calculated by reference to the number of weeks, or part weeks, of self-employment in the tax year.

19. The Class 2 liability will arise at the end of the tax year and the amount due will be assessed on an annual basis, with reporting and collection through the SA process. The self-employed will, as now, be required to file their SA return by the 31 October following the end of the tax year if submitted on paper, or by the 31 January following the end of the tax year if submitted online.

20. The payment of Class 2 will be due no later than 31 January.

21. Penalties and appeals will be more closely aligned with those for SA so that the self-employed are not subject to two different regimes.

22. The current SEE arrangements will no longer be necessary. Liability for Class 2 will be determined by whether the self-employed earner’s Class 4 profits (rather than earnings), declared at year end, exceed a set threshold – the SPT. The SPT will be set at the current Class 2 SEE level and will in future be uprated annually along with other NIC thresholds and limits. Those with either low profits (or even losses) or no profits, who will no longer be liable for Class 2 under the new arrangements, will be able to opt to pay Class 2 voluntarily so that they may protect their benefit rights.

23. The Class 2 bi-annual bill and Direct Debit arrangements (monthly & six monthly) will end for the majority of self-employed earners. These customers will instead receive a payment request (either via paper or electronically) once they have filed their SA return at the end of the tax year.

24. Most self-employed earners will be able to choose to make in-year payments to budget for any annual Class 2 liability (or to pay voluntary Class 2 contributions if their profits fall below the threshold). This is to avoid those with low profits facing a large end of year bill, something which was raised in a number of responses to the consultation on collecting Class 2 NICs through SA.

25. Those who are self-employed for Class 2 purposes, but not for tax and Class 4 NICs purposes and who therefore do not have any Class 4 profits for the purposes of establishing liability (for example, those running a property or investment business), will still be entitled to pay Class 2 NICs voluntarily. A separate process will be retained to allow these self-employed earners and the special groups mentioned above (other than Share Fishermen who can pay through SA) to continue to pay Class 2 contributions under the new arrangements.

26. Self-employed women wishing to claim MA may be impacted by the change given the contemporaneous nature of the qualifying condition that currently determines the weekly rate of MA payments to the payments of Class 2 contributions. Women who have not had the opportunity to file an SA return and pay Class 2 NICs will be able to pay Class 2 contributions early in order to secure MA entitlement at the standard weekly rate. This payment option will apply whether or not the woman ultimately becomes liable to pay Class 2. Self-employed women who choose not to make an early payment of Class 2 will receive the lower rate of MA, unless they have an SA record which demonstrates that they have made the requisite number of Class 2 contributions.

27. Women who are neither employed nor self-employed but who participate in the business of their spouse or civil partner can receive the lower rate of MA for 14 weeks if their spouse or civil partner has paid Class 2 NICs for 26 weeks, voluntarily or as evidenced by their SA return. Those spouses or civil partners who have not had the opportunity to file an SA return and pay Class 2 NICs will also be able to pay Class 2 contributions early.

ANNEX B

GLOSSARY

Term	Explanation
CRCA 2005	Commissioners for Revenue and Customs Act 2005
DOTAS	Disclosure of Tax Avoidance Schemes
FA 2009	Finance Act 2009
FA 2014	Finance Act 2014
GAAR	General Anti-Abuse Rule
MA	Maternity Allowance
NICs	National Insurance contributions
NIF	National Insurance Fund
NIA 1998	Northern Ireland Act 1998
PAYE	Pay As You Earn
PSA	PAYE Settlement Agreement
SA	Self-assessment
SEE	Small earnings exception
SSAA 1992	Social Security Administration Act 1992
SSA(NI)A 1992	Social Security Administration (Northern Ireland) Act 1992
SS(CE)R 1978	Social Security (Categorisation of Earners) Regulations 1978 (S.I. 1978/1689)
SSCBA 1992	Social Security Contributions and Benefits Act 1992
SSCB(NI)A 1992	Social Security Contributions and Benefits (Northern Ireland) Act 1992
SS(C)R 2001	Social Security (Contributions) Regulations 2001 (S.I. 2001/1004)
SSC(TF)A 1999	Social Security Contributions (Transfer of Functions, etc.) Act 1999
SSC(TF)(NI)O 1999	Social Security Contributions (Transfer of Functions, etc.) (Northern Ireland) Order 1999 (S.I. 1999/671)
SPT	Small profits threshold
TAAR	Targeted anti-avoidance rule
TIIN	Tax Information and Impact Note
TMA 1970	Taxes Management Act 1970
WRA 2012	Welfare Reform Act 2012