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The Parliamentary Under-Secretary of State for Social Security (Miss Ann Widdecombe) : I am grateful to my hon. Friend the Member for Harwich (Mr. Sproat) for providing an opportunity for me to respond to the points that he has somewhat vehemently raised in the case of the firm of Animal Aunts, and also for the opportunity this gives me to say something about the importance that I attach generally to the correct determination under the law of individuals' employment status for national insurance, while at the same time seeking to ensure that the mechanisms for doing so are not unduly bureaucratic or burdensome.
This case is all about whether pet and animal sitters--or "aunts", as they are called--supplied by the firm Animal Aunts are to be treated as self- employed earners responsible for their own national insurance contributions or, as my hon. Friend vigorously contends, are to be treated as employed earners for national insurance purposes, with the firm of Animal Aunts being liable to pay full class 1 contributions on their behalf.
Class 1 national insurance contributions are, of course, the most widely paid class of contribution, paid by virtually everyone in a job and by office holders, such as company directors or, indeed, Members of Parliament.
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Well over a million employers regularly deduct and pay over these contributions to the tune of nearly £40 billion per year. It is virtually part of our culture to pay these contributions. If anything, attention often focuses on instances in which employers fail to meet their obligations to pay contributions in respect of their employees. We have seen, for instance, reports by the Comptroller and Auditor General pinpointing certain shortcomings in the contribution collection system, and it is to the public credit of my Department's Contributions Agency that it is addressing these with vigour, and is meeting or exceeding the various high-level targets that are published.In saying that, I seek not to undermine my hon. Friend's stance in the Animal Aunts case, but simply to place it in context. I should also like to remind the House of the purpose of national insurance contributions, which are at the very centre of this debate. Unlike taxes, which are raised by the Crown with the consent of Parliament, to provide moneys for the general purposes of government, the national insurance system is entirely separate, providing pensions for the retired and short-term contributory benefits for those who are sick or unemployed. These benefits are covered by the national insurance fund, which is directly financed by the contributions of employers and people in employment. As its name denotes, the national insurance fund is an insurance fund over which the Secretary of State has powers of control and management. Entitlement to benefits from the fund depends upon the amount and class of contributions paid.
There is an important distinction here. Employed earners who have paid full class 1 contributions are entitled to the full range of contributory benefits. However, the class 2 contributions paid by self-employed persons do not earn entitlement to unemployment benefit or to SERPS. Moreover, self -employed persons who suffer an accident at work cannot qualify for disablement benefits under the industrial injuries scheme, so it is very important from the individual contributor's point of view that he or she be correctly categorised for national insurance purposes. We have heard much about the interests of the firm, but we need to consider also the interests of individuals and the benefits that may or may not accrue according to which contributions they pay.
Indeed, a considerable number of disputes arise from cases where workers have been treated as self-employed persons, suffered an accident at work and then found that they are not entitled to benefits under the industrial injuries scheme. Of course, in the vast majority of cases it is abundantly clear which is the correct class of contribution due : usually a person is either working clearly under contract of service to an employer or is on business on his own account, and therefore an independent contractor.
However, the Government are conscious that there are grey areas, and, picking up the deregulation point that my hon. Friend made, we have sought to make it as easy as possible for people to get authoritative advice on their status. Thus, in each tax and social security office one person is responsible for all inquiries and decisions about employment status. Anyone in work can get a written decision on their employment status from either the Inland Revenue or the DSS. My Department and the Inland Revenue have got together to produce a joint leaflet giving extra guidance.
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I will come later to the special position of employment agencies, but, while on the subject of deregulation, I should just like to mention my Department's employers panel, with whom we consult regularly on a wide range of issues. The next meeting of the panel is to be on 25 May 1993. Sub-groups of the main panel meet on specific issues, and small businesses are represented on the panel. Arising from our commitment to the Government's deregulation initiative, we are eliminating, from this April, some annoying differences in definitions of earnings and expenses between tax and national insurance.I have described in some detail the general provisions that govern employment status, but there is a particular provision that is relevant to this case. It deals with the special circumstances of employment agencies that supply workers to third parties. By way of further background, the House should be aware that the special provisions embodied in the Social Security (Categorisation of Earners) Regulations exist with the aim of achieving parity of treatment for workers under the social security scheme.
Thus, for example, a relief typist or secretary supplied by an agency and working alongside other office workers under similar conditions is treated as an employed earner for the purposes of national insurance by virtue of the regulations, notwithstanding that she would otherwise be a self- employed earner, because she is not under a contract of service to either the agency or client firm. Following a query from one of the "aunts" late in 1987, my Department made detailed inquiries into the terms of engagements and eventually concluded late in 1989 that the provisions of the regulations to which I have referred were satisfied, and that the aunts should be treated as employed earners for national insurance purposes.
I should like to say a little about the Contributions Agency's conclusions. Regulations 2(1) and (2) of the Social Security (Categorisation of Earners) Regulations provide for persons to be treated as employed earners in respect of any employment falling within column A of part 1 of schedule 1 provided the person is not within the exceptions specified in the corresponding paragraph of column B.
It was concluded that the aunts fell within paragraph 2 of column A, but that the exceptions in column B did not apply. In particular, one condition that had to be satisfied was that there was no on-going financial interest on the part of the third person. However, under the terms of the contract with the client, Animal Aunts collects further fees if an engagement is extended or renewed at a later date, and therefore maintains an on-going financial interest in the employment. Subject to the ruling being operated by the firm, the Department agreed not to pursue the question of arrears at that time.
Rulings of this sort are administrative in nature and carry no force in law. However, there is the right to have the question formally determined by the Secretary of State, as provided by section 17 of the Social Security Administation Act 1992. The Secretary of State's function is to determine a question raised by a contributor. There is no provision for the Department to raise any question itself, or to participate in the proceedings as an interested party. The jurisdiction is not to adjudicate in a dispute between the contributor and the Department, but to
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investigate afresh all the facts relevant to the question and to reach a conclusion as to its appropriate determination in the light of all the relevant facts and applicable law.In carrying out those functions, the Secretary of State has power to appoint a person to hold an inquiry into the question and report to him. Such inquiries are inquisitorial and form part of the process of determination. The possibility of a formal determination in the Animal Aunts case was quickly mentioned in ensuring correspondence between the Department and the firm's accountants, but the correspondence became somewhat protracted as the accountants queried the application of the regulations and the Department responded. Far from hounding the firm as my hon. Friend has suggested, I think that it would be right to say that the Department took considerable time and trouble to examine every representation made on the matter, but finally remained of the view that the facts did not allow another conclusion to be reached. It was more than two years later that the firm eventually applied for the matter to be formally determined last May. Further delays took place, but the inquiry was held last month, and I am pleased to be able to tell the House that the inquirer's report and recommendation have been received, and it was possible for the formal decision to be given yesterday. This has been dispatched to Animal Aunts and will, I hope, arrive in the first post this morning, but I have pleasure in informing the House that the "aunts" who were the subject of the application have been found not to be included, or treated as included, in the category of employed earner for the purposes of social security Acts--
Miss Widdecombe : -- and, on that announcement, I am pleased to hear the first kind words in this debate from my hon. Friend. In other words, the Secretary of State found in favour of Animal Aunts. If I may say so, I think that that is particularly significant, given my hon. Friend's concern about the independence of the decision-making process when the Secretary of State might be held by some to be judge in his own cause.
It is not uncommon for the Secretary of State to overturn the Department's view. The "improvement" rate--as it is called--by the Secretary of State, for instance in 1991-92, was such that 36 per cent. of employment status decisions resulted in the Department's view being overturned. That is a very much higher percentage than my hon. Friend suggested.
My hon. Friend made the point that where there is reasonable doubt about the applicability of a regulation, the benefit of that doubt should be in favour of the side that creates or preserves jobs and profitability. There are wider issues here which it would not be appropriate for me to try to answer, but I do think that if one were making such a proposition then an equally strong argument could be made for giving the benefit of the doubt in such a way as would protect the benefit rights of the individuals concerned.
Finally, I pay tribute not only to my hon. Friend's enthusiasm in pursuing the Animal Aunts case so vigorously, but also to the entrepreneurial spirit of its proprietor. Let there be no doubt about that : the last thing my Department wants to do is to harass small businesses.
Question put and agreed to.
Adjourned accordingly at half-past Eight o'clock.
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