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Social Security Contributions (Transfer of Functions, etc.) Bill [H.L.]

 

These notes refer to the Social Security Contributions (Transfer of Functions, etc.) Bill [Lords] as brought from the House of Lords on 1st February 1999 [Bill 38]

SOCIAL SECURITY CONTRIBUTIONS (TRANSFER OF FUNCTIONS, ETC.) BILL [H.L.]

EXPLANATORY NOTES

INTRODUCTION

1.     These explanatory notes relate to the Social Security Contributions (Transfer of Functions, etc.) Bill as brought from the House of Lords on 1st February 1999. They have been prepared by the Department of Social Security (DSS) in order to assist the reader of the Bill and to help inform debate on it. They 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.

3.     A glossary of abbreviations used in these notes is at annex A.

SUMMARY

4.     At present, the Contributions Agency (CA), an executive agency of the DSS, is responsible for the operational functions of collecting and recording National Insurance contributions ("contributions") which are paid into the National Insurance Fund (NIF). Payment of contributions gives entitlement to contributory benefits. CA also carries out the operational functions in relation to contracting-out of the State Earnings-Related Pensions Scheme (SERPS), Statutory Sick Pay (SSP) and Statutory Maternity Pay (SMP). These functions will be carried out by the Inland Revenue from the day appointed for the operational transfer.

5.     The DSS currently has policy responsibility for SSP, SMP, SERPS and for contributions.

6.     The Chancellor of the Exchequer announced in his Budget speech on 17 March 1998 that the CA and its operational functions would transfer from the DSS to the Inland Revenue in April 1999 (Hansard vol. 308, cols 1097 - 1189). It was also announced that policy responsibility for contributions would transfer to the Inland Revenue once decisions had been reached on a new benefit entitlement test. Control and management of the NIF will also move to the Inland Revenue.

7.     The Bill effects these transfers on one or more appointed days.

8.     The Bill makes a number of changes to social security and other legislation as it relates to functions transferred by the Bill, in particular by bringing appeals about contributions, SSP and SMP within the jurisdiction of the General and Special Commissioners for Income Tax, who hear tax appeals. Although operational functions in respect of contracting-out of SERPS will transfer to the Inland Revenue, policy responsibility will remain with the Secretary of State. Similarly, policy responsibility for SSP and SMP will remain with the Secretary of State, while operational functions will transfer to the Inland Revenue. Appeals concerning issues where the policy responsibility remains with DSS other than SSP and SMP (i.e. contracting-out matters, credits and home responsibilities protection) will be heard by the new unified appeals tribunals to be set up under Chapter I of Part I of the Social Security Act 1998 (SSA).

9.     In addition the Bill corrects a defect in the legislation which governs the financing of National Insurance rebates for contracted-out occupational money purchase pension schemes. It represents a technical amendment in relation to Government accounting mechanisms, and does not affect individuals in, or employers running, occupational pension schemes.

BACKGROUND

10.     In practice, around 94 per cent of contributions are collected under statutory arrangements by the Inland Revenue alongside income tax. There are currently five classes of contributions:

  • Class 1 contributions are paid by both employees and employers on the employee's earnings. They are mostly collected with PAYE income tax.

  • Class 1A contributions are paid by employers on the value of cars and fuel provided to their employees.

  • Class 2 contributions are flat rate. They are paid by the self-employed.

  • Class 3 contributions are paid voluntarily by the non-employed for retirement pension purposes.

  • Class 4 contributions are profits-related, paid by the self-employed. They are collected with Schedule D income tax.

    From April 1999 there will also be:

  • Class 1B contributions which will be paid by employers only on small non-cash payments which are dealt with under a PAYE Settlement Arrangement.

    11.     Since SERPS was introduced in 1978, employers who operate occupational pension schemes are allowed to "contract out" - i.e. to provide a pension to their employees in place of SERPS - provided that certain conditions are met. In contracted-out occupational schemes both employer and employee pay lower ("rebated") rate contributions in recognition that full SERPS will not be paid. Individuals can also contract out of SERPS via an appropriate personal pension. Members of appropriate personal pensions pay full rate contributions but an amount equal to the rebate is paid directly into the scheme by the CA. As well as paying rebates, the CA administers the system of contracting-out more generally.

    12.     Contributions in Northern Ireland are collected by the Contributions Unit of the Northern Ireland Social Security Agency, which is part of the Northern Ireland Department of Health and Social Services (DHSS(NI)). Contributions and related matters are "excepted matters" for the purposes of the Northern Ireland Act 1998. Clause 24 of this Bill provides for those excepted matters to be transferred by Order in Council to the post-transfer location of their equivalents for Great Britain. Operational functions of the CA would transfer to the Inland Revenue. Policy functions in respect of contributions would transfer to the Treasury or the Inland Revenue. Related excepted matters would transfer to the Secretary of State for Social Security.

    13.     Normally transfers of functions between Government Departments would be achieved by an Order in Council under the Ministers of the Crown Act 1975 (MoCA). However, the Inland Revenue does not fall within the definition of "Minister of the Crown" in that Act. As a result, a Bill is required to transfer functions. This Bill achieves this principally by amending the provisions which confer functions on the Secretary of State in relation to contributions, SSP, SMP and contracting-out matters, and by amending incidental provisions of tax and social security law to the extent necessary to enable the transferred functions to be exercised effectively by the Inland Revenue alongside its existing functions in relation to tax.

    14.     Throughout the Bill, and in these explanatory notes, the Commissioners of Inland Revenue are referred to as "the Board" or "the Inland Revenue" as appropriate.

    OVERVIEW

    15.     The Bill is in three Parts.

    16.     Part I of the Bill provides for the transfer of both operational and policy functions from the Secretary of State for Social Security to the Inland Revenue and the Treasury on one or more appointed days. It also deals with the exercise of those operational functions by the Revenue post-transfer.

    17.     Clause 1 introduces Schedules 1 and 2. Schedule 1 transfers to the Inland Revenue the day-to-day operational functions currently discharged by the CA on behalf of the Secretary of State. These functions, in relation to contributions, SSP, SMP and contracting-out matters, will be exercised by the Inland Revenue from the day appointed for the operational transfer. Schedule 1 amends the provisions of Acts which confer such functions on the Secretary of State, and also other provisions which make consequential references to his exercise of those functions. Functions conferred on the Secretary of State by the subordinate legislation listed in Schedule 2 are also transferred to the Inland Revenue. In most cases, Schedule 1 substitutes "Inland Revenue" for "Secretary of State" in the relevant provisions, and makes related amendments.

    18.     Clause 2 introduces Schedule 3 which transfers contributions policy - such as the level and scope of the contributions charge - to the Treasury or the Inland Revenue as appropriate. These functions consist mainly of the exercise of powers to make subordinate legislation in relation to contributions, and the control and management of the NIF. They will be transferred from a date appointed by a commencement order under clause 28.

    19.     Existing social security law contains extensive powers to make regulations. Where these powers relate wholly to contributions they will be transferred to the Treasury or to the Inland Revenue. However, in a number of cases a regulation-making power affects the operation of the contributory benefits system, which will remain the responsibility of the Secretary of State. Also, in the case of matters such as SSP and SMP and contracted-out pension schemes, policy responsibility (and therefore the prime powers to make subordinate legislation) will remain with the Secretary of State. In these cases the Bill makes provision for the regulations to be made by the Inland Revenue or the Treasury with the concurrence of the Secretary of State or vice versa. This is designed to provide a safeguard against unintended operational consequences, or effects on benefit entitlements, of regulations.

    20.     Clause 3 brings contributions under the care and management of the Inland Revenue and places the Inland Revenue under a duty to collect contributions. It amends legislation which governs the role and functions of the Inland Revenue and the powers and duties of its officers.

    21.     Clause 4 introduces Schedule 4 which is concerned with methods of enforcing the recovery of unpaid contributions. It enables summary proceedings to be taken in magistrates' courts in the same way as for tax debts. Schedule 4 also permits authorised officers of the Board who are not lawyers to appear in proceedings in the county courts (in England, Wales and Northern Ireland) and in the sheriff court in Scotland.

    22.     Clause 5 introduces Schedule 5. This amends certain powers of enforcement relating to contributions, SSP and SMP for Inland Revenue officers to exercise alongside their existing powers of enforcement in relation to tax.

    23.     Clause 6 introduces Schedule 6 which amends existing social security and tax legislation, setting out the powers to exchange contributions information following the transfer. Existing flows of information will be protected without creating new, additional exchanges of information.

    24.     Clause 7 allows the Inland Revenue to pool, internally, information obtained in connection with functions transferred by this Bill with the information from its tax functions.

    25.     Part II of the Bill introduces new arrangements for decisions and appeals relating to contributions, SSP, SMP and contracting-out matters. Decisions about these matters are to be made by the Inland Revenue, with a right of appeal to the tax appeal Commissioners, except in relation to contracting-out, where decisions will be appealable to the unified appeal tribunals to be set up under the SSA. See in particular clause 16.

    26.     Clause 8 specifies the decisions to be made by an officer of the Inland Revenue.

    27.     Clauses 9 and 10 enable the Inland Revenue to make regulations in connection with the decision-making process and to provide for decisions to be varied or superseded in certain circumstances.

    28.     Clause 11 provides for rights of appeal to the tax appeal Commissioners against decisions made under clause 8 or by virtue of clause 10.

    29.     Clause 12 provides for the manner in which an appeal is to be brought, and for the circumstances in which an appeal is to be dealt with by the Special Commissioners rather than the General Commissioners.

    30.     Clause 13 provides for regulations to be made by the Inland Revenue in relation to appeals to the tax appeal Commissioners, and for the application, with appropriate modifications, of provisions of the Taxes Management Act 1970 (TMA) and regulations under it, relating to such appeals.

    31.     Clause 14 enables the Inland Revenue to make provision in regulations about a person's right to SSP or SMP or his/her liability for contributions pending, or in consequence of, a decision made by one of its officers, or the determination of an appeal.

    32.     Clause 15 enables the Secretary of State to make transitional provisions in connection with decisions, and appeals, for the period between the day appointed for the coming into force of clause 8 and the coming into force - possibly less than a year later - of Part I of SSA (which provides for new arrangements for decision-making and appeals about social security matters).

    33.     Clause 16 makes provision for the Inland Revenue, instead of the Secretary of State, to make decisions about matters arising in connection with the contracting-out arrangements under the Pension Schemes Act 1993 (PSA), and related matters. However, Part I of the SSA (once it is in force) is in all other respects to apply to such decisions in the same way as if they had been made by the Secretary of State under that Act.

    34.     Clause 17 allows the Inland Revenue to make decisions as agents of the Secretary of State in relation to "home responsibilities protection" and "credits", both of which affect a person's contributory record and hence benefit entitlement.

    35.     Clause 18 introduces Schedule 7 which contains amendments - principally of the TMA, the Social Security Contributions and Benefits Act 1992 (CBA), the Social Security Administration Act 1992 (SSAA 1992) and the SSA - in connection with the new arrangements for decisions and appeals provided for in Part II of this Bill. Some of these amendments will be brought into force after the day appointed for the operational transfer, so as to fit with the progressive entry into force of the SSA provisions.

    36.     Clause 19 contains definitions in connection with the tax appeal Commissioners.

    37.     Part III of the Bill deals with miscellaneous and supplemental issues.

    38.     Clause 20 provides for National Insurance rebates for contracted-out occupational money purchase pension schemes to be funded from the NIF, and for any rebate-associated recoveries to be paid into that Fund. It also provides for the NIF to reimburse the Consolidated Fund for the monies it has paid out in respect of such rebates in the current financial year. Corresponding changes are also made to the Northern Ireland legislation.

    39.     Clause 21 provides for property, rights and liabilities associated with functions being transferred by the Bill to be transferred from the Secretary of State to the recipient of the functions in question.

    40.     Clause 22 makes provision for the transfer of rights and liabilities under contracts which relate partly to functions transferred to the Inland Revenue and partly to functions retained by the Secretary of State.

    41.     Clause 23 enables any future transfers of functions relating to certain contributions, the NIF, SSP, SMP and contracted out pension matters between the Secretary of State and the Inland Revenue to be made by Order in Council.

    42.     Clause 24 allows the transfer by Order in Council to the Treasury or, as the case may be, the Inland Revenue of any functions relating to Northern Ireland which correspond to the functions in relation to Great Britain transferred by virtue of clauses 1 and 2 of this Bill. There is also provision for the transfer to the Secretary of State of certain functions relating to Northern Ireland and for the onward transfer of some of these functions to the Treasury or the Inland Revenue. These provisions are drafted to accommodate any restructuring and renaming of Northern Ireland Departments that may happen before an Order is made under this clause. An Order may also make appropriate consequential or contractual modifications.

    43.     Clause 25 provides that Orders and regulations under the Bill are to be made by statutory instruments. These may make different provision for different circumstances. It also provides that Orders in Council and regulations under the Bill are to be subject to the negative resolution procedure.

    44.     Clause 26 introduces Schedule 8 (which provides for savings and transitional arrangements) and Schedules 9 and 10 (which provide respectively for consequential amendments and repeals).

    45.     Clause 27 defines "the Board" and "contributions".

    46.     Clause 28 sets out the short title of the Bill, provides for the commencement of its provisions and specifies which provisions of the Bill extend to Northern Ireland.

    COMMENTARY ON CLAUSES

    PART I

    Clause 1 and Schedule 1- transfer of operational functions to the Inland Revenue

    47.     Clause 1 introduces Schedule 1 which transfers the operational functions currently carried out by the CA on behalf of the Secretary of State. These functions in relation to contributions, SSP, SMP and contracting-out matters will from the day appointed for the operational transfer, be carried out by the Inland Revenue. Most of the amendments in Schedule 1 substitute "Inland Revenue" for "Secretary of State".

    48.     Functions conferred on the Secretary of State in provisions of subordinate legislation listed in Schedule 2 are also transferred to the Inland Revenue.

    Schedule 1

    Social Security Act 1986

    49.     Paragraphs 1 and 2 amend legislation relating to the payment of incentives to contracted-out occupational pension schemes under the Social Security Act 1986 by substituting "Commissioners of the Inland Revenue" for "Secretary of State" as appropriate.

    Income and Corporation Taxes Act 1988 (ICTA)

    50.     Paragraph 3 amends section 638 ICTA which provides for restrictions on the approval of personal pension schemes. It substitutes "the Board" for "Secretary of State".

    51.     Paragraph 4 amends section 649 ICTA, which provides for the tax treatment of DSS payments into personal pension schemes, to reflect the transfer from the Secretary of State to the Inland Revenue of the functions of making such payments.

    Social Security Contributions and Benefits Act 1992 (CBA)

    52.     Paragraphs 5 to 9, 12, 13, 16 to 19 amend references in relevant sections of CBA to reflect the transfer of contributions, SSP and SMP functions from the Secretary of State to the Inland Revenue.

    NB: Sections 1, 17 and 18 CBA and paragraphs 4, 6, 7 and 8 of Schedule 1 CBA are also amended by Schedule 3 to this Bill.

    53.     Paragraphs 10, 11, 14 and 15 stipulate that regulations made under powers in sections 161, 162, 170 and 171 CBA (special classes - e.g. servicemen and mariners) shall be made by the Secretary of State with concurrence of the Treasury.

    54.     Paragraph 17 states that the Secretary of State shall make any regulations under the power in Schedule 1, paragraph 6(5) CBA in concurrence with the Inland Revenue. This follows the precedent in the regulation-making powers for Class 4 contributions, also collected alongside income tax, for ensuring an operational input to DSS policy changes.

    55.     Paragraph 20 inserts a new paragraph 1A into Schedule 11 CBA which requires regulations under paragraph 1 of that Schedule to be made with the concurrence of the Treasury.

    Social Security Administration Act 1992 (SSAA 1992)

    56.     Paragraph 21 amends section 116 (legal proceedings) so that an officer of the Revenue, not DSS, may conduct proceedings in relation to section 114 (fraudulent evasion of contributions).

    57.     Paragraphs 22 to 24 transfer functions relating to recovery of unpaid contributions from the Secretary of State to the Inland Revenue.

    58.     Paragraphs 25 to 27 state that the Secretary of State shall make any regulations under powers in sections 125, 130 and 132 relating to SSP and SMP in concurrence with the Inland Revenue.

    59.     Paragraphs 28 to 30 amend sections 162, 163 and 165 SSAA 1992 to reflect the transfer of functions relating to the NIF.

    NB: Sections 162, 163 and 165 are also amended by Schedule 3 to this Bill.

    60.     Paragraph 31 allows applications for a National Insurance number to continue to be made through the contributions route or the benefits route as appropriate.

    61.     Paragraph 32 inserts a definition of "Inland Revenue" into the SSAA 1992. It means "the Commissioners of Inland Revenue".

    Pension Schemes Act 1993 (PSA)

    62.     Paragraphs 33 to 63 make amendments to relevant sections of the PSA to reflect the transfer of operational functions for the contracting-out of SERPS by way of rebates of contributions from the Secretary of State to the Inland Revenue. Statutory Sick Pay Act 1994

    63.     Paragraph 64 adds the Inland Revenue to the provisions of section 5(3) of the Statutory Sick Pay Act 1994 to ensure that any expenses incurred as a consequence of the provisions of that Act may be paid out of money provided by Parliament.

    Jobseekers Act 1995

    64.     Paragraphs 65 and 66 make amendments to relevant sections of the Jobseekers Act 1995 to reflect the transfer of functions from the Secretary of State to the Inland Revenue.

    NB: Section 27 of the Jobseekers Act is also amended by Schedule 3 to this Bill.

    Pensions Act 1995

    65.     Paragraphs 67 and 68 make amendments to sections 107 and 108 of the Pensions Act 1995 to reflect the transfer of functions from the Secretary of State to the Inland Revenue.

    Schedule 2

    66.     Schedule 2 lists provisions of secondary legislation which confer on the Secretary of State functions that are to be transferred to the Inland Revenue.

    Clause 2 and Schedule 3 - transfer of policy functions to the Treasury and Inland Revenue.

    67.     This clause effects the transfer to Treasury Ministers and the Inland Revenue of policy functions of the Secretary of State in relation to contributions and the NIF. The transfers are to come into effect from an appointed day.

    68.     In tax legislation, regulation-making functions are generally reserved to the Treasury where they affect matters such as the existence or size of a tax liability. Regulation-making powers relating to administrative functions are usually sent to the Board of Inland Revenue. This Bill proposes the same general divide in relation to contributions. So the regulations relating to policy functions transferred would be made by the Treasury, although the Inland Revenue would be responsible both for advising Ministers on policy and for its operational implementation.

    Schedule 3

    Social Security Contributions and Benefits Act 1992 (CBA)

    69.     Paragraph 1 transfers to the Treasury powers in section 1 to make regulations relating to the basic structure of the contributions regime, the rates of different categories of contributions and who is liable to pay them.

    70.     Paragraphs 2 and 3 transfer powers concerning earners and earnings. These are to be exercised in concurrence with the Secretary of State since there are implications for the contributory benefits system.

    71.     Paragraphs 4 to 15 transfer to the Treasury powers in sections 6 to 14 CBA to make regulations concerning liability and calculation of different categories of contributions.

    72.     Paragraph 16 requires the Inland Revenue rather than the Secretary of State to pay Class 4 contributions and related interest into the Northern Ireland NIF.

    73.     Paragraphs 17 and 18 remove DSS involvement in regulating incidental matters concerning Class 4 contributions, which is collected together with Schedule D tax.

    74.     Paragraph 19 confirms that regulations concerning contributions regime fall to the Treasury, whilst regulations concerning earnings factors, which are benefit related, are retained by the Secretary of State.

    75.     Paragraph 20 transfers a power to make regulations, inserted by section 54 SSA, allowing wrongly paid contributions to count for benefit purposes.

    76.     Paragraph 21 amends the power to make regulations about what sums are to be treated as earnings so that it shall be exercised by the Treasury in concurrence with the Secretary of State. This takes account of potential implications for benefits.

    77.     Paragraphs 22 to 28 transfer regulation-making powers in regard to special classes of contributors, such as servicemen. Because of potential effects on benefit entitlements they are all to be exercised by the Treasury in concurrence with the Secretary of State.

    78.     Paragraphs 29 and 30 amend sections 175 and 176 (which cover regulation-making procedures) to include provisions where the Treasury or Inland Revenue have powers to make regulations.

    79.     Paragraphs 31 to 35 transfer to the Inland Revenue powers in Schedule 1 paragraphs 1 to 6 to make regulations about the detail of payment methods etc.

    80.     Paragraph 36 retains the apportionment between tax and contributions of any penalties collected under powers in Schedule 1 paragraph 7 CBA.

    81.     Paragraphs 37 and 38 transfer to the Treasury the powers to set rates of penalties under paragraphs 7A and 7B of Schedule 1 CBA.

    82.     Paragraph 39 transfers most of the list of regulation-making powers in Schedule 1, paragraph 8 to the Treasury. Paragraph 8(d) which concerns entitlement to benefits stays with the Secretary of State.

    83.     Paragraphs 40 and 41 transfer regulation-making powers in paragraphs 9 and 11 of Schedule 1 to the Treasury.

    Social Security Administration Act 1992 (SSAA)

    84.     Paragraphs 42 and 43 provide that powers in sections 14 and 15 relating to SSP and SMP are to be exercised by the Secretary of State in concurrence with the Inland Revenue.

    85.     Paragraphs 44 to 50 amend references in sections 141 to 147 SSAA 1992 which relate to periodic review of, and reports to Parliament on, the balance in the NIF. All such responsibilities are transferred from the Secretary of State to the Treasury.

    86.     Paragraphs 51 and 52 transfer functions relating to the administration of the NIF from the Secretary of State to the Inland Revenue.

    87.     Paragraph 53 provides that the NIF shall meet the administrative costs of statistical enquiries whether they are commissioned by the Inland Revenue or the Secretary of State.

    88.     Paragraph 54's amendments of section 165 should be read together with the amendments in paragraph 30 of Schedule 1 to the Bill. Both the Inland Revenue and the Secretary of State have roles in making adjustments between the NIF and the Consolidated Fund which reflect their respective responsibilities post-transfer.

    89.     Paragraph 55 amends section 166 because the Treasury will take over responsibility for receiving the report of the Government Actuary on the state of the NIF.

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