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These notes refer to the National Insurance Contributions Bill as introduced in the House of Commons on 11 October 2005 [Bill 53] NATIONAL INSURANCE CONTRIBUTIONS BILLEXPLANATORY NOTESINTRODUCTION 1. These explanatory notes relate to the National Insurance Contributions Bill as introduced in the House of Commons on 11 October 2005. 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. They do not form part of the Bill and have not been endorsed by Parliament. 2. These 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. SUMMARY 3. This Bill takes forward the Paymaster General's Pre-Budget Report 2004 announcement that the Government would be prepared to act against tax and National Insurance Contributions avoidance involving employee remuneration. (Written Ministerial Statement made on 2 December 2004 - see House of Commons Hansard Vol. 428 Col 45 WS). The Bill provides for a power to make regulations in respect of National Insurance Contributions ("NICs") that reflect retrospective tax changes that take effect on or after 2 December 2004. Existing NICs legislation does not allow regulations to be made which can take effect that far back. The powers allow for NICs liability to be changed back to 2 December 2004, if necessary. They also allow for consequential changes to contributory benefit and statutory payments where appropriate. This power will be used in the first instance to reflect the employment-related securities anti-avoidance provisions included in Schedule 2 to the Finance (No.2) Act 2005, which received Royal Assent in July 2005 but which took effect from 2 December 2004. [Bill 53-EN] 54/1 4. The other main provisions in the Bill:
OVERVIEW OF THE BILL 5. An explanation of the various classes of National Insurance contributions is at Annex A; a description of statutory payments, is at Annex B; and a glossary of abbreviations is at Annex C. Power to make regulations to create a retrospective liability for National Insurance contributions etc 6. The provisions in clause 1 will enable the Treasury to make regulations under specified existing powers that will have retrospective effect from dates as early as the 2 December 2004, if necessary. The new power may only be used where a provision of the Income Tax Acts which relates to income tax chargeable under the employment income Parts of ITEPA 2003 is passed which has retrospective effect and the Treasury consider it appropriate to make NICs regulations under any of those existing powers for the purpose of reflecting the whole or part of the retrospective tax provision. It must also appear expedient to the Treasury for the NICs regulations to have retrospective effect in consequence of the retrospective tax provision. The regulations can ensure that payments made under a tax and NICs avoidance scheme or arrangement, used since the 2 December 2004, can be treated as earnings for NICs purposes. The resulting NICs liability will be calculated as if a liability had existed at the time the payments were made. The Government only envisages exercising these powers where the retrospective tax provision is a provision tackling avoidance of the income tax payable on employment income. 7. Clause 1 also provides for wide powers to make consequential changes or other changes that may be required through exercise of the powers described in paragraph 6 above for the purposes of contributions, contributory benefits, statutory payments, contracted-out pension rebates or other purposes. In particular it is anticipated the powers will allow for:-
8. Clause 3 introduces powers to enable the Treasury to make regulations in relation to matters affecting the law relating to Class 1A NICs where this is expedient in consequence of retrospective tax legislation which affects a person's general earnings. The regulations may have retrospective effect to dates as early as the 2 December 2004, if necessary. Voiding of NICs Agreements and Elections 9. Currently, employers and employees can jointly agree or elect to transfer any future potential secondary NICs liability, due on certain employment income from shares and securities acquired by employees, from the employer to the employee. These provisions are found in paragraphs 3A(2)-(4) (agreements) and 3B of Schedule 1 (joint elections) to the CBA 1992. This facility was introduced on 28 July 2000 by the Child Support, Pensions and Social Security Act 2000, to help employers deal with the problem of their unpredictable future NICs costs due on gains from share options. Amendments made by the National Insurance Contributions and Statutory Payments Act 2004 extended this facility to include employment income derived from restricted securities and convertible securities. 10. Clause 5 ensures that Joint NICs Agreements and Elections can only be used for their intended purpose and specifically prevents the use of these agreements and elections by employers who seek to recover from their employees any NICs liability that may be imposed retrospectively under the powers being introduced by this Bill. Disclosure of NICs avoidance schemes and arrangements 11. Part 7 of the Finance Act 2004 requires disclosure of arrangements or proposals for arrangements where:
12. The Finance Act 2004 disclosure provisions apply to income tax, corporation tax, capital gains tax, stamp duty land tax, stamp duty reserve tax, inheritance tax and petroleum revenue tax. The Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2004 (SI 2004/1863), as amended, describe the notifiable arrangements in relation to income tax, corporation tax and capital gains tax. These include arrangements that concern employment. The Tax Avoidance Schemes (Information) Regulations 2004 (SI 2004/1864), as amended, specify the information required to be disclosed. The Tax Avoidance Schemes (Promoters and Prescribed Circumstances) Regulations 2004 (SI 2004/1865), as amended, specify the circumstances in which persons are not to be treated as promoters. 13. It was recognised that many employment schemes relate to both tax and NICs. However, NICs were not included in the disclosure rules because that would have required NICs primary legislation. In practice the tax disclosure rules provide the information necessary to counter both tax and NICs avoidance in the usual situation where a scheme seeks to avoid both. But they do not provide information in relation to schemes seeking to avoid only NICs. Clause 7 provides for the tax disclosure rules to apply to NICs proposals and arrangements as they apply to income tax schemes. Application of the Bill to Northern Ireland 14. Clauses 2, 4 and 6 mirror for Northern Ireland the provision made in clauses 1, 3 and 5 for Great Britain. Clause 7 extends to Northern Ireland as well as Great Britain. Under the provisions of Schedule 2 to the Northern Ireland Act 1998 NICs are an excepted matter. The Bill therefore amends relevant Northern Ireland legislation relating to NICs. 15. Where the powers in the Bill allow for retrospective changes to earnings, Treasury regulations made by virtue of the Bill which make consequential changes to matters which are the responsibility of a Northern Ireland department require the concurrence of that department. Contributory benefits and statutory payments are transferred matters under the Northern Ireland Act 1998 and responsibility for them lies with the Department for Social Development and the Department for Employment and Learning (in respect of SPP and SAP). COMMENTARY ON CLAUSES Power to make regulations to create a retrospective liability for National Insurance contributions Clause 1 - Power to make provision in consequence of retrospective tax legislation: Great Britain 16. Subsection (1) provides for new sections 4B and 4C to be inserted after section 4A of the CBA 1992. 17. Subsection (1) provides for a new power at New Section 4B - Earnings: power to make retrospective provision in consequence of retrospective tax legislation. Section 4B enables the existing regulation making powers mentioned in subsection (3) of that section to be exercised with retrospective effect. The power can only be exercised where there have been retrospective tax enactments relating to those Parts of ITEPA 2003 dealing with employment income. The Treasury must also consider it appropriate to make the regulations for the purpose of reflecting in whole or in part the provision made by the retrospective tax provision. Subsection (2) provides that it also must appear to the Treasury to be expedient in consequence of the retrospective tax provision for the regulations to have retrospective effect. 18. Subsection (3) specifies the relevant NICs regulation making powers, which are to be extended to allow NICs legislation to be made that can take effect back to 2 December 2004. They are the powers in sections 3, 4(6) and 4A of the CBA 1992. 19. Subsection (4) provides for retrospective tax provisions which were made before the Bill is passed to also trigger the use of the power in subsection (1). 20. Subsection (5) limits how far back the NICs changes can be backdated. It provides that the new regulation-making powers cannot take effect earlier than 2 December 2004, which was the date of the Paymaster General's announcement on tax and NICs avoidance. 21. Subsection (6) provides that regulations made retrospectively through extension of the powers at sections 3, 4(6) and 4A of the CBA 1992 will be able to affect payments of earnings made to or for the benefit of employees prior to the date when the regulations are made. 22. Subsection (7) provides for definitions of "relevant contributions legislation", "the relevant time" and "the revised earnings " in section 4B. 23. Subsections (8), (9) and (10) provide that, where regulations that are made by virtue of subsection (2) have the effect described in subsection (6), the contributions legislation is to be applied to the revised earnings figure and liability is to be re-determined by reference to the revised earnings or amount of those earnings as if the revised position applied at the time. 24. Subsection (11) provides that subsections (7) to (10), which provide for liability to be re-determined, are to be subject to any exceptions which are specifically provided. 25. Subsection (12) makes it clear that the new power in section 4B(2) does not affect any other power in the CBA 1992 or other enactments. 26. Subsection (13) provides for the meaning of "contributions legislation" in section 4B. 27. Subsection (1) of new section 4C - Power to make provision in consequence of provision made by or by virtue of section 4B(2) etc - provides for the Treasury to make regulations which it considers expedient for any of the purposes mentioned in subsection (2) in consequence of any provision made by or by virtue of the powers in section 4B(2). The regulations require the concurrence of the Secretary of State. Subsection (2) identifies the purposes for which it may be necessary to make regulations where earnings are re-determined. Subsection (2)(f) also allows for additional purposes to be prescribed in future by the Treasury with the concurrence of the Secretary of State. 28. Subsection (3)(a) provides for the regulations to make changes to primary and secondary legislation, including provisions which come into force on or after the day this Bill receives Royal Assent. 29. Subsection (3)(b) provides for the regulations to apply primary and secondary legislation with or without modifications. 30. Subsection (4) provides that any regulations under section 4C(1) cannot have effect earlier than 2 December 2004, which was the date of the Paymaster General's announcement on tax and NICs avoidance. 31. Subsection (5) gives a non-exclusive list of examples of matters which may be affected by regulations under section 4C(1) having retrospective effect. 32. Subsection (6) provides that, where matters specified under subsection (5) have already been determined, regulations can be made under section 4C(1) that will allow for re-determination of these matters. 33. Subsection (7) ensures that where "the operative provisions" could remove past or future entitlement to contributory benefit, contribution-based jobseeker's allowance or statutory payments or reduce the amount of such payments those provisions are to be read with such modifications as are necessary to ensure that they do not have that effect. 34. Subsection (8) defines "the operative provisions" and "entitlement" for the purposes of subsection (7). 35. Subsection (9) ensures that other powers conferred by the CBA 1992 or any other enactment are not affected by this new power. 36. Subsection (10) provides that further amendments and revocations can be made to provisions modified by regulations under section 4C(1), and these do not need to be made under the section 4C(1) powers. 37. Subsection (11) provides the meaning of "the commencement day" "enactment", and "statutory payment" in section 4C. 38. Subsection (2) of the clause amends section 176 of the CBA 1992 39. Subsection (2)(a) inserts references to section 4B(2) and 4C into section 176(1)(a). This provides that if regulations are made using the powers under sections 4B(2) and 4C a draft of the instrument has to be laid before Parliament and approved by a resolution from both the House of Commons and the House of Lords, before the instrument is made. 40. Subsection (2)(b) inserts section 176(2A) and (2B) which provide that regulations made by virtue of section 4B(2) should be laid before Parliament within 12 months of the corresponding tax provision being passed. Where the corresponding tax provision was passed or made before Royal Assent of the National Insurance Contributions Bill 2005, the regulations should be laid within 12 months of that Act being passed. Subsection (2)(b) also inserts section 176(2C) which defines some of the terms used. Clause 2 - Power to make provision in consequence of retrospective tax legislation: Northern Ireland 41. Clause 2 replicates the provisions of Clause 1 in respect of the CB(NI)A 1992. Clause 3 - Class 1A contributions: power to make provision in consequence of retrospective tax legislation: Great Britain 42. Clause 3 inserts a new section 10ZC after section 10ZB of the CBA 1992. 43. Subsection (1) of section 10ZC provides for regulations to be made if it appears to the Treasury to be expedient, for any purpose of the law relating to Class 1A contributions, to make the regulations in consequence of retrospective tax legislation which affects the amount of general earnings chargeable to income tax under the employment income Parts of ITEPA 2003. The power to make regulations also enables general provision to be made to deal with matters that may arise should such retrospective tax legislation be passed in the future. Retrospective tax provisions have an automatic effect on Class 1A liability by virtue of section 10 of the CBA 1992. 44. Subsection (2) defines "relevant retrospective tax provision". 45. Subsection (3) allows for the tax provision that triggers the use of the power in subsection (1) to have been made before or after the commencement day of this Bill. 46. Subsection (4) makes it clear that the regulations can make provision modifying existing enactments (including future enactments) and applying existing enactments with or without modifications. 47. Subsection (5) provides that new regulations made under these powers cannot have retrospective effect earlier than 2 December 2004, which was the date of the Paymaster General's announcement on tax and NICs avoidance (written Ministerial Statement made on 2 December 2004 - see House of Commons Hansard Vol. 428 Col. 45 WS). 48. Subsection (6) allows for cases that have already been decided before regulations have been made under subsection (1), to be reviewed and amended where necessary. For example, more than one employer may provide to the same employee a benefit which is chargeable to tax and which gives rise to a liability on each employer to pay a Class 1A contribution. That liability is apportioned between the employers. If a retrospective tax provision then provides for a revaluation of that benefit and alters the amount chargeable to tax in respect of it, it will be necessary to redetermine the apportionment and the amount due from each of the employers in respect of the resulting revised Class 1A liability. 49. Subsection (7)(a) prevents regulations made under subsection (1) from imposing a liability to pay a Class 1A contribution. Retrospective tax legislation which alters the amount of income tax chargeable to general earnings will normally automatically create a liability for Class 1A contributions by virtue of section 10 of the CBA 1992. 50. Subsection (7)(b) prevents regulations made under subsection (1) from increasing the amount of any Class 1A which is payable. The amount of any Class 1A will follow automatically by virtue of the retrospective tax legislation and its impact on section 10 of the CBA 1992. 51. Subsection (8)(a) ensures that the power in section 10ZC is without prejudice to any liability to pay a Class 1A contribution which arises by virtue of a relevant retrospective tax provision. Such liability will normally arise automatically under section 10 of the CBA 1992. 52. Subsection (8)(b) ensures that other powers conferred by the CBA 1992 or any other enactment are not affected by the power in section 10ZC. 53. Subsection (9) ensures that the modification of any secondary legislation by regulations made by the Treasury under section 10ZC does not prejudice any existing power that the department that made the original legislation has to amend or revoke it. 54. Subsection (10) defines "the commencement day" for the purposes of section 10ZC as the day upon which the Bill receives Royal Assent. It also defines "enactment" for the purposes of section 10ZC as including an instrument made under an Act. 55. Clause 3(2) inserts a reference to section 10ZC into subsection (1)(a) of section 176 of the CBA 1992. This provides that if regulations are made using the powers under section 10ZC a draft of the instrument has to be laid before Parliament and approved by a resolution from both the House of Commons and the House of Lords before the instrument is made. Clause 4 - Class 1A contributions: power to make provision in consequence of retrospective tax legislation: Northern Ireland 56. Clause 4 replicates the provisions of clause 3 in respect of the CB(NI)A 1992. Agreements and Elections Clause 5 - Agreements and joint elections: Great Britain 57. Subsection (1) introduces changes to be made to Schedule 1 to the CBA 1992 which contains the rules on Agreements and Elections that allow the employer to recover from, or pass on to, the employee any secondary NICs liability arising on certain securities based remuneration. 58. Subsection (2) amends paragraph 3A(2A) of Schedule 1. The change prevents Agreements for the recovery of contributions by the employer from the employee (of the kind allowed under that provision) from being used to recover any secondary contributions resulting from the imposition, by virtue of new section 4B(2), of a retrospective liability to Class 1 NICs. 59. Subsection (3) amends paragraph 3B(7B) of Schedule 1. Provisions in paragraph 3B allow the employer and the employee to enter into a joint election for the transfer of secondary NICs liability arising from securities options, restricted securities and convertible securities to the employee. The change will prevent the transfer of any secondary NICs liability that is due as a result of retrospective liability to Class 1 NICs imposed by virtue of section 4B(2). 60. Subsection (4) provides that the amendments made by the section have effect in relation to agreements or elections entered into before, on or after, the time the Bill is passed. Clause 6 - Agreements and joint elections: Northern Ireland 61. Clause 6 replicates the provisions of clause 5 in respect of the CB(NI)A 1992 Disclosure of avoidance Clause 7 - Disclosure of contributions avoidance arrangements 62. Subsections (1) and (2) of the clause provide for a new section 132A - Disclosure of contributions avoidance arrangements, to be inserted into the SSAA 1992. 63. Subsection (1) of section 132A provides that the Treasury may make regulations requiring, or relating to, the disclosure of information in relation to "notifiable contribution arrangements" or "notifiable contribution proposals". 64. Subsection (2) restricts the scope of the power provided by subsection (1). The regulations can only apply in relation to NICs (with or without modification), or make provision corresponding to, those provisions in primary or secondary legislation relating to the disclosure of information in relation to income tax avoidance arrangements, including provisions that come into force on or after the day this Bill is enacted. 65. Subsection (3) defines "notifiable contribution arrangements" and "notifiable contribution proposal". In essence, these are arrangements, or proposals for arrangements, whose use might be expected to obtain a NICs advantage as one of the main benefits of using those arrangements. 66. Subsection (4) provides a power enabling the Treasury to amend subsection (3) by regulations if, after the passing of this Bill, any of the provisions relating the disclosure of income tax avoidance arrangements are amended in such a way that the definitions in subsection (3) no longer mirror the relevant tax provisions. The scope of the power is limited to amending the definitions in subsection (3) to make provision analogous to the changes to the relevant tax provisions. 67. Subsection (5) defines some of the terms used in subsection (4). 68. Subsection (6) ensures that regulations made under section 132A cannot require any person to disclose information which is protected by legal professional privilege. This provision mirrors the equivalent provision applying to the disclosure of information in relation to income tax arrangements (section 314 of the Finance Act 2004). 69. Subsection (7) contains definitions of "advantage", "arrangements", "contribution" and "tax avoidance arrangements". 70. Subsection (3) of the clause inserts a reference to subsection (4) of the new section 132A of the SSAA 1992 into section 190(1) of the SSAA 1992. This provides that if regulations are made using the powers under section s132A a draft of the instrument has to be laid before Parliament and approved by a resolution from both the House of Commons and the House of Lords before the instrument is made. 71. Subsection (4) of the clause ensures that the new section 132A extends to Northern Ireland as well as Great Britain. ESTIMATE OF PUBLIC SECTOR FINANCIAL EFFECTS AND PUBLIC SECTOR MANPOWER EFFECTS Public sector financial effects 72. The cost of processing additional returns from employers is estimated to be £20,000 in additional manpower costs for HMRC. |
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