Public sector manpower effects
73. The measures in this Bill will not have any effect on public sector manpower.
SUMMARY OF REGULATORY APPRAISAL
74. The Department has conducted a Regulatory Impact Assessment on the measures contained in this Bill. The assessment concluded that the impact of the Bill would be minimal.
75. There has recently been repeated evidence of significant NICs avoidance through use of tax/ NICs avoidance schemes. The Paymaster General in her announcement of 2 December 2004 (written Ministerial Statement made on 2 December 2004 - see House of Commons Hansard Vol. 428 Col. 45 WS) indicated that where avoidance schemes are closed down, liability could be applied back to the date of that announcement if necessary. This Bill seeks a power to be able to introduce NICs liability through regulations to counter avoidance. It is intended that the power will be used, in the first instance, to close down avoidance involving the use of employment-related securities.
76. The Bill also includes powers to make amendments to the scope of NICs exemptions to reflect so far as possible similar changes to reliefs or exemptions for income tax that are exploited beyond their original intent and used for NICs avoidance.
77. In addition the government has decided to extend the scope of the disclosure rules to NICs avoidance schemes to close a gap in the existing rules and to ensure that the HMRC has the information to counter NICs only avoidance. The overall costs to Government and employers of this Bill and the related regulations will be minimal.
78. The combined impact of the measures in this Bill will not impose significant additional burdens or costs on employers unless they engage in contrived schemes to avoid income tax and NICs on remuneration paid to their employees. Employers that do not engage in such activity will be unaffected.
79. In summary, costs/benefits identified are: -
- Employers that have engaged in avoidance will have to submit supplementary end of year returns of NICs now payable and HMRC estimate 500 employers and 10,000 employees may be affected, incurring additional costs estimated not to exceed around £3,000 per employer.
- The cost of processing these additional returns for HMRC is estimated to be £20,000 in additional manpower costs.
- HMRC estimates 21,000 small businesses, and potentially a further 90,000 self-employed persons, specialising in accountancy and tax will incur learning and familiarisation costs but these costs will be negligible.
- HMRC estimates that this measure will secure an additional £95 million in NICs in 2004-05 and £240 million per annum thereafter.
- HMRC has evidence that some employers may have abandoned plans to channel bonuses through these schemes and instead paid cash bonuses following the Paymaster General's announcement of 2 December 2004 (written Ministerial Statement made on 2 December 2004 - see House of Commons Hansard Vol. 428 Col. 45 WS).
80. Copies of the Regulatory Impact Assessment are available from:
100 Parliament Street
London SW1A 2BQ
Tel. 0207 147 2521
or on the Inland Revenue website http://www.hmrc.gov.uk/ria/
EUROPEAN CONVENTION ON HUMAN RIGHTS (ECHR)
81. Convention issues arise in relation to a number of provisions in the Bill.
Article 1 of Protocol 1 (protection of property)
82. Clauses 1, 2, 3 and 4 allow, but do not require, regulations to be made with retrospective effect. To the extent regulations made under clauses 1 and 2 are capable of increasing a person's liabilities retrospectively they raise issues of whether legal certainty is interfered with in such a way so as to breach obligations under Article 1 of Protocol 1. In the context of regulations which target contrived anti-avoidance activity, the Government considers that regulations that may be made under these powers are capable of pursuing the legitimate objective of securing public finances and the fair distribution of the contributions burden. The Government also considers that regulations that may be made under the power are capable of maintaining a fair balance between the individual's interest and the general community interest without placing an excessive burden on the individual, and therefore that the regulation making powers do not breach obligations under Article 1 of Protocol 1 to the Convention.
83. Clauses 5 and 6 only have effect if regulations altering Class 1 NICs liability are made under clauses 1 and 2 respectively. They ensure that when employees agree or elect to pay secondary liability on certain types of security based income, they are not made liable for amounts which they might not reasonably have anticipated when making their agreement or election. The Government does not consider therefore that obligations under Article 1 of Protocol 1 are breached.
Article 8 (right to respect for private and family life)
84. Clause 7 enables, but does not require, provision to be made requiring disclosure of arrangements which avoid NICs in a similar way to the disclosure provisions of tax introduced by Part 7 of the Finance Act 2004 and regulations made thereunder, making modifications where necessary.
85. The Government considers that any perceived interference with rights under Article 8 of the Convention created by these provisions is justified under paragraph 2 of that Article on the grounds that it is necessary in the interests of the economic well-being of the country.
Article 6 (right to a fair trial)
86. Regulations made under clause 7 may provide for a system of penalties on scheme providers and individuals that use the schemes which are slightly higher than normal NICs penalties and may therefore be regarded as criminal penalties within Article 6 of the Convention.
87. The system of adjudication for such penalties involving an independent appeal tribunal could make these provisions compatible with Convention rights. The Government considers that regulations providing for penalties under clause 7 could be made in way which was compatible with Article 6 of the Convention, and therefore that clause 7 does not breach its obligations under that Article.
88. 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 of the Bill with the Convention rights (as defined in section 1 of that Act). The statement has to be made before second reading. On 5 October 2005 the Chancellor of the Exchequer made the following statement:
"In my view, the provisions of the National Insurance Contributions Bill are compatible with the Convention rights."
Overview of National Insurance Contributions 1
1 Amounts and rates are for the 2005/6 tax year
There are six classes of contributions.
- Class 1 contributions which are paid by both employees and employers on the employee's earnings - the employee's share is known as the primary contribution, the employer's as the secondary contribution. Class 1 contributions are payable on all gross earnings including commissions and bonuses, on readily convertible assets given to employees and on employees' liabilities paid by employers. Primary contributions are payable at 11% of earnings above £94 up to £630 per week (£4,895 to £32,760 per year) and 1% of earnings above this limit. Secondary contributions are payable at 12.8% of all earnings above £94 per week. There are arrangements for reducing the rates of both primary and secondary contributions where the employee has contracted out of the State Second Pension. Class 1 contributions are normally collected monthly by HMRC along with PAYE income tax.
- Class 1A contributions are payable by employers on most taxable benefits in kind. They are payable by employers only and collected annually by HMRC.
- 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 12.8% on the value of the 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 £2.10 per week - a self-employed person can be exempted from liability where earnings are below £4,345 per year. Class 2 contributions are paid either monthly or quarterly.
- Class 3 contributions are paid on a voluntary basis by people who fall outside the scope of Class 1 and 2 contributions at a flat rate of £7.35 per week.
- Class 4 contributions are paid annually by the self-employed on profits that are derived from a trade, profession or vocation and which are chargeable to income tax. Class 4 NICs are payable at a rate of 8% on profits between £4,895 and £32,760 and 1% of profits above £32,760.
Overview of Statutory Payments 2
2 Amounts are for the 2003/04 year
There are four Statutory Payments.
- Statutory Sick Pay (SSP) is paid to employees by their employer when the employee is incapable of work for four or more calendar days in a row. The employee does not need to provide the employer with medical evidence. There are some qualifying conditions the employee must satisfy. The main one is to have average weekly earnings of at least £82 in a period of at least 8 weeks before they became incapable of work. SSP is payable for a maximum of 28 weeks at £68.20 a week. If the employee is not entitled to SSP or they run out of their entitlement the employer must complete a form to enable the employee to claim Incapacity Benefit.
- Statutory Maternity Pay (SMP) is paid to pregnant employees by their employers when they satisfy the qualifying conditions. The employee must:
- provide the employer with medical evidence of their pregnancy and the week the baby is due;
- have worked for the employer continuously for 26 weeks up to and including the 15th week before the week the baby is due;
- have average weekly earnings of at least £82 in a period of at least 8 weeks up to and including the 15th week before the week the baby is due; and
- give their employer 28 days notice of when they want to take time off work.
SMP is payable at 2 rates. The first 6 weeks is paid at 90% of the average weekly earnings. The remaining 20 weeks are paid at the lower of £106 a week or 90% of the average weekly earnings. If the employee is not entitled to SMP the employer must complete a form to enable the employee to claim Maternity Allowance.
- Statutory Adoption Pay (SAP) is paid by employers to employees who are adopting a child on their own or to one member of a couple who are adopting a child together. The employee must:
- provide the employer with evidence that they have been matched with a child for adoption;
- have worked for the employer continuously for 26 weeks up to and including the week in which they are matched with a child for adoption;
- have average weekly earnings of at least £82 in a period of at least 8 weeks up to and including the week in which they notified they have been matched with a child for adoption; and
- give their employer 28 days' notice of when they want to take time off work.
SAP is payable for 26 weeks at the lower of £106 a week or 90% of the average weekly earnings. There is no state benefit if the employee is not entitled to SAP.
- Statutory Paternity Pay (SPP) is paid by employers to employees who satisfy the qualifying conditions and who are:
- the baby's biological father; or
- the partner or husband of the mother but not the baby's biological father, including a female partner in a same sex couple; or
- adopting a child with their partner; or
- the partner of someone adopting a child on their own.
- provide the employer with a declaration of family commitment;
- have worked for the employer continuously for 26 weeks up to and including the 15th week before the week the baby is due OR up to and including the week in which the adopter is matched with a child for adoption;
- remain continuously employed until the baby is born or the child is placed for adoption (this means the child starts living permanently with the person who will be adopting them);
- have average weekly earnings of at least £82 in a period of at least 8 weeks up to and including the week in which the baby is due OR the week in which the adopter is matched with a child for adoption; and
- give their employer 28 days notice of when they want to take time off work.
SPP is payable for 1 or 2 whole weeks at the lower of £106 a week or 90% of the average weekly earnings. The employee may be entitled to Income Support if they are not entitled to SPP.
HMRC are responsible for providing employers with support to help them operate all four Statutory Payment schemes and also for ensuring that employees receive their correct entitlement.
Glossary of abbreviations
|CBA 1992||Social Security Contributions and Benefits Act 1992|
|CB(NI)A 1992 ||Social Security Contributions and Benefits (Northern Ireland) Act 1992 |
|ITEPA 2003||Income Tax (Earnings and Pensions) Act 2003|
|SAP||Statutory Adoption Pay|
|SMP||Statutory Maternity Pay|
|SPP||Statutory Paternity Pay|
|SSAA 1992||Social Security Administration Act 1992 |
|SSA(NI)A 1992||Social Security Administration (Northern Ireland) Act 1992|
|SSP||Statutory Sick Pay|