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General Committee Debates
Delegated Legislation Committee Debates
|Prepared 30th November 2010
Publications on the internet
General Committee Debates
Delegated Legislation Committee Debates
Draft National Minimum Wage (Amendment) (No. 2) Regulations 2010
The Committee consisted of the following Members:
Eliot Barrass, Simon Patrick, Committee Clerks
† attended the Committee
It is a great pleasure to serve under your chairmanship, Mr Rosindell. The regulations ensure that money payments made by an employer for travelling expenses that are eligible for tax relief do not count towards the national minimum wage. They address the problems that the Government have identified with what are commonly called travel and subsistence schemes operated by some employment businesses that involve low-paid workers. The regulations follow a consultation on those problems launched by the previous Government, some of whose concerns are shared by the current Government, who have, therefore, introduced the regulations.
I will briefly outline how the schemes work and why we are tightening their rules. Traditionally, employment businesses have engaged workers under agency contracts, under which the worker is not an employee of the employment business. As a result, each assignment with a client is, for the purposes of tax legislation, considered to be the worker’s permanent place of employment. Increasingly, however, some employment businesses are engaging workers not under an agency contract, but under an employment contract. Such contracts are sometimes referred to as overarching contracts of employment, because they link—or claim to link—a series of different assignments into one overarching employment with the employment business. One consequence of that approach is that, for tax legislation purposes, each assignment with a client is considered to be the worker’s temporary place of employment.
The distinction between a temporary and a permanent place of employment is important for this statutory instrument. Since 1998, workers who travel from home to a temporary workplace have been eligible for tax relief on their travel expenses, including associated subsistence costs. Travel from home to a permanent workplace, on the other hand, does not qualify for tax relief. As a result, by engaging workers under employment contracts, employment businesses are able to use travel and subsistence schemes to reduce the amount of tax and national insurance contributions paid by the worker, and the amount of national insurance contributions paid by the employer.
Travel and subsistence schemes operate through an arrangement known as salary sacrifice, under which an employee contractually agrees to waive part of their taxable income in exchange for something that is either
Under national minimum wage rules, payments of expenses for travel from home to temporary workplaces and associated subsistence count as pay. Therefore, as long as the taxable pay and the expenses paid by the employer are equal to or greater than the national minimum wage, the employer is compliant with national minimum wage rules. The worker benefits as they receive slightly higher take-home pay than they would have otherwise, and the employer also benefits as the amount of salary upon which they have to pay employers’ national insurance contributions is reduced. In many cases, the expenses paid by the employer to the worker are less than the salary given up by the worker.
There is a number of problems with the use of travel and subsistence schemes for workers on the national minimum wage, the first of which relates to preserving the integrity of the minimum wage as a wage floor. As I am sure the Committee knows, the coalition Government are committed to the national minimum wage, because we recognise the protection that it gives to low-income workers, and the incentives to work that it provides. For the national minimum wage regime to be effective, workers need to know what they are entitled to, and employers must be able to demonstrate easily that they have met their legal obligations. That is particularly important given the vulnerability of those workers.
Allowing some salary sacrifices to count towards the minimum wage when others, such as child care vouchers, do not unduly complicates the regime. There is evidence that the employer gains far more from the schemes than the worker, and that the majority of workers do not understand how the schemes work. I consider that to be a form of exploitation of low-paid workers, and it is clear that the previous Government were similarly minded.
A number of adverse consequences flow from the use of schemes for low-paid workers. The amount a worker pays in national insurance contributions potentially affects their entitlement to certain benefits. The most significant impact for national minimum wage workers in travel and subsistence schemes is on the basic and additional state pension. By participating in such schemes, the pay that is liable for national insurance contributions is reduced; that increases the number of weeks that a worker must work and pay national insurance contributions to secure the qualifying earnings for the state pension, and thus increases the risk of the worker not meeting the eligibility criteria for contributory benefits. In addition, businesses not using travel and subsistence schemes can find themselves at a competitive disadvantage. Businesses using such schemes can undercut them on price or general profit margins, which would not be possible without the tax and national insurance contribution benefits available.
Some employment businesses have told us that they do not want to implement travel and subsistence schemes because they consider them to be exploitative and morally wrong. For some, therefore, this is a matter of ethics. They believe that low-paid workers do not properly understand how the scheme works; that some schemes, in reality, do not give workers the employment rights associated with an employment contract; and that such
Fairness is also an issue. The artificial reduction in the pay liable for tax and national insurance contributions means that a low-paid worker in a travel scheme becomes entitled to an increased level of certain benefits, such as tax credits, compared with a low-paid worker who is paid the same amount, but not through a travel scheme. That is not right, and nor is it right that the burden of financing benefits should be offloaded from the employer and the worker on to the general taxpayer.
For all those reasons, we consider that payments of travel and associated subsistence expenses relating to travel from home to a temporary workplace should not count as pay for minimum wage purposes. That is aim of the draft regulations before the Committee. The regulations will preserve the integrity of the minimum wage. They will lessen the risk of reducing low-paid workers’ entitlements to certain social security benefits. They will ensure a level playing field for those businesses that are unwilling or unable to use such schemes. They will remove the unfairness that is inherent in the present system. For those reasons, I commend the draft regulations to the Committee.
The statutory instrument before us proposes to make a change so that payments by an employer for travel expenses to a temporary workplace, which are eligible for tax relief, will not count as pay for national minimum wage purposes. The national minimum wage was introduced by the Labour Government in 1999 in spite of all manner of scaremongering, particularly from some sections of the right-wing press; and, of course, it was opposed by the Conservative party at the time. When it was introduced, it raised pay for more than two million people, and thereafter the Labour Government ensured that there were regular, above-inflation increases, so that in the first 10 years of its existence, the national minimum wage rose by 59%. Those increases raised the living standards of the lowest paid and helped to close the gap between men and women’s pay.
Despite the initial and determined opposition to the national minimum wage, it appears that it is now accepted by the main political parties. We should, however, never be complacent, particularly in the light of the private Member’s Bill introduced in the previous Parliament by the hon. Member for Christchurch (Mr Chope), in which he seriously advocated the abolition of the national minimum wage and a return to working for a couple of pounds an hour. I very much hope that the coalition parties will continue our policy of increasing the national minimum wage at or above the level of inflation, and that there is no intention on their part to allow the national minimum wage to wither on the vine. I express those fears because we have already seen the Conservative-Liberal Democrat coalition Government decide to use the consumer prices index instead of the retail prices index to calculate rises in pensions and benefits, which will gradually erode pensioners’ income.
As with all legislation, however, there is a need to keep it under review and to see how matters work out in practice. The draft regulations aim to create a level playing field. At the moment, some employers are able to use a scheme whereby they pay a part of their workers’ wages as travel and subsistence, thus avoiding the need to pay tax and national insurance contributions on that portion. That, we are told, puts them at a competitive advantage, because their costs are lower than those of the firms that pay the whole of the national minimum wage amount as a wage and not as a combination of wage and travel and subsistence payments. Firms that operate such schemes point out that the schemes are legitimate and that other companies could set them up if they wanted. The measure is about protecting the Exchequer, however, because it ends a scheme that has allowed firms to avoid paying tax and national insurance contributions on part of their workers’ pay. That is an important point: the regulations are about ending a loophole and making a fairer and more level playing field.
What of the workers? How does the use of such schemes affect the workers and what they take home as pay? Just as important, what does it mean for them in terms of future entitlements? If the money that one takes home equates to the minimum wage, and it is made up partly of wages and partly of an amount for travel, the actual wage is rather less than the minimum wage. In cases that Her Majesty’s Revenue and Customs has seen, workers who are paid at the national minimum wage and who use travel and subsistence schemes can find that as much as 40% of their wages are paid as travel and subsistence expenses. Their access to earnings-related contributory benefits, which is based on a worker attaining the qualifying earnings factor, can therefore be affected. The effect of participating in travel and subsistence schemes is to reduce the amount of the worker’s pay on which the national insurance contributions are paid. That, depending on how many weeks they are able to work for, puts at risk their ability to achieve the qualifying earnings factor. That is most likely to affect eligibility for both basic and additional state pension.
If workers are missing out in a way that could affect their eligibility for pension benefits, that is very serious indeed. With ever-increasing life expectancy, such workers could miss out on a considerable sum over a long period of time. Given the nature of the employment of workers who utilise such schemes, they may at some point want to access earnings-related contributory benefits either here or in another EU country. Participation in such schemes means that workers are potentially restricting their access to what may later be an important source of income.
I understand from the impact assessment that the schemes we are discussing are likely to involve some 90,000 workers out of more than 1 million who are working at or near the national minimum wage. As so often with such changes, there are winners and losers. The change proposed in the legislation could have a negative impact on some workers who are currently in such travel and subsistence schemes. Because only part of the amount that a worker takes home is pay, and gross pay is assessed for tax purposes, some workers, because they receive less pay, may be entitled to a greater amount of working tax credit. Under the regulations, some people, because a larger amount of their take-home
We know that tax credits have been a huge boost to those on low incomes and have been recognised as helping to reduce the gap between rich and poor, but I am sure that I am not the only hon. Member who has had to deal with constituents whose circumstances have changed and who are then faced with a clawback whereby they must pay back an overpayment of tax credit. I stress that we want to know what the Government will do to ensure that anyone affected by the measure is kept fully informed and does not end up in a situation, months down the line, of being asked to pay back money that they simply do not have.
That said, we support the motivation behind the measure because it will prevent exploitation and ensure that the contributory benefit position of temporary workers paid at or near the national minimum wage is not prejudiced by the reduction of earnings liable to pass on national insurance contributions. We also support it because the intention is to ensure that employment businesses and umbrella companies do not gain an unfair competitive advantage through the use of travel and subsistence schemes for temporary workers.
Jeremy Lefroy (Stafford) (Con): In principle, I believe that the regulations are moving us in the right direction and are needed. My question is on the timing. The statutory instrument is due to come into effect on 1 January, which is only a month away. The two important consequences of the regulations have been referred to both by the Minister and by the hon. Lady. The first is that, for some people, the regulations will result in a reduction in their net take-home pay. Let us not forget that such people are already on very low pay—the minimum wage.
Secondly, the regulations will result in increased costs for those employers who already participate in the scheme, because they will be required to pay employers’ national insurance contributions on the part of salary that has, until now, been forgone. We may consider that that is right and proper, but I repeat: the regulations will come into effect in one month’s time. That, in my view, does not give such companies enough time to adjust.
Given, as we all accept, that the next calendar year will be financially challenging, we need to ask questions about that combination of consequences both for the people who will suffer from lower take-home pay, and for certain employers, who will face increased employment costs. Has the Minister considered delaying the implementation of these regulations to allow more time for those effects to be taken into account? I refer also to
Mr Davey: I welcome the overall support for the regulations voiced by the hon. Member for Llanelli. I am pleased, given that it was her party’s Government that kicked off the consultation. She initially took us through a history of the national minimum wage, but she did not talk about the history of minimum wages more generally, nor did she go back further. I am sure that she will not mind my putting it on the record that it was a Liberal Government who brought in the wages councils and the first minimum wages in this country.
The hon. Lady is right to say that, as well as to protect workers and employment businesses that are unfairly disadvantaged, one of our objectives in the draft regulations is to protect the Exchequer. That is a fair objective to have. Although she did not mention the figure, some of the estimates suggest that up to £90 million per annum will flow to the Exchequer through this protection measure.
The hon. Lady rightly focused on the problems that many low-income workers face, and she graphically pointed out that HMRC has noted that some workers see 40% of their wages paid through travel and subsistence, which undermines their eligibility for future entitlements to contributory benefits. I am grateful for her raising that point. She also noted that there may also be losers among the workers affected by the measure. Such people will probably lose relatively small amounts, but she is right to mention it. My hon. Friend the Member for Stafford also pointed to that concern.
It is very clear, though, that the way such schemes work means that it is the employers who get the huge benefits, and they are not passing on those benefits in any equal way to their employees. We should be absolutely clear about that, in case anyone thinks that a largesse is being handed out to employees who sign up to such schemes, because that is not the reality. Moreover, the important point upon which the hon. Lady focuses is the loss of future entitlement to contributory benefits, which could be very significant for people who sometimes unknowingly sign up to such schemes and do not understand what they are agreeing to when they sign such contracts, so one should bear that in mind. I hope that that deals with the point about the losers.
The major question the hon. Lady asked me was about the information that will be provided to employees who might lose some tax credits. That is a point very well made. All members of the Committee will have encountered in their constituency surgeries people who have been overpaid tax credits, often through no fault of their own, and who must pay them back out of pretty low net incomes. The repayment of tax credits was a problem with which the previous Government struggled, and we do not want to make it any worse.
The changes, as well as being highlighted in the consultation—it is not a dramatically new development, as the hon. Lady knows—are being publicised by HMRC through its Employer Bulletin; there will be guidance on Business Link and Directgov; the Gangmasters Licensing Authority is making labour providers aware of the changes; and HMRC will also use targeted advice to tax
My hon. Friend the Member for Stafford asked about timing. I am sure that he will be aware that in the consultation, the proposed implementation date was 1 October 2010. I am sure that businesses that will be affected by the measure were aware of that consultation, so for them the implementation date will be later than originally planned. The general election got in the way. We could have decided to delay further, to 1 October next year—that option was certainly open to us—but as 1 January 2011 is later than originally planned in the consultation, I thought that unnecessary. Although I did not have a face-to-face conversation with the Chancellor
We should realise that many such schemes are computerised, so it will hardly be onerous to make changes quickly. Given our concern about the participation of low-paid workers in the schemes, it would not be appropriate to delay implementation either. Given that the changes were first proposed in July, scheme users have had ample time to prepare, and we are trying to ensure that low-paid workers who are affected will be properly informed.
|Prepared 30th November 2010