National Insurance Contributions Bill

Memorandum submitted by Wenta (NI 01)

Comments to the proposals to this Bill

A. Increase in the NI contributions paid by Employers, Employees and Self Employed from 1st April 2011 by 1 % point.

Whilst the Government may consider it appropriate to increase the NI rates proposed by the previous Government from April 2011, I find it extremely hard to understand why they are including Employers NI increases within these changes. In my opinion the Employers National Insurance Contributions are the most retrograde tax on employment and directly impacts on the number of jobs within the economy; the profitability of businesses; and inward investment by companies. It is the most restrictive tax on business and in times of severe recession contributes more to counter growth and employment above any other measure operated by the Government.

The Government claimed it to be a ‘tax on jobs’ during the last election, and yet is now considering increasing the burden on employers at the very time it is seeking to grow employment opportunities in the private sector. If the Government accepted it as a tax on jobs during the last election, I fail to understand why it now wants to increase payment thresholds within 12 months of the election and based on pledges from the previous government?

In my view the Government should seriously consider scrapping the Employers National Insurance contribution completely. Whilst I accept that this tax on employment produces considerable and easily earned tax revenues for the Government, it does so at an even greater cost to British business which I hope to demonstrate as follows.

At a time of considerable uncertainty it is the Governments role and responsibility to be assertive, dynamic and innovative in order to stimulate growth, jobs and prosperity The Government can have a substantial impact on the British economy particularly by taking courageous decisions on direct business taxation. The period of recovery and the length of recession are clearly within the control of government influence, and its policies on business taxation. Therefore if the Government were to scrap the Employers NI contributions it would have very substantive impact on all the following areas,

1. By making Employers free from this tax burden, the Government could and should immediately increase the Minimum Wage by a substantial amount, of at least say £2.50 per hour, to support its agenda of assisting the lowest paid. Employers, free of this NI burden, would surely offer no serious objection to this increase. This would also enhance the Governments aims of making work pay, and to create a substantial differential between benefits and the minimum wage.

2. The Government should also insist that employers immediately contribute a minimum 3% of salary into a private/portable pension scheme for every employee. This would meet the Governments objective of getting every employee into a private pension scheme that offers enhanced retirement income over the state pension. Whilst there is already a directive to see this introduced in 2014? Implementing it this way will achieve the same result but without damaging business competitiveness or increasing costs in an ever increasingly competitive market.

3. Whilst I accept government revenues would be substantially reduced, there are many areas where the Government could recoup some of these lost revenues. The immediate benefit being the Exchequer would take considerable additional income tax revenues from higher earnings. Unemployment would drop substantially faster than currently predicted and thereby substantially decrease the cost of social benefits. I believe there should be a commitment to seek a very substantial increase in the numbers of jobs created (possibly as much as a million new jobs) within two years, or at least see unemployment fall by the equivalent number (1 million) over two years. Businesses able to invest into their operations would produce greater profits and therefore contribute greater levels of Corporation Tax. The Government may also wish to increase the levels of Corporation Tax as it has always seemed to me a more sensible form of taxation, to tax profits already earned, rather than placing taxation that directly inhibits profitability. The Government therefore wins with higher levels of Income Tax and Corporation Tax and lower levels social security benefits. The gap is substantially widened between the minimum wage and benefits which will further enhance the argument that it pays to work.

4. There are many businesses that are on the brink of closure and this would act as an immediate boost to protect those companies and jobs under threat of closure and redundancy through weak cashflow positions and where banks have failed to provide support.

5. The Government directly or indirectly employs circa 25% of the working population and it has the ability to reduce public sector budgets by the equivalent savings from all Employers NI (with the exception of wage inflation) to ensure the private and voluntary sectors are the only beneficiaries. The Voluntary Sector is currently in a state of melt down with the substantial projected cuts in public funding, and this would be a boost to many Voluntary and Charitable organizations facing funding cuts. This would further boost employment numbers at a time when projected job cuts are considerable.

6. The benefits to the economy would be that wages/salaries would be increased without increasing overall costs to business, and at a time when almost every employee is facing wage deflation. There would be more disposable money in the economy to boost consumer spending. The very poorest would directly benefit from a minimum wage increase and companies could afford to pay the increase without incurring additional costs. This would also counter the planned increases in VAT to 20%. Allowing people to earn higher levels of income would have a direct impact on the amount claimed under the Governments Tax Credit scheme.

7. Employers would have the windfall of additional income to invest into their businesses, avoiding the need to seek bank finance, which has become ever more difficult to access. Every employer I have spoken to would see this as an opportunity to invest into their business, either through the employment of additional staff, enhanced product development, or price competitiveness. Whilst the impact on small and medium businesses would be considerable, I believe the impact on larger/corporate businesses would be even greater. Companies such as Rolls Royce or Marks and Spencer would almost certainly use the additional income to enhance inward investment, employment numbers and price competitiveness for exports.

8. Employee payments into Pension funds would be a windfall to Pension Investment Funds and therefore significantly boost long term investment funding and act as a counter or alternative to the shortfall in bank finance currently being experienced. It surely has to be a better option in securing real long term investment into the economy.

9. There would be no reason to prolong the separation of National Insurance and Income tax and huge economies of scale could be achieved with the simplification of the Personal Tax system and the consolidation of a single tax system by the Inland Revenue. It allows at long last for real honesty from politicians to admit that top rate tax bands are in truth not 50% but 62.8%.

10. There could be other additional benefits to the Inland Revenue, for example the CIS scheme in the Construction Industry. So long a problem for the Inland Revenue, could be reviewed with many more self employed brought into the employed tax regime. The construction industry as a whole would be boosted by the extra funds flowing into the Pension Funds for immediate investment.

11. Shortfalls in revenue should be made up from other indirect taxation schemes that the Treasury could no doubt construct.

Additional Evidence

Last year, Wenta paid to the Government approximately £110,000 in Employers National Insurance. This is a very considerable sum for a ‘Not for Profit’ company with a turnover of less than £2m. Had we not had to bear this tax and as a ‘Not for Profit’ company, every penny would have been invested into delivering our services to the community. Wenta assisted over 400 small businesses to start across Hertfordshire and Bedfordshire last year, but had we not had to pay this job tax we could have employed a further 3 full-time advisory staff (or up to 8 self-employed staff) that would then have increased our start up numbers considerably to the benefit of the local economy. £110,000 additional income into our organization would have an enormous impact on our services. Multiply this with the other 110 Enterprise agencies across England and the effect on the economy would be very substantial.

I sit on a number of local partnership groups and bodies, such as Local Strategic partnerships in Watford, Hertsmere, Stevenage, Luton and Bedford. Two weeks ago at the One Watford strategic partnership the Head of the CVS stated they were expecting complete melt down in employed numbers from April next year. This same statement has been reiterated by Voluntary Sector leaders at the Luton, Bedford and Hertsmere forums. There is massive resentment about these cuts within the voluntary sector. An exemption from employers NI would be a substantial windfall to the voluntary sector and assist in maintaining employment and support schemes at a time when core funding is disappearing.

I recently met with the Regional Director of the Prince’s Trust for the Eastern Region to discuss why start-up numbers in Hertfordshire had fallen from 40+ to less than 5 over the past 3 years. Lack of funding was the key issue and when I mentioned Employers NI he said without this job tax there would be enough funds generated to underwrite the loan fund to get it back to 2005 levels. Additional mentors could also be recruited.

The local Watford Chamber of Commerce, that has the largest independent membership in the country, struggles to maintain its presence with 5 part-time employed staff. If free of Employers NI, it would allow the Chamber to increase staff hours and to employ a further member of staff. Every penny would be re-invested back into their business. Multiply this across all Chambers of Commerce and employed numbers would increase substantially.

The Citizens Advice Bureau continues to struggle with the numbers of trained debt councillors to support its ever increasing workload. Numbers are likely to be cut with the forthcoming spending cuts by Tier 1 & 2 Local Authorities. If exempt from Employers NI substantial funds could be made available to support such vital services, maintain councillor numbers and even increase them.

I act as a mentor to a local self employed builder who currently uses several self employed workers under the CIS scheme. If Employers NI was to be abolished I believe he would look to employ at least two staff possibly more, and offer at least one an apprenticeship. With greater levels of earnings opportunities it would also reduce the level of Tax Credits currently received by his workers. In other words the higher the wages or salaries earned the lower the need to pay Tax Credits and the greater the contributions from income tax.

A Scheme to help new businesses in targeted areas of the United Kingdom

In my opinion this is a divisive and almost unworkable scheme that will be expensive to introduce and to monitor. You can see from just reading the explanatory notes that it is going to be a very complicated scheme to police and for the beneficiaries to understand. It will place additional administrative burdens on the Inland Revenue staff to manage the scheme at a time when their efforts could be more usefully deployed.

To me, running a business in the South-East, it seems to be just another euphemism to pour further funds into other areas of the country, in the same manner of the Regional Growth Fund. The Government ought to be concentrating its efforts to get greater start-up numbers across the country rather than just focusing on so called other areas.

In the present climate where start-ups are an essential tool for the recovery it should be a scheme where anyone can benefit, and not just for some. The most important element for start-ups is survivability, and I’m not aware of any ‘short term’ initiatives over the past 15 years that have had a major impact on new start-up survivability.

I have seen the forecasts provided in this paper of costs and benefits, and they seem to me to be wholly optimistic. Almost all new businesses that start today do so from firstly working from home. Most new start-up/new business ventures therefore do not immediately offer employment opportunities in their early months of activity. Employment opportunities normally occur once the business is established and is then looking for growth. To aim this scheme at start-ups, whilst appearing innovative, is misleading and frankly disingenuous.

My biggest criticism of governments over the past 23 years is that too much public funding has been spent on ‘short term’ initiatives which ultimately fail to make any lasting or meaningful impact in the areas aimed at. I would put this scheme into this category.

November 2010