National Insurance Contributions Bill

Additional Memorandum submitted by HM Treasury (NI 07)

Note on Interpretation of Costing Information for the Regional Employer National Insurance Contributions Holiday for New Businesses

1. The National Insurance Contributions Bill includes (part 2) clauses giving effect to regional employer National Insurance Contributions holiday for new businesses. The memorandum supplied in written evidence to the Bill Committee had annexed the information supplied at the June Budget on how the policy was costed. This included reference to additional Exchequer costs of around £40m for direct behavioural effects. These effects relate to possible general changes in the microstructure of businesses in response to the measure.

2. The costing follows the Government’s methodology for all policy costings , set out in Budget 2010 policy costings , by including direct behavioural effects on the tax base itself but not including wider indirect effects on macroeconomic determinants such as labour supply and business formation. All such indirect effects are captured in the O ffice for B udgetary R esponsibility ’s forecast , which is based on judgements about the overall effects of all measures in place and their interaction with prevailing economic conditions

3. The type of effects which are classified as direct behavioural effects include (i) business fragmentation, for example new businesses with many staff setting up as multiple separate entities in order to avoid being affected by the limit of ten employees; (ii) existing businesses closing down and starting up again in order to qualify as new; (iii) businesses choosing to locate in targeted areas where they would not otherwise have done so. Our assessment is that our compliance plans, together with the limited duration of the holiday, will limit such effects. However, we cannot guarantee there will be no such effects.

4. The scale of potential losses is hard to quantify, but our working assumption, which was scrutinised and certified by the Office for Budgetary Responsibility, was to allow for around £40m of costs associated with direct behavioural effects over the holiday period.

5. Additionally, there are indirect behavioural and dynamic effects. These include businesses setting up which would not otherwise have done so, or employing people where, bearing in mind supply and demand for labour, such jobs would not otherwise have been created. They also include effects from improved rates of business survival. Such effects are likely to be beneficial to the Exchequer overall, through an increase in tax revenues, even though such an increase will not include the employer National Insurance Contributions that would have been due in the absence of the holiday.

6. It is therefore incorrect to interpret the figure for direct behavioural costs as indicating how many additional jobs will be created by the measure.

7. There is always a degree of uncertainty about dynamic and behavioural effects. We should expect reducing employment costs to have some positive effect. Research by the Federation of Small Businesses has indicated that a reduction in labour costs is the single factor most likely to make the difference between taking on an extra member of staff and not doing so, cited by 60% of small businesses surveyed. We are not making bold or unsubstantiated claims as to what the behavioural impact will be. We shall be monitoring and evaluating the policy to improve our understanding.

December 2010