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Lord Haskel moved Amendment No. 40:

Page 36, line 22, leave out ("10") and insert ("12.2").

On Question, amendment agreed to.

Clause 53 [Contributions paid in error]:

Lord Haskel moved Amendment No. 41:

Page 36, line 33, leave out ("a period falling in").

The noble Lord said: My Lords, in moving Amendment No. 41 I wish to speak also to Amendments Nos. 42, 43, 44, and 45. These are minor technical amendments designed to clarify existing provisions of the Bill. Amendments Nos. 41 to 44 propose changes to Clause 53. That clause addresses the situation where payments of national insurance contributions are made in error on the basis that the earner was employed when he was in fact self-employed.

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Under current rules, refunds of national insurance contributions paid in error can normally be made for up to six years only. Under Clause 53, contributors will be able to claim refunds of Class 1, 1A or 1B contributions only until the end of the tax year following that in which they are made. As presently drafted, Clause 53 does not allow for the situation where the error has been recognised by the Contributions Agency before the end of the following tax year.

Amendment No. 42 which introduces a new paragraph (c) into Section 19A(1), confirms that the new section will operate only where the contributor has not been notified by the Secretary of State of the error before the end of the tax year following the one in which the payment was wrongly made. For ease of comprehension, these amendments also introduce changes to describe the tax year in which the erroneous payment is made as "year 1", and the following tax year as "year 2". These are all minor technical amendments designed to clarify the legislation.

Amendment No. 45 is a minor technical amendment to clarify Clause 56. The reference to the coming into force of Section 56 reflects the fact that different parts of the Act will come into force at different times. Some sections will come into force on Royal Assent--for example, the provisions on restrictive covenants, Clause 50. Other sections, including Clause 56, will be brought into force by way of a Commencement Order. The amendment makes it clear that the period referred to in sub-paragraph (8) of new paragraph 7B is the period before Clause 56 is brought into force by way of Commencement Order. I beg to move.

On Question, amendment agreed to.

Lord Haskel moved Amendments Nos. 42 to 44:

Page 36, line 34, leave out from ("year") to end of line 37 and insert ("("year 1");
(b) the payments are made in error, in that the employment from which the earnings are derived (or by reason of which the benefit is made available) is not employed earner's employment; and
(c) the person making the payments has not been notified of the error by the Secretary of State before the end of the tax year following year 1 ("year 2").").
Page 36, line 38, leave out ("the tax year following that mentioned in subsection (1) above") and insert ("year 2").
Page 36, leave out lines 44 and 45 and insert ("as if the earnings were derived from (or the benefit were made available by reason of) employed earner's employment."").

On Question, amendments agreed to.

Clause 56 [Collection of contributions by Secretary of State]:

Lord Haskel moved Amendment No. 45:

Page 40, line 2, leave out ("passing of this Act") and insert ("coming into force of section 56 of the Social Security Act 1998").

On Question, amendment agreed to.

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Lord Higgins moved Amendment No. 46:

Leave out Clause 56.

The noble Lord said: My Lords, this amendment is to omit Clause 56 which concerns collection of contributions by the Secretary of State. We were somewhat puzzled as to precisely why the provision should be in this form. We should be grateful if the Minister could explain. I beg to move.

Baroness Hollis of Heigham: My Lords, I cannot resist such an invitation. I shall do my best.

This clause does not stand in isolation. It forms part of the revised measures on penalties which introduce a new, modern civil penalty regime to enable the Contributions Agency to deal more effectively with non-compliance with national insurance legislation.

It aims to modernise the collection process of national insurance contributions. It introduces the power for regulations to be made to prescribe the circumstances when contributions are to be paid to and collected directly by the Secretary of State, and the circumstances in which interest and penalties may be imposed. It also allows for the Inland Revenue to impose interest or penalties on late paid contributions which are due to be paid to the Secretary of State if they are discovered. To ensure equity of treatment with contributions collected by the Inland Revenue, a similar regime for charging interest on late paid contributions or imposing penalties for underpayments will apply no matter by which route the contributions are paid.

I do not know how much more the noble Lord wishes me to say. I can suggest why the clause is needed. I can add to the points about the method of extracting improved compliance. I can talk about the reasons for the transfer. I know that this is unusual at Report stage, but I accept the limitation mentioned already by the noble Lord: that he cannot apply Committee procedures at Report stage. If he were to indicate further before I sit down, as is the convention of the House, any area on which he requires elucidation, I should do my best to be helpful.

Lord Higgins: My Lords, I am grateful for the invitation. We were puzzled as to the argument for abolishing the Contributions Agency as regards the Secretary of State, and returning power mostly to the Inland Revenue.

Baroness Hollis of Heigham: My Lords, we are transferring Contributions Agency activity to the Inland Revenue so that there is one service. The Inland Revenue already collects 94 per cent. of contributions. However, transferring full responsibility for administration of the contributions scheme will itself require primary legislation. Until that legislation has been properly considered and brought forward to Parliament, it does not make sense to start taking provisions out of the current Bill. The deeper thought underlying this issue is that we are trying to rationalise the contact employers, businesses and the public have with government bodies. The transfer of the Contributions Agency will enable employers and representatives to deal with one organisation for tax and national insurance. That will reduce burdens on

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businesses so that they can focus on their business objectives. I believe that the move has been widely supported.

Lord Higgins: My Lords, I am grateful to the Minister. I do not wish to pursue the point. It simply seemed a further reflection of the way in which the whole of this side of things is moving towards the Inland Revenue rather than the Department of Social Security. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

5.15 p.m.

Clause 63: [Liability of directors etc. for company's contributions]:

Lord Goodhart moved Amendment No. 47:

Page 45, line 40, leave out ("appears to the Secretary of State to be") and insert ("is").

The noble Lord said: My Lords, this clause was introduced by the Government at Committee stage. Its aim is to deal with the problem of the phoenix companies. A phoenix company is a company which is started up, carries on business for a while, pays its directors large salaries and then goes bust. Almost inevitably it turns out that there is nothing left for the creditors, which include the Inland Revenue and the Department of Social Security in respect of PAYE and national insurance contributions.

Where the non-payment is due to the fraud or neglect of a director, it is obviously right that that director should not be able to hide behind the screen of the company's limited liability and should be personally liable. Therefore we on these Benches entirely support the principle underlying Clause 63.

My concern is that the clause is seriously defective. The amendment is non-partisan. Its sole purpose is to correct defects. The noble Lord, Lord Higgins, has put his name to the amendment. We have had meetings to try to persuade the Government of our case. Those meetings have not so far been successful.

There are two serious defects. First, the clause is, I believe, plainly incompatible with the European Convention on Human Rights and therefore with the Human Rights Bill which recently passed through this House. Article 6 of the European convention provides:

    "In the determination of his civil rights and obligations ... everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law".
What happens under Clause 63? First, the Secretary of State, through members of her staff, investigates the reason for the company's failure to pay contributions. Secondly, the Secretary of State, through another member of staff, concludes that the failure has been due to the fraud or neglect of a director or a group of directors. There is no provision for any kind of hearing before that conclusion is reached. Thirdly, a personal liability notice is served on the director who is found culpable who becomes liable to pay contributions to the Secretary of State.

The Secretary of State is the plaintiff, the prosecutor and the judge. There is no independent and impartial tribunal. A right of appeal is provided, but it cannot save

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a defective first tier procedure, in particular because the right of appeal is itself limited. The appellant can only raise issues which are specified in the substituted Section 121D(2) of the administration Act. The appellant cannot argue therefore that the company was never in fact liable for those unpaid contributions in the first place. I believe that it will take approximately five minutes for a court to decide that this procedure is a clear breach of Article 6. It appears from the drafting at present that the burden of proof on the issues will be on the appellant.

It has been suggested that there are precedents. Section 61 of the Value Added Tax Act and Section 703 of the Income and Corporation Tax Act have been pointed to. I have looked at them and they are plainly not comparable. I believe that the provision entirely fails to pass the test of compatibility with the Human Rights Bill and the European convention.

Secondly, the Secretary of State has saddled herself with the complicated and unnecessary duty of apportioning blame between different culpable officers of any particular company. The Secretary of State, or anyone else making a first-tier decision, must of course satisfy himself or herself that any given officer is at least partly involved. But if she finds that the failure to pay contributions is attributable to the fraud or neglect of more than one officer of the company, there is no reason why each officer should not be made jointly and severally liable to the Secretary of State for the entire shortfall. If one of them is called upon to pay, there are well-established procedures by which he can call upon the other culpable officers to make appropriate contributions to recompense him in part for the sums that he has had to pay. There is no reason why the Secretary of State should waste the department's time or money in apportioning fault rather than leaving the culpable officers to fight it out at their own expense. Again, approportionment will mean a shortfall if one of the culpable officers of the company to whom part of the blame has been allocated is personally bankrupt or skips the country.

The effect of this group of amendments is, first, that where the Department of Social Security believes that failure to pay is due to fraud or neglect, the department will claim payment through the ordinary court system and will have to prove its case in the ordinary way. That will guarantee that there will be no problem with the European Convention on Human Rights. Secondly, under my proposed amendments, there will be no need to apportion culpability. The whole shortfall can be recovered from any of the company's officers who is found culpable. Thirdly, a provision which, as drafted, consists of two sections with 14 subsections will be reduced to one section with three subsections. That is in every way an improvement. I hope that the Government will look more favourably upon this proposal than they have in the past. I beg to move.

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