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Baroness Hollis of Heigham: My Lords, it was not a slip. Those jobs will be lost to the people holding them. It will, of course, be a saving to the Exchequer.

Lord Higgins: My Lords, absolutely; I agree on both points. Nonetheless, in terms of efficient allocation of the nation's resources, one might perhaps have described it as a saving since presumably the motivation of the Bill is that the Government should become more efficient, and in that context it is important that one should operate with as great a degree of efficiency and economic savings as is possible. Indeed, it is true that quite a few of the proposals in the Bill merely reflect the existing situation. As the Explanatory Notes point out, 94 per cent. of the revenue to which we refer is already collected through the system which involves the Inland Revenue.

I have looked up the position of the previous government. In June 1995 the Chancellor of the Exchequer was asked a question on integrating the national insurance and Inland Revenue systems. Sir George Young replied:

We all enjoyed the "Yes, Minister" series. The previous government's Ministers turned the proposals down. But the moment the present Government came to power the same proposals were submitted to them. In terms of efficiency, it is uncertain whether the Bill is as justified as the Minister seeks to argue.

However, the Minister was at pains to say that this is a mechanical measure not related to other policy changes. That is difficult to accept. The whole thrust of the Government's social security policy over the past year or 18 months has been to undermine the contributory principle in a number of respects. That in turn undermines universal benefits. The effect of moving the Contributions Agency from the DSS to the Inland Revenue is to make the contributions more and more like a tax. In moving the purely administrative arrangements from one department to another, the Bill is clearly in line with the Government saying, "We shall now merge the Contributions Agency and the Inland

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Revenue". It will become more and more a tax, and therefore easier to argue that a contribution to a specific national insurance scheme does not have the same force of entitlement to benefits as was previously the case.

Therefore, contrary to what the noble Baroness argued, I believe that the legislation should be viewed in the context of that overall move. The contributory principle has been the bedrock of our national insurance and social security systems since World War II. We are concerned about this issue not least because of the implications of means testing the national insurance basic pension. In general the Government have moved more and more towards means testing. We believe that that is important.

I give some examples of the way in which the contributory principle is being undermined. On the one hand there are people who are not receiving benefits to which they were previously entitled. They believed that they would receive them because they had made their national insurance contribution. A few days ago the Government put forward a proposal with regard to widows benefits. In another context there are changes in incapacity benefits and the offsetting of those payments against pensions. On the other hand, people are receiving benefits for which they have not contributed. The so-called guaranteed minimum pension is a move in that direction.

Although the measure may be in many respects highly technical, we are concerned about the general thrust of the Government towards more and more means testing. We know that more means testing undermines thrift for the reasons spelt out clearly, for example, by Mr. Frank Field. Contrary to the proposals in the Bill, the move towards means testing--the Government have introduced a number of measures recently--are likely to increase rather than reduce fraud.

The front page of the explanatory memorandum states that,

    "policy responsibility for NICs would transfer to the Inland Revenue once decisions had been reached on a new benefit entitlement test".
The Minister made no reference to that point. When the noble Baroness winds up, perhaps she will tell us when the new benefit entitlement test is to be specified in detail; and when it is likely that the transfer to which I have referred is likely to take place.

On that issue, perhaps I may add one word of caution as regards timing. The integration of the two systems seems likely to take place during the millennium. We know that there are grave concerns, not least in the pensions industry, as to the effect of the so-called millennium bug on the ability of organisations, in particular large organisations such as the Contributions Agency or Inland Revenue, to cope with those problems. To impose on those two departments the added burden of this transition seems rather unwise. Since many pension companies are looking into the matter in great depth, perhaps the Minister will tell us to what extent, in deciding to make this change now, the Government have taken into account the problems that may arise with regard to computers, and so on.

I turn now to penalties. The Minister sought to reassure the House. However, there is a general feeling that the penalties imposed by the Inland Revenue are

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more severe than those imposed by the Department of Social Security. In order to reassure us further, will the Minster give a clear undertaking that nothing presented in the Bill as a mechanical or technical measure will result in anyone who commits an offence being subject to a heavier penalty than was otherwise the case. There may be an argument for a heavier penalty in a specific instance but it should not be achieved in that way.

The Minister did not refer to this point. I understand that some of the offences previously dealt with in this area of legislation will no longer be criminal offences. I am not clear whether that is so. I see the Minister indicates that that is so. However, in her opening remarks--I may have been distracted for a moment--I do not think that she dealt with that problem.

In Committee we may wish to examine in more detail the investigatory powers of the Government. The Bill is one among other recent Bills which include a disclaimer by the Minister that nothing in the Bill contravenes the European Convention on Human Rights. We had some problems last year on the Social Security Bill in that respect. It will be interesting to see how that operates now that the convention has been incorporated into domestic law. It is an innovation which on the whole is to be welcomed. But we shall need to establish that the undertaking given by the Minister is justified.

She also mentioned the relationship between the Inland Revenue and the Department of Social Security concerning the security of national insurance numbers. I was not entirely clear what she had in mind on that subject but I believe it is the case that there has always been a concern about the exchange of confidential information between one department and another. Certainly, the situation is now a lot better than it was some years ago. Indeed, there are statutory penalties for those in government who transfer information, contrary to statute, between one department and another. But inevitably the integration of the two departments seems to mean that there is a greater exchange of information at a lower level of authority than was previously the case. Indeed, there are references in the Bill to pooling arrangements and so on, particularly as regards Clause 6. Perhaps I may draw your Lordships' attention to that. Information which is held by the board or by a person providing services to the board can be transferred, as I understand it, from one part of the organisation to another. The expression,

    "a person providing services to the Board"
would seem to involve people outside government service who might then have access to confidential information. Perhaps the Minister can reassure us, if not now, then at Committee stage, as regards that particular point. It has always been a matter of concern as regards Parliament.

There is a number of other very detailed provisions in the Bill and not least, as the Minister stated, concerning ACT and the rebates issue on which, as she rightly pointed out, there appears to be some problem in the existing legislation. Again, I hope we shall be able to probe that particular point.

Finally, I raise the question of the extent to which, under these new arrangements, there will be any change in the power of officials to carry out investigations at

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particular premises. In my opening remarks I declared an interest. I was rather intrigued to see that under these arrangements it is apparently possible for the Inland Revenue to "raid"--I believe that is the right expression--the particular premises of a trustee of a pension fund. There is an exclusion for a person's home, provided that it is not used for business. But it may be that the business which takes place at the person's home has nothing whatever to do with his function as a trustee of a pension fund. I am sure your Lordships will wish to have that provision, but it seems a little doubtful whether it is as secure as it might be.

As I say, generally speaking, our concerns about the Bill are more as regards the way in which it fits into the Government's overall policy regarding the integration of national insurance and taxation and the strength which that then gives to their policy, which seems to us to involve more and more a move towards means testing and away from universal benefit to which people have contributed and to which, until now, they have been entitled. But as I said at the beginning, it is certainly a complicated Bill. We shall do our best to ensure that when it finally moves from this House to another place it is in a shape which is more appropriate for the statute book than in its present form.

4.13 p.m.

Lord Goodhart: My Lords, on behalf of the Liberal Democrats I give a warm welcome to the Bill. It is extremely technical and, to a large extent, non-controversial. I believe that that may be indicated by the fact that no-one has put down their name to speak in this debate other than the "usual suspects" and not all of them since my noble friend Lord Russell, who is sitting beside me today, has taken a vow of silence on this occasion.

As the Minister pointed out, the Bill contains two distinct parts. Part I deals with the transfer of responsibilities for the administration and collection of NICs from the DSS to the Inland Revenue. Part II deals with the transfer of decisions and appeals on questions of contributions from the DSS and the social security appeal tribunals to the Inland Revenue and to Commissioners for Income Tax. We strongly support both parts of the Bill.

Turning first to Part 1 of the Bill, we certainly agree that, as now proposed, national insurance contributions should be collected by the body responsible for the collection of direct taxes. Why is that? First, because national insurance contributions are not insurance contributions at all, but a hypothecated tax on earned income in the case of employees or a payroll tax as regards employers. The national insurance system has not for many years, if ever, been a genuine system of insurance. For example, retirement pensions make up more or less three-quarters of the total spending under the contributory system. In a proper insurance system retirement pensions would be paid for by retaining and investing the contributions in order to provide pensions for the contributors when they retire. But right from the start of the non-means-tested state pension system, under the Pensions Act 1925 pensions have been paid

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on a pay-as-you-go basis. Therefore, today's contributors are not saving for their own retirement pensions, but paying for the pensions of today's pensioners. In other words, the National Insurance Fund is not, as most people believe, a reservoir but a pipe.

It is true, of course, that people must have made contributions in the past in order to qualify for the right to a pension now. But, frankly, that is not so very different from saying that one has to pay vehicle excise duty before one is entitled to drive one's car on the public highway. Further, of course, there is no link between the amount of benefit payable and the amount paid in contributions. Contributors pay a percentage of their income between the lower and upper earnings limits or, in the case of employers, NICs without limit. But the benefits, with the only serious exception being the state earnings-related pension supplement (SERPS), are flat rate. The fact that the amount paid in contributions has no link to the amount paid in benefits is again a characteristic of tax rather than insurance.

Looking at administration, since we stopped buying stamps to stick on cards, which I believe occurred in 1981, national insurance contributions have been collected through the PAYE system along with income tax. The noble Baroness said that that collection now amounts to 94 per cent. of the total amount received by way of contributions. It is obviously sensible to collect NICs through the PAYE system and no one wants to go back. Furthermore, it is clear that further alignment between NICs and income tax is both possible and desirable. It is absurd that some forms of remuneration have been treated as income for income tax, but not for national insurance contributions. For example, that leads to many ridiculous schemes to avoid national insurance contributions by payment in gold bars or hay or various other tradeable commodities. It is quite clear that the test of income should be the same for both income tax and national insurance contributions. All this emphasises both the logic and convenience of treating NICs as a tax. One might say that if one owns a dog which quacks like a duck, waddles like a duck, flies like a duck and lays eggs, what one has got is not a dog, but a duck. NICs are not a dog, but a duck: they are not an insurance premium, but a tax. The sooner that is made clearer the better. I do not believe in trying to fool the public, which, frankly, is what the national insurance scheme sets out to do. I therefore welcome anything which leads to a closer integration between national insurance contributions and income tax.

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