APPENDIX 3: NATIONAL INSURANCE (CONTRIBUTIONS)
BILL
Memorandum by HM Treasury
Introduction
This Bill takes forward the Paymaster General's Pre-Budget
Report 2004 announcement of 2 December 2004 that the Government
would be prepared to act against avoidance of tax and National
Insurance Contributions (NICs) involving employee remuneration.
The Bill confers powers to make regulations in respect of NICs,
to enable retrospective changes to be made to NICs legislation
to reflect retrospective changes made to the tax regime. The powers
allow for NICs liability to be charged back to 2 December 2004,
if necessary. They will be used in the first instance to reflect
the employment-related securities anti-avoidance provisions included
in Schedule 2 to the Finance (No.2) Act 2005, which received Royal
Assent in July 2005 but took effect from 2nd December 2004.
1. The primary purposes of the measures in this Bill
are:
· to
enable existing powers to make NICs regulations to be exercised
with retrospective effect, so as to make provision which reflects
the whole or part of a retrospective tax provision relating to
employment income. It is intended that this provision will be
used to impose retrospectively NICs liabilities to mirror, as
far as possible, retrospective anti-avoidance tax measures in
Finance Bills;
· to confer
power to make changes to the law relating to contributions, contributory
benefits and statutory payments which are consequential on the
power to make such retrospective provision;
· to provide
a power to extend to NICs the disclosure rules relating to tax
avoidance; and
· to prevent
NICs elections and agreements being used by employers to recover,
or pass on the liability for, secondary NICs on certain security-based
employment income which is brought into NICs liability retrospectively
by reason of the exercise of the powers conferred by clause 1
or 2.
2. The Bill contains 7 substantive clauses. Clauses
1, 3 and 5 make provision for Great Britain and clauses 2, 4 and
6 make corresponding provisions for Northern Ireland. Clause 7
makes provision for Great Britain and Northern Ireland.
Territorial Coverage
3. There is a separate body of social security legislation
applying to Northern Ireland. But, consistent with the principle
of parity in relation to social security under section 87 Northern
Ireland Act 1998, it is contemplated that there will be co-ordination
between the two systems with a view to securing a single system
of social security for the United Kingdom. Clauses 2, 4 and 6
mirror for Northern Ireland the provision made in clauses 1, 3
and 5 for Great Britain. Clause 7 extends to Great Britain and
Northern Ireland. Legislation on NICs is an excepted matter for
the purposes of Northern Ireland. Excepted matters are set out
in Schedule 2 to the Northern Ireland Act 1998 and are the matters
that remain the responsibility of the UK Parliament.
4. With effect from 2 December 1999, responsibility
for devolved matters in Northern Ireland transferred to the Northern
Ireland Assembly and its Executive Committee of Ministers. The
legislation relating to contributory benefits and the legislation
relating to statutory payments are transferred matters for the
purposes of Northern Ireland and so fall within the responsibility
of the devolved administration. Transferred matters are all matters
that are not excepted or reserved under respectively Schedule
2 or 3 of the Northern Ireland Act 1998. As the Northern Ireland
Assembly is currently suspended, primary legislation relating
to transferred matters will normally be made by Order in Council.
5. In relation to the Scottish devolution settlement,
the subject matter of the provisions are reserved matters for
the UK Parliament by virtue of Paragraph F1 (Social Security Schemes)
of Part 2 of Schedule 5 to the Scotland Act 1998.
Overview of delegated Powers
6. The powers are listed in tabular form at Annex
A. There are delegated powers at -
· clause
1, in new sections 4B(2), 4C(1) and (2)(f) and section 4C(11)(b)
of the Social Security Contributions and Benefits Act 1992 (CBA
1992);
· clause
2, in new sections 4B(2), 4C(1) and (2)(f) and section 4C(11)(b)
of the Social Security Contributions and Benefits (Northern Ireland)
Act 1992 (CB(NI)A 1992);
· clause
3, in new section 10ZC(1) of the CBA 1992;
· clause
4, in new section 10ZC(1) of the CB(NI)A 1992
· clause
7, in new section 132A(1) and (4) of the Social Security Administration
Act 1992 (SSAA 1992).
7. New section 4B of the CBA 1992 and the CB(NI)
1992 enables specified existing powers under those Acts to be
exercised retrospectively, so as to enable NICs regulations to
be given retrospective effect where such provision is considered
appropriate to reflect retrospective changes made to tax legislation.
The NICs regulations can, if necessary, have retrospective effect
back to 2 December 2004. The power allows regulations to be made
to remove or introduce a NICs liability retrospectively.
8. The kinds of changes which will need to be made
can already be made prospectively using delegated powers under
the existing legislation. Section 4B allows these changes to be
made retrospectively. This extension of existing powers made by
new section 4B is considered appropriate because, in the absence
of this provision, primary legislation would be required every
time a retrospective tax provision was introduced which the Government
wanted to reflect for NICs. Changes to NICs are not within the
scope of the annual Finance Bill, so separate primary legislation
would be required. This would lead to a delay in the collection
of any backdated NICs liability, pending the necessary primary
legislation being prepared and passed by Parliament. Enabling
the provision to be made by regulations allows the Government
to respond quickly and effectively to avoidance schemes. Regulations
made by virtue of section 4B are subject to affirmative resolution
procedure in Parliament, thus ensuring Parliamentary oversight
and scrutiny.
9. New section 4C of the CBA 1992 and the CB (NI)
A 1992 enables provision to be made for the collection and recovery
of any retrospective NICs liability arising by virtue of the new
section 4B. It also enables provision to be made dealing with
any consequential effects on statutory payments, contributory
benefits and contributions to pension schemes. Regulations made
under this section will include the detailed machinery provisions
of when and how employers will pay any NICs that become payable
under the regulations made by virtue of new section 4B. It is
expected that these machinery provisions will generally mirror
the existing machinery provisions which are set out in regulations.
So it is considered appropriate to also deal with the new machinery
provision in regulations. The delegated powers relating to consequential
changes to statutory payments, contributory benefits and pension
contributions allow the Government sufficient flexibility to amend
the complex raft of existing legislation to take account of retrospective
NICs liabilities arising by virtue of regulations under section
4B.
10. The powers conferred by new section 4C(2)(f)
provide flexibility to expand the range of purposes for which
consequential provision may be made. This will enable provision
to be made quickly dealing with unforeseen consequential issues
that may arise where regulations are made by virtue of section
4B.
11. In section 4C(11), paragraph (b) of the definition
of "statutory payment" enables the Treasury to prescribe
by regulations other payments which are to be regarded as "statutory
payments" for the purposes of section 4C.
12. New section 10ZC enables regulations to be made
in consequence of retrospective tax legislation, if this appears
to the Treasury to be expedient for any purpose of the law relating
to Class 1A contributions. Such regulations cannot have effect
earlier than 2nd December 2004. The regulations cannot impose
or increase Class 1A NICs liability retrospectively. (Such a power
is not required because retrospective tax provisions have an automatic
knock-on effect on Class 1A liability by virtue of the existing
section 10 of the CBA 1992.)
13. The section 10ZC powers have been taken on precautionary
basis in case, in future, schemes which seek to avoid tax and
Class 1A NICs are closed down retrospectively by tax legislation.
Because the Government is unable to anticipate precisely what
form possible avoidance in the field of Class 1A NICs might take,
or to foresee precisely what consequential changes might be required
as a result, it is thought desirable to use delegated legislation
to retain flexibility in this area. Also, in a similar way to
the regulations under new section 4C of the CBA 1992 and the CB
(NI) A 1992, legislation providing when and how any resultant
Class 1A liability resulting from retrospective tax legislation
is paid or reported is likely to reflect existing machinery regulations.
Again, it seems sensible for these further machinery provision
also to be in regulations.
14. The purpose of the power at new section 132A
is to allow for the tax disclosure rules, to the extent they apply
to income tax, to be extended to NICs and for provision made in
relation to NICs to continue to mirror the tax rules if those
rules are changed. In the absence of delegated powers, primary
NICs legislation would be needed to mirror changes to income tax
disclosure rules. As provision relating to NICs is outside the
scope of a Finance Bill, separate primary legislation would be
required. It is in the interest of those required to comply with
the disclosure provisions that the law relating to tax and NICs
is kept aligned. If separate primary legislation were needed for
NICs this would be likely to result in a period when the two regimes
were not aligned. By conferring power to make the changes by delegated
legislation this eventuality can be avoided.
Parliamentary Scrutiny
15. The Bill includes a power that will enable regulations
to be made which can be effective from 2nd December 2004, if necessary.
This is a proportionate response to deal with what are regarded
as contrived tax and NICs avoidance schemes. The Bill will enable
HMRC to react quickly to any new avoidance and will deter future
avoidance. Without powers to introduce retrospective NICs legislation
through regulations it would be necessary to have a NICs Bill
every time there was a retrospective tax measure which the Government
wanted to reflect retrospectively for NICs purposes.
16. Regulations will be made by statutory instrument
under the affirmative resolution procedure, except for
certain regulations made under clause 7 (s132A(1) SSA 1992) which
are subject to the negative resolution procedure.
17. The main powers in sections 4B and 4C are tempered
by the fact that the regulations to be made under these new powers
have to go through the affirmative resolution procedure and can
only be used to reflect, in whole or in part, retrospective tax
provisions. These tax provisions will already have been debated
when the relevant Finance Bill proceeded through Parliament.
18. By virtue of the amendments made by clauses 1(2)(b)
and 2(2)(b), regulations made by virtue of section 4B(2) must
be laid no later than 12 months after the date upon which the
corresponding tax provision was passed. In a case where the corresponding
tax legislation was passed before this Bill, the period is 12
months from the passing of the Bill. Accordingly, the period during
which the retrospective regulations can be made is limited.
19. Regulations under section 4C(2)(f) or (11) are
also subject to affirmative resolution procedure, which is regarded
as appropriate given that the effect of these regulations is to
expand the purposes for which provision may be made under section
4C(1).
20. Clause 7 (s132A(1) of SSAA 1992) allows for regulations
to be made requiring the disclosure of information in relation
to NICs avoidance schemes. The scope of the power is restricted
to applying to NICs, or making provision for NICs corresponding
to, the income tax disclosure provisions (with or without modifications).
21. In relation to disclosure regulations made under
new section 132A(1), the Government considers the negative resolution
procedure is appropriate. If new section 132A is adopted, Parliament
will have already taken a decision to extend the income tax disclosure
rules to NICs and it is not apparent what the added value would
be in having an affirmative resolution debate on the same point.
The regulations themselves are expected to be technical in nature,
applying the income tax disclosure rules with only such minor
modifications and adaptations as are necessary to make them fit
with the NICs system. The negative procedure would seem to afford
Parliament sufficient scrutiny in such circumstances.
22. S132A(4) provides that regulations may also amend
s132A(3) to the extent necessary to keep the definitions of notifiable
NICs schemes in line with the parallel definitions in tax legislation.
This power would be used if the tax provisions were to be amended
subsequent to s132A(4) coming into force.
23. Any regulations made under the power in s132A(4)
will be subject to the affirmative resolution procedure. Here
it is appropriate for Parliament to scrutinise the changes under
the affirmative procedure as the regulations can change the scope
of certain regulation-making powers in the Bill itself, albeit
only to make changes analogous to those made for tax.
Draft Regulations
24. Draft regulations showing how the powers are
to be used have been made available to members of the House of
Commons Standing Committee that scrutinised the Bill, and will
be available for its passage through the House of Lords. These
are attached to the Memorandum at Annex B and cover:-
· Draft
Regulations to mirror the tax position in Schedule 2 to the Finance
(No. 2) Act 2005; and
· Draft
Regulations on disclosure of contribution avoidance arrangements.
25. Regulations on collection of the backdated liability
and consequential changes relating to statutory payments and contributory
benefits will also be drafted.
26. Clauses 5 and 6 do not introduce any new regulation
making powers, but for the sake of completeness consequential
amendments being made to existing regulations have been included
at Annex C.
27. All draft regulations at Annexes B and C have
been published on the HMRC website.
Clauses
Clause 1 - Power to make provision in consequence
of retrospective tax legislation: Great Britain
28. Subsection (1) provides for new sections 4B and
4C to be inserted after section 4A of the CBA 1992.
Section 4B - Earnings: power to make retrospective
provision in consequence of retrospective tax legislation
29. Subsection (1) provides for section 4B to apply
where there has been retrospective tax legislation, relating to
those Parts of ITEPA 2003, dealing with employment income. The
Treasury must also consider it appropriate to make regulations
by virtue of section 4B for the purpose of reflecting in whole
or in part the provision made by the retrospective tax provision.
30. Subsection (2) provides that where section 4B
applies regulations may be made under various existing powers
(the "relevant powers") so as to have retrospective
effect. This can only be done if it appears to the Treasury to
be expedient in consequence of the retrospective tax provision
for the regulations to have that effect.
31. Subsection (3) specifies the "relevant powers".
They are the powers in sections 3, 4(6) and 4A of the CBA 1992.
32. Subsection (4) ensures that tax provisions which
were made before this Bill is passed also trigger the power to
make retrospective provision conferred by subsection (2).
33. Subsection (5) limits how far back the NICs changes
can be backdated. It provides that regulations cannot take effect
earlier than 2nd December 2004. That was the date of the Paymaster
General's announcement on tax and NICs avoidance.
34. Subsection (6) provides that regulations made
retrospectively, by virtue of the extension of the powers at sections
3, 4(6) and 4A of the CBA 1992, will be able to affect payments
of earnings made to or for the benefit of employees prior to the
date when the regulations are made.
35. Subsection (7) defines "relevant contributions
legislation", "the relevant time" and "the
revised earnings".
36. Subsections (8), (9) and (10) provide that, where
regulations that are made by virtue of subsection (2) have the
effect described in subsection (6), the contributions legislation
is to be applied to the revised earnings figure. Accordingly,
liability is to be re-determined by reference to the revised earnings
or amount of those earnings, as if the revised position applied
at the time.
37. Subsection (11) provides that subsections (7)
to (10), which provide for liability to be re-determined, are
to be subject to any exceptions which are specifically provided
for.
38. Subsection (12) sets the scope of the power in
relation to other provisions in the CBA 1992 and other enactments.
39. Subsection (13) defines "contributions legislation".
Section 4C - Power to make provision in consequence
of provision made by or by virtue of section 4B(2)
40. Subsection (1) enables the Treasury to make regulations
which it considers expedient for any of the purpose mentioned
in subsection (2) as a consequence of provision made by or by
virtue of using the powers in section 4B(2). Where the changes
apply to contributory benefits, occupational pensions, personal
pensions, Statutory Sick Pay, Statutory Maternity Pay or Maternity
Allowance concurrence will be required from the Secretary of State
for Work and Pensions. Where the changes apply to Statutory Adoption
Pay or Statutory Paternity Pay concurrence will be required from
the Secretary of State for Trade and Industry.
41. Subsection (2) identifies the purposes for which
it may be necessary to make regulations where earnings are re-determined.
Subsection (2)(f) also allows for additional purposes to be prescribed
in future by the Treasury with the concurrence of the Secretary
of State.
42. Subsection (3)(a) provides that consequential
changes may be made to primary and secondary legislation, including
legislation passed or made on or after the day on which this Bill
receives Royal Assent.
43. Subsection (3)(b) enables regulations under section
4C to make provision by applying primary or secondary legislation
(with or without modifications).
44. Subsection (4) provides that any consequential
regulations cannot have effect earlier than 2nd December 2004,
which was the date of the Paymaster General's announcement on
tax and NICs avoidance.
45. Subsection (5) lists examples of matters which
may be affected retrospectively under section 4C(1) powers. This
list is not exhaustive.
46. Subsection (6) provides that where matters specified
under subsection (5) have already been determined, regulations
can be made under section 4C(1) allowing for re-determination
of these matters. It is not the intention to re-determine matters
generally but the nature of organised avoidance is such that those
seeking to avoid might try to manipulate the processes for determining
matters. Regulations will provide the flexibility to re-determine
only where appropriate.
47. Subsection (7) ensures that the operative provisions
do not operate to remove past or future entitlement to contributory
benefit, contribution-based jobseeker's allowance or statutory
payments or to reduce the amount of such payments.
48. Subsection (8) defines the operative provisions
for the purposes of subsection (7).
49. Subsection (9) ensures that other powers conferred
by the CBA 1992, or any other enactment are not affected by this
new power.
50. Subsection (10) ensures that the modification
by the Treasury of any secondary legislation under the new section
4C does not prejudice any existing power which the person who
made the original legislation has to amend or revoke it.
51. Subsection (11) provides the meaning for "commencement
day", "enactment" and "statutory payment".
52. Subsection (2) of the clause amends section 176
of the CBA 1992.
· Paragraph
(a) inserts references to section 4B(2) and 4C into section 176(1)(a),
so as to provide that regulations under section 4B(2) or 4C are
subject to the affirmative resolution procedure. Such regulations
will, therefore, have to be laid before, and approved by a resolution
of, each House of Parliament. This will safeguard against any
improper use of these powers, particularly in relation to retrospective
liability.
· Paragraph
(b) inserts section176 (2A), (2B) and (2C). Subsections (2A) and
(2B) provide that regulations made by virtue of section 4B(2)
must be laid before Parliament within 12 months of the corresponding
tax provision being passed. Where the corresponding tax provision
was passed or made before Royal Assent of this Bill, the regulations
must be laid within 12 months of Royal Assent of the Bill. Subsection
(2C) defines terms used in subsection (2B).
Clause 2
53. Clause 2 replicates the changes made by clause
1 for the purposes of the CB (NI) A 1992 except that in relation
to new section 4C whereas the requirement in CBA 1992 is that
the regulations be made with the concurrence of the Secretary
of State, in CB(NI)A 1992, it is the concurrence of each of the
Northern Ireland departments responsible for any of the matters
to which the regulations relate whose concurrence is required.
Clause 3
54. Clause 3 inserts new section 10ZC after 10ZB
of the CBA 1992.
Section 10ZC
55. Subsection (1) enables regulations to be made
for the purposes of the law relating to Class 1A NICs in consequence
of any relevant retrospective tax provision which has been passed
or made or which may be passed or made in the future.
56. Subsection (2) defines "relevant retrospective
tax provision" as a provision which affects the amount of
general earnings chargeable to income tax under the employment
income Parts of the Income Tax (Employment and Pensions) Act 2003.
57. Subsection (3) allows for the tax provisions
that trigger the use of the power in subsection (1) to have been
made before or after the commencement day of this Bill.
58. Subsection (4) makes it clear that the regulations
can make provision modifying existing enactments (including future
enactments) and applying existing enactments with or without modifications.
The nature of contrived avoidance is such that without the ability
to make consequential changes, those seeking to avoid might successfully
circumvent the legislation and so frustrate the will of Parliament.
59. Subsection (5) provides that the new regulations
made under these powers cannot go back earlier than 2nd December
2004, which was the date of the Paymaster General's announcement
on tax and NICs avoidance.
60. Subsection (6) allows for cases that have already
been decided before regulations have been made under subsection
(1) to be reviewed and amended where necessary.
61. Subsection (7) ensures that regulations made
under this Act may not themselves impose a liability to Class
1A contributions or increase an existing liability.
62. Subsection (8) ensures that any liability to
Class 1A NICs arising by virtue of any retrospective tax legislation,
and any other powers conferred by the CBA 1992 or any other enactment,
are not affected by this new power.
63. Subsection (9) ensures that the modification
of any secondary legislation under the new section 10ZC by the
Treasury does not prejudice any existing power which the person
who made the original legislation has to amend or revoke it.
64. Subsection (10) defines "the commencement
day" of this Bill as the day the Bill is turned into an Act
following Royal Assent.
Clause 4
65. Clause 4 replicates the provisions of clause
3 in respect of the CB (NI) A 1992.
Clause 7 - Disclosure of contributions avoidance
arrangements
66. Subsection (1) and (2) insert a new section 132A
- Disclosure of contributions avoidance arrangements - into the
SSAA 1992.
Section 132A
67. Subsection (1) provides that the Treasury may
make regulations requiring, or relating to the disclosure of information
in relation to "notifiable contribution arrangements"
or "notifiable contribution proposals".
68. Subsection (2) restricts the scope of the power
provided by subsection (1). The regulations can only operate by
applying to NICs (with or without modification), or making provision
for NICs corresponding to, primary or secondary legislation relating
to the disclosure of information in relation to income tax avoidance
arrangements. Those provisions include any provisions that come
into force on or after the day this Bill is enacted.
69. Subsection (3) defines "notifiable contribution
arrangements" and "notifiable contribution proposals".
In essence, these are arrangements, or proposals for arrangements,
whose use might be expected to obtain a NICs advantage as one
of the main benefits of using those arrangements.
70. Subsection (4) provides a power enabling the
Treasury to amend subsection (3) by regulation if, after the passing
of this Bill, any of the provisions relating the disclosure of
income tax avoidance arrangements are amended in such a way that
the definitions in subsection (3) no longer mirror the relevant
tax provisions. The scope of the power is limited to amending
the definitions in subsection (3) so as to make changes analogous
to those made to the relevant tax provisions.
71. Subsection (5) defines some of the terms used
in subsection (4).
72. Subsection (6) ensures that regulations made
under section 132A cannot require any person to disclose information
which is protected by legal professional privilege. This provision
mirrors the equivalent provision applying to the disclosure information
in relation to income tax arrangements (section 314 FA 2004).
73. Subsection (7) defines "advantage",
"arrangements", "contribution" and "tax
avoidance arrangements".
74. Subsection (3) of the clause provides that regulations
made under the power contained in subsection (4) of the new section
132A SSSA 1992 will be subject to the affirmative resolution procedure.
75. Subsection (4) of the clause extends the scope
of the new section 132A to Northern Ireland as well as Great Britain.
Conclusion
76. As set out above the Government believes the
need to make provision under regulation-making powers in this
Bill and the provisions for Parliamentary scrutiny have been carefully
considered and are justifiable and proportionate in terms of the
policy aims of the Bill. The power to make changes to Class 1
NICs liability retrospectively are not unfettered, as regulations
made under it must take effect on or after 2nd December 2004 and
reflect in whole or in part income tax measures. The new powers
will act as a strong deterrent against NICs avoidance schemes
and arrangements. The new regulation-making powers deal with contentious
issues, but the Government believes that they are appropriate.
The affirmative resolution procedures will enable Parliament to
scrutinise the exercise of regulation-making powers that are capable
of creating NICs liabilities retrospectively.
| 
