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Grand Committee

Thursday, 23 January 2014.

National Insurance Contributions Bill


2 pm

The Deputy Chairman of Committees (Lord Bichard): My Lords, welcome to the Grand Committee on the National Insurance Contributions Bill.

Clause 1 agreed.

Amendment 1

Moved by Lord Davies of Oldham

1: After Clause 1, insert the following new Clause—

“Post implementation review

(1) Her Majesty’s Revenue and Customs must, after one year, prepare a post implementation review of the employment allowance which the Minister shall lay before Parliament.

(2) The review must consider—

(a) what impact the employment allowance has had on the number of jobs;

(b) what impact the employment allowance has had on wage levels;

(c) overall take up of the employment allowance;

(d) the geographical spread of businesses, charities and sports clubs taking up the employment allowance; and

(e) the effectiveness of Her Majesty’s Revenue and Customs’ strategy to promote the employment allowance.”

Lord Davies of Oldham (Lab): My Lords, I am sure that the Committee’s affairs will not be too protracted today, as we clearly have a consensus from the House that the Bill is a pretty good thing. As the Minister already knows, it is the Opposition’s view that in general terms the Bill pursues a good policy and is vastly superior to the sad instrument that was relied on for the first three years of this Administration with regard to the holiday on national insurance contributions—which of course failed dismally in both its reach and its general effectiveness, with every conceivable expectation that the Government expressed before that Bill became law being disavowed by the process over the following three years. We are now in the business of recognising that the principle behind the Bill is far superior and is a position that we broadly endorse. However, it is incumbent on us to ensure that the policy works effectively and that the Bill that is the basis of that policy is fit for purpose in every respect.

The amendment would require the Government to carry out and publish a post-implementation review of the employment allowance, including HMRC’s assessment of its impact on jobs and wage levels, the overall take-up, the geographical spread of businesses that take it up and the effectiveness of HMRC’s strategy to promote it. I emphasise all these points because on every single one of them the previous policy instrument on NICs failed conclusively, and it is important that

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all those targets are effectively hit. That is why, although I am not underestimating the difficulties of these demands in some areas, we want to see an assessment, as far as the Government are able to provide one, of job and wage levels as a result of the measure.

We certainly want to be reassured on the overall take-up and the geographical spread of businesses taking it up. The previous Bill had a geographical element to it, which we the Opposition never understood —but we did not have to understand it because the Bill had such a limited impact for good anywhere that those who were left out had missed very little indeed. For obvious reasons, as the Minister will appreciate, we are concerned about significant regional disparities in the employment figures, particularly with regard to young people. That is why we want this review to cover a geographical dimension.

That also brings us on to the extent to which the Government will be successful in promoting the measure. After all, a great deal of the expectation is that the beneficiaries will be small and medium-sized enterprises. The medium-sized ones probably do an effective job in keeping up to date and four-square with government initiatives, and we know that the large corporations monitor the Government so effectively that not infrequently—we will come to this later—they pay a great deal less tax than perhaps they ought.

Small businesses inevitably have a problem with legislation. Part of the difficulty with the previous legislation was the conspicuous failure to promote the concept widely enough for take-up to be at the level for which people—certainly Ministers—had hoped. We want to see that rectified as far as this measure is concerned. The amendment, therefore, establishes the necessity for a report that would guarantee a review to provide early indications of the success or otherwise of the policy. We might, as a result, see the Government learning from difficulties that may be developing.

It took a long time for the penny to drop last time. I recall that it was three years before the previous amendment to the legislation on national insurance contributions was finally written off as being unsuccessful, which shows how slow the Government can be, and how blunt their antennae, in picking up the responses of people who are meant to benefit from the legislation. We want this review, therefore, to oblige the Government to face up to these questions—and to do so early.

The amendment we are proposing follows a clause which was retabled on Report in the Commons. We are retabling it in the Lords because of the difficulties of the earlier legislation; we cannot emphasise too strongly how much we want this to be successful. We note that the Government outlined in the Commons the complexity of some of these issues, but we think it is worth trying to measure the impact of this measure on employment and wages. It seems sensible at least to consider the relationship between the employment allowance and job and wage levels. The Minister will recognise that we have seen the benefit of some of the responses in the other place to this major proposition, but I hope that he has had time to reflect, that his officials have appreciated the anxieties that were expressed

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in the other House, and that today we will get from him a more constructive response than we obtained elsewhere. I beg to move.

Lord Newby (LD): My Lords, the proposed new clause seeks to require HMRC to publish a post-implementation review of the employment allowance after one year. I would like to explain why this new clause is unnecessary.

The tax information and impact note already commits the Government to keep the scheme under review through ongoing communication with taxpayer groups affected by it. Moreover, in Committee in the Commons on 21 November last year, and on Report in the Commons on 10 December, the Exchequer Secretary agreed that the Government should publish information twice a year about the overall take-up of the employment allowance, including by geographical location. I am happy to repeat that commitment in the Moses Room today.

This amendment focuses on the number of jobs created by the employment allowance. However, while the employment allowance will clearly reduce the cost of taking on new staff for small businesses and charities, it will be up to those businesses and charities to decide how they use the resulting NICs savings. I remind the Committee of the comments made by the Institute of Fiscal Studies and by the Federation of Small Businesses at the evidence session in the House of Commons on 19 November last year, to the effect that it is impossible to get precise numbers. We cannot conduct the equivalent of a randomised trial with tax policy to determine the number of jobs created because of the allowance. As the IFS pointed out, there are a number of factors in the economy simultaneously influencing the number of jobs.

The Government have not set any target for the number of jobs we expect to be created, although survey evidence from the FSB suggests that 28% of small businesses will use the savings to employ additional staff. It would not, therefore, be possible to provide information about the number of jobs created as a direct result of this measure. Similarly with wage levels, the same research from the FSB suggests that 29% of small businesses would use the NICs savings to boost staff wages. However, it would be difficult precisely to quantify that effect, given that wage levels are subject to many different pressures, varying from business to business.

The new clause also requires an assessment of HMRC’s strategy to promote the employment allowance. HMRC has already been proactive in promoting the allowance, having spoken to various stakeholders—including representatives of software providers, charities and small and medium-sized enterprises—about the design and operation of the measure. There is continuing engagement between HMRC and those stakeholders on guidance for employers and publicity. As a result of these discussions, communications to raise awareness of the allowance will begin more widely in February and March this year to maximise impact in the crucial period running up to the introduction of the allowance in April, using a range of HMRC publications and products and the department’s national network of

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local Working Together groups. As a result, we are confident that employers across the UK will be ready to claim the allowance in April. These efforts will continue after April to support take-up from companies that have not done so at that point.

With these reassurances, and in the light of the Government’s existing agreement to make information about take-up available twice yearly, I hope that the noble Lord will withdraw his amendment.

Lord Davies of Oldham: My Lords, I am grateful to the Minister for the additional information he has given about the reinforcement of the necessary publicity to promote awareness among those who could benefit from the allowance. I recognise that the issue is being taken seriously. It cannot be taken seriously enough. The Minister is absolutely right to cite what the FSB thinks can be achieved, and we recognise that the Government have to set their sights for advantages within a fairly low range in the early days. It takes time for people to appreciate the advantages.

The Minister made one passing reference to charities. We have no anxiety about the ability of very large charities to keep up with legislation, although they tend to be more preoccupied with legislation that will affect them in other Bills before the House, rather than this more benevolent provision. However, the Minister will appreciate that we are anxious about other charities on that score. I am grateful that he mentioned them en passant—although not as strongly as I would have wished. Nevertheless, it was a constructive and helpful reply and, on that basis, I beg leave to withdraw the amendment.

Amendment 1 withdrawn.

Amendment 2

Moved by Lord Davies of Oldham

2: After Clause 1, insert the following new Clause—

“Administrative and compliance costs review

(1) Her Majesty’s Revenue and Customs must, after six months of this Act coming into force, prepare a review which the Minister shall lay before Parliament.

(2) The review must consider—

(a) whether there are any administrative or compliance costs associated with the employment allowance being reported by those applying for it; and

(b) whether businesses, charities and sports clubs are having any problems in claiming the employment allowance.”

Lord Davies of Oldham: My Lords, this amendment would require a one-off administrative and compliance costs review to take place six months after the employment allowance comes into force. We are using this amendment to ask questions about the 10% of businesses that the Government think will not claim the employment allowance, and to explore ways in which they might be engaged more successfully. We are asking whether the guidance will be available in sufficient time for people to get their software ready.

The Minister’s colleague in the Commons indicated that the necessary changes to software and the pressure on businesses, particularly small businesses, would be

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challenging. Evidence received by colleagues in the other place suggested that normally three to six months is required for systems to be developed, including time for specification and documentation of the changes, development, testing and release to clients. That cannot be started effectively until it is known what is expected.

The indications were that the guidance would be ready early in the new year—in January. Will the Minister update the Committee on where we are? We believe that there has been some slippage from that optimistic date. Will the system be available in sufficient time for the response that we all want to see? A review would enable us to check six months on that software-type issues or unexpected administrative costs have been ironed out and dealt with. That would give the Government an early opportunity to rectify what needs to be changed.

2.15 pm

Here again, we are aware that it is important for HMRC to communicate with interested groups and gauge their view of the employment allowance. It was also said in the other place that the employment allowance would be very easy to claim. Easy for government often looks a good deal more difficult at the other end. I want the Minister to flesh out that point and to indicate that arrangements are in hand and on time to render this amendment unnecessary. The amendment reflects our anxieties.

Lord Newby: My Lords, the proposed new clause would require that HMRC should, six months after the Act comes into force, prepare a review to consider whether there are any administrative or compliance costs that have been reported by employers claiming the allowance, and whether businesses, charities and community amateur sports clubs are having problems in claiming it. I hope that I can persuade the noble Lord that this proposed new clause is also unnecessary for two main reasons.

First, as I pointed out when commenting on the previous proposed new clause, the tax information and impact note already commits the Government to keep the scheme under review through communication with stakeholders affected by the measure. As part of this review, HMRC will speak to stakeholders to gauge their views of the allowance and to ascertain the ways in which it is being used. HMRC talked to various stakeholders over the summer and autumn about the design and operation of the allowance, including the claims process. There are continuing discussions between HMRC and these groups around guidance and publicity, and these will continue after the launch of the allowance in April.

A crucial part of this work has been discussions with software developers. As I said, HMRC has held discussions with representatives of charities, payroll software providers and businesses to help inform the design of the new system. In particular, in July last year the 2014-15 RTI technical pack for software developers was published on the HMRC website and specified that an employment allowance indicator would be needed on the employer payment summary. There is ongoing engagement with stakeholder groups around

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this draft employer guidance with a view to making employer guidance available early next month. However, this does not affect the calculations in the software packages.

HMRC will also target communications to key stakeholders and use HMRC publications, for example, the Employer Bulletinin February and March, to further build awareness. I hope that I can reassure the noble Lord that the difficulties that he is rightly concerned about are likely to be minimised by the fact that the allowance is very easy to claim. Employers will receive it through their routine operation of PAYE. They will simply need to confirm their eligibility via their regular payroll processes. Enabling the employment allowance to be claimed by employers through their payroll software will ensure that it is straightforward to claim. They will simply have to indicate yes, once, in their employer payment summary. The claim will continue from tax year to tax year.

After making the claim, employers will not need to pay their first £2,000 of secondary class 1 NICs. If their secondary class 1 NICs liability is less than that in the first month or quarter, dependent on whether they pay their PAYE liabilities monthly or quarterly, any unused allowance will be carried forward to the next month or quarter until it is exhausted. If an employer does not have an employer payment summary on his own software, he can use the free HMRC Basic PAYE Tools package. For the very small number of eligible employers—around 2,000—who still submit their returns to HMRC on paper, there will be a paper process to mirror the IT process.

The Government are very keen that this new proposal should have the maximum possible impact because we want to see it promote economic development. We have gone to considerable lengths to engage with the industry and provide the private sector and the charities sector with information in good time. We think that we have prepared well. The guidance will be out next month and there will be ongoing discussions with all the relevant stakeholder groups and individual firms and organisations that might claim it. In those circumstances, I hope that the noble Lord will withdraw the amendment with his proposed new clause.

Lord Davies of Oldham: My Lords, once again I am grateful to the Minister for fleshing out some of the arrangements that the Government will put in place to ensure that this operation is as straightforward as possible.

Reference was made to sports clubs. In my previous incarnation before the most recent general election, I had quite a bit to do with sports clubs and their administration. I have not the slightest doubt that the mega-clubs of the Premier League have no need for the Government to advise them on how they should organise their tax affairs. They seem to be pretty adroit in doing so at present. However, sports clubs run by a small number of people, where decisions are generally taken by amateurs, even if there are one or two professional employees, are a different matter. They will need to be provided with the easiest possible transactions to ensure that they benefit from this measure. We want to see sports clubs and charities as

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well as mainstream employers adopt a positive, outward-looking perspective as regards young people. After all, they are most likely to engage successfully with youngsters through the sport in which the latter engage.

I emphasise to the Minister that this is a probing amendment. I am grateful for his assurances that the ability of even the smallest employer to make the claim when it is due does not come down to much more than ticking one box, or even answering yes or no in that box. I am reassured on that front. I beg leave to withdraw the amendment.

Amendment 2 withdrawn.

Clauses 2 and 3 agreed.

Schedule 1 agreed.

Clauses 4 to 8 agreed.

Clause 9: Reduction of secondary Class 1 contributions for certain age groups

Amendment 3

Moved by Lord Davies of Oldham

3: Clause 9, page 10, line 39, at end insert—

“(13) The Treasury shall publish a review of the level of youth unemployment as at December 2013 and the effect on the level of youth unemployment if the amendments made in this section were required to be brought into force on 6 April 2014.”

Lord Davies of Oldham: This amendment would place a direct responsibility on the Treasury, so I know that the Minister will respond to it creatively, positively and in the full recognition that we will expect him to fulfil all the obligations entered into.

We, of course, see the advantages of this initiative and we hope that it will encourage employers to take on more young people under the age of 21. We all know the difficulties that our society has undergone in recent years in terms of employment, and we all take pleasure in some welcome signs at last of an improvement in the employment statistics. But those improvements are up against a colossally difficult situation for young people. They have the right to expect, after they have been through their educational experience, at whatever level, that they are part of a society that ought to welcome them into gainful employment—but it presents a desperately bleak face at present.

We all know of the numbers of applications that people have to make, even for roles that are far from the massively competitive positions that we expect at graduate or postgraduate level. We are talking about school leavers who have to produce a CV dozens of times to make any kind of progress. Progress for most of the time, of course, is just the adjustment to rejection. We recognise that the Bill represents a contribution towards helping young people. We do not think that it is bold enough. It does not go far enough to tackle the great problems that we have with youth unemployment, but the situation will be greatly improved if we can measure progress. That is what the amendment would do. It would require a review to be undertaken on the effects of the policy on youth unemployment.

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Of course, this is a probing amendment. I have no intention of taking it further, but I am asking the Minister to put on record as much as he can about the likely positive impact of this proposal. He will appreciate that we are concerned that many months will elapse before it starts to take effect. As I enumerated in discussing an earlier amendment, the Government’s record in this area is not good. They produced a policy that we severely criticised at the time and thought was destined to fail, but they seemed to take an inordinate amount of time to recognise that its failure had occurred. That is why the Government are in this position. On the national insurance contribution dimension to employment issues, these were wasted years and there is not much time left in the present Parliament for the Government to show real achievement.

We asked questions in the other place about crucial issues, but we did not feel that we got answers that totally satisfied us. On one question we got no answer at all: how will it be paid for? I would like the Minister to comment on that. It also raises the issue of how tight the timeframe is for employers. I recognise that they will have to move with some dispatch to take advantage of these proposals, but that is what the country is expecting. In circumstances of youth unemployment being in such a critical state, we are expecting employers and the Government to act with dispatch, and effectively.

Will the Minister comment on an aspect that was emphasised in the other place—namely, that we have to take care what demands we place on IT systems as regards the ability of receiving bodies to get their systems squared up, and of the Treasury to adjust to the new measure? The Treasury ought to be light on its feet in these terms. If it is slow, that may be occasioned by the number of disasters that have befallen other departments in this context—for which I am sure the Treasury disavows any responsibility. However, given that this policy is urgently needed, it ought to recognise that responses which blame the amount of time needed to get IT systems squared up look a little—I will not use the word “evasive”, as it is a pejorative term in the tax context, but they suggest that the Treasury is trying to excuse a lack of drive at the centre. I hope that the Minister will reassure me on that point.

2.30 pm

Lord Newby: My Lords, this proposed new subsection would require the Treasury to publish a review of the level of youth unemployment as of December 2013 and of the effect on the level of youth unemployment if the zero rate of employers’ class 1 NICs on the earnings of employees under the age of 21 were to be brought into force from 6 April 2014 rather than 6 April 2015.

I would like to explain to the noble Lord why I believe that the amendment is unnecessary. The Government are committed to increasing employment levels for all parts of the working-age population. Employment is now at its highest ever level and unemployment is lower than when the Government came to power. The Government recognise the challenges posed by youth unemployment, and dealing with them has long been a priority of ours and of the predecessor

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Government. For example, around 370,000 young people have been supported through the Work Programme since June 2011. Furthermore, the Youth Contract provides almost £1 billion in funding to support up to 500,000 young people into employment and education opportunities.

The employment figures published yesterday showed another significant fall in youth unemployment. Although it is not enough, it is not the first quarter in which we have seen such a fall, and now the overall aggregate of youth unemployment is falling significantly. As we have already debated, it is extremely difficult to say what proportion of the fall is attributable to one cause rather than another. However, overall, the improved economic environment and the Government’s policies taken together are clearly having a significant beneficial effect on youth unemployment.

The Autumn Statement, which gave another push in this direction by abolishing employer NICs for under-21s, builds on the policies already in place, and has been widely welcomed by industry. Indeed, John Cridland at the CBI said that the policy,

“will make a real difference and help tackle the scourge of youth unemployment”.

However, I see little point in the Treasury publishing a review of the level of youth unemployment. The Office for National Statistics is responsible for publishing statistics on employment, and these regular releases are available to the public through the ONS website. There is a limited case for the Treasury intervening and also publishing a review.

In addition, I do not think that there is any value in attempting to estimate the impact of a policy introduced at a theoretical date, and I am not sure that the noble Lord is pushing this element of the amendment particularly hard. The Autumn Statement announced that employer NICs would be abolished for those under 21 years of age from 6 April 2015. Attempting to deliver this a year earlier on 6 April 2014 would increase the administrative costs to business, and rushing the measure through in this manner would be likely to lead to cost, confusion and the failure of many employers to take it up.

Such a tight timeframe would not give employers, payroll software developers and HMRC sufficient time to update their IT systems. As regards HMRC, there would not be enough time to ensure that the policy was implemented in a way that does not disrupt its other important IT systems. These difficulties were recognised by the Chartered Institute of Payroll Professionals, which commented on the Autumn Statement:

“We … welcome the news that this will not be enacted until April 2015, giving the payroll industry time to plan properly.”

This is not a case of the Government being complacent or lacking in energy and drive; it is simply that I do not want to be at the Dispatch Box under the lash of the noble Lord because the Government have not implemented a policy with the maximum possible efficiency and effectiveness. The timetable that we have adopted, in our view, will enable us to do it in due time, so that employers and HMRC can prepare and, when the policy comes into effect, it will be well prepared for by all who need to implement it. The fact

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that it has already been announced means that employers can begin to think about how they will choose to benefit from it when it comes into force.

The noble Lord asked how much it will cost and how it will be funded. In its first year, it is expected that it will cost £465 million, rising to £530 million by 2018. Although the policy obviously carries a significant cost, overall, the Autumn Statement in which it was introduced was fiscally neutral and reinforced the Government’s commitment to reducing the deficit. It is worth repeating that this policy represents half a billion pounds-worth of support to young people in employment—so it is very significant and, we hope, will have an equally significant impact on youth unemployment.

In view of all those considerations, I hope that the noble Lord will withdraw his amendment.

Lord Davies of Oldham: I was certainly not underestimating the significance of the programme. We all know the magnitude of the task before the Government in dealing with youth unemployment, so the figures that the noble Lord has cited seem apt for the task in hand—except that we consider the scheme inadequate for the scale of young people’s difficulties, which we can already measure.

I am grateful to the noble Lord for giving us those facts and am reassured by them. On the question of delay, I sometimes think, on the issues that we have raised with regard to the compatibility of IT operations, that in the wonderful world in which we live, the magnificent speed with which computers can bring huge advantages to society have to be balanced against the fact that the introduction of legislation seems to be tied up in a computed timescale which all pen-pushers would regard as unacceptable. After all, what is the Minister saying to me? He is saying, “We recognise that the present policy that we are operating on the role that insurance contributions can make to improve employment is a dead loss to the country. It has such marginal utility that no one will weep for its passing”. But that policy has dominated three years of this Government’s life, and he is saying that its replacement will see the light of day virtually on the brink of the next Government coming to power.

Of course the Minister is right to say that proper consultation has to take place, that we must not add to the burdens on business unnecessarily and that computer systems are mightily complex and vastly costly when they go wrong. The Government are in quite a good place to assess the costs when computer systems go wrong, because they have a few instances on their doorstep at present. However, the implication is straightforward: the policy of using national insurance contributions and elements of alleviation has failed for three years, and it will make only a marginal impact over the duration of this Government’s life. I beg leave to withdraw the amendment.

Amendment 3 withdrawn.

Clause 9 agreed.

Debate on whether Clause 10 should stand part of the Bill.

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Lord Davies of Oldham: My Lords, we have taken the strategy of objecting to the clause because as a matter of principle we want to discuss with the Minister what is going on. Of course, it is not that we are objecting to the application of GAAR to this policy; we want to address some issues with regard to tax avoidance. I must say that I will make a note for any succeeding Labour Ministers whose path happens to cross mine in the future that when we produce concepts that will be abbreviated down to four letters, they might like to produce a somewhat more attractive word than GAAR. Life is difficult enough. We do not often speak the language of Shakespeare in the House, but to constantly use initials that grate on the mind the moment they are introduced is misfortunate. However, it is GAAR that we will be talking about and that is the word I shall use throughout my contribution. I like to think that I am giving the Minister due notice that I shall think of something more felicitous for the Government 15 months from now—but that is probably wishful thinking on my ability rather than a prediction about whether we will have a different Government in 15 months’ time.

GAAR is not an answer to all tax avoidance, as is freely recognised. In fact, when looking at the returns thus far, we are all too well aware of how little they measure up to the massive challenges presented by those who seek to avoid tax with dextrous moves and huge resources. We know the ability of multinational organisations to indicate, in any administration that has an effective tax scheme, that very little of their operation is ever tax-worthy and tax-liable. Of course, a great deal of their activity is carried out in administrations that have precious little in the way of ability to abstract tax from them. That is to say nothing of the transfer of tax out of a significant country in which they operate: for example, the UK, which is a very significant market. The loss of tax revenue to any country is to be deplored when the activities of these companies are so significant in this country.

GAAR, as it stands, is so narrowly defined that the number of occasions on which it can be usefully deployed is obviously limited. The scale of the concept that the Government are working on at present is ludicrous in relation to closing the tax gap that we have all exemplified and identified. It will not go anywhere near closing the tax gap of any one multinational whose figures have come to light in recent years, let alone the totality of the position. We want to prevent that kind of abuse being extended. There is no doubt that the public reaction to those who avoid tax in an extensive and often blatant way is to regard it as utterly unacceptable.

The GAAR is in danger of becoming a bit of a fig leaf for the Government in that, when a difficult issue about tax abuse and avoidance is raised, reference can be made to the GAAR and everything will be resolved. However, the figures utterly and totally belie that fact. That is why I am asking the Minister to reassure the Committee that he will keep in mind the effectiveness of the GAAR. A government scheme for closing down tax avoidance should do more to close a tax gap than they suggest this policy will.

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2.45 pm

Members of the Commons asked about penalties in an attempt to stiffen the Government’s implementation of the GAAR. The Minister there said that attaching penalties was a very complex matter and that there needed to be a period during which the GAAR could be bedded in and taxpayers and advisers could get to grips with it, but that future action might be possible. That is another way of getting to the next general election without answering a significant question about a feature of legislation. We thought that the response in the other place was wholly unsatisfactory. I know that the Minister will make strenuous efforts to give me greater reassurance than my honourable friends obtained in the other place when this issue was discussed there.

The Chartered Institute of Taxation also highlighted the fact that it is not always clear what is considered abusive in this context. It gives the example of salary sacrifice, which, of course, is much in use at present. We need greater clarification for employees. It is important that tax avoidance is tackled effectively. The amount of uncollected tax rose last year. The much-vaunted agreement with Switzerland produced an absolutely minute amount in comparison with what the Chancellor had indicated. I say a “minute amount” because, if the Chancellor gives a figure for expected returns and then gets about a quarter of that, it is a pretty severe misjudgment.

I do not wish the clause, which introduces the GAAR into the Bill, to be agreed as legislation is meant to be effective and the GAAR’s record is far from effective in this context. How does the Minister intend to ensure that it is effective in this instance?

Lord Razzall (LD): My Lords, when I looked at the amendments that the noble Lord had put down and saw this one, I had a wonderful fantasy that what we were seeing here was Labour adopting the stance of being in favour of tax abuse through the use of NICs. I was already beginning to draft the leaflet that would pin this new policy on the Labour Party. Sadly, having listened to what the noble Lord said, I realised that that was not what he was saying at all.

No doubt the Minister will respond to attacks on the GAAR. I listened very carefully to the speech of the noble Lord, Lord Davies, but did not hear any explanation of why, if the GAAR exists and includes provisions in relation to tax abuse generally, NICs should not be included in it. I understand that the noble Lord does not like the GAAR and does not think that it is effective—but, given that we have it, I am not sure why we should not include national insurance in it.

Lord Newby: My Lords, I am grateful to the noble Lord for introducing this debate, because it has given me the opportunity to make a suggestion to him about what we might replace the term GAAR with. I wonder whether he would be happy if instead of calling it GAAR, we called it GREAT, as in Great Britain: the general rule to eliminate the avoidance of tax. If we had done that, we might have satisfied the noble Lord, and summed up our emotion when we think of the new provision.

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The noble Lord’s basic argument is that we are not doing enough. As a veteran of debates on GAAR over the past decade, I recollect that noble Lords in the previous Government—perhaps even the noble Lord, Lord Davies—explained to me why the GAAR was totally impossible, completely unworkable and the Government would not countenance it. Indeed, they did not; they did not do anything in this area. The fact that the noble Lord finds this inadequate is slightly sad, given their failure to act in this area.

The noble Lord raised a number of points of failure, as it were, but one of them was in respect of the agreement with Switzerland. The agreement with Switzerland has not brought in as much as was expected, but the Exchequer has received almost £800 million via that agreement. That is £800 million that we would not have had, £800 million that the previous Government showed no inclination to pursue. That is only one of a large number of measures that we have taken to ensure that people and companies who are avoiding or evading tax do not get away with it. In terms of personal taxation, the Lichtenstein disclosure facility has yielded a lot more than was ever envisaged and, along with the Swiss agreement, is part of driving down the ability of those with large resources to avoid tax.

The new automatic information sharing agreements, which have followed the FATCA legislation in the United States, are revolutionising the ability of HMRC to gain information about the tax affairs and bank holdings of British nationals, whether those are held in the Channel Islands or some Caribbean tax havens. Along with the Swiss and Lichtenstein démarche, that will make a big difference to our ability to get the money to which the Government are entitled. On companies, as the noble Lord knows, the work being done in the OECD, particularly on base-erosion and profit-shifting, is aimed to deal with the particularly egregious examples of large multinationals paying very little tax indeed.

As for domestic action, GAAR is only one plank in our overall strategy. HMRC published Levelling the Tax Playing Field alongside Budget 2013 to provide an update on the strategy and to set out the full range of measures being taken in this area. Some people have argued that because GAAR is tightly focused, it will not hit many of the targets and almost gives a green light to other forms of tax avoidance, but if you look at the whole raft of measures that we have taken in Budgets and Finance Bills—most recently, some announcements in the Autumn Statement—it becomes apparent that we have taken measures to protect several billion pounds of Exchequer revenue which might otherwise not have been agreed.

We have, for example, taken firm action to clamp down on stamp duty land tax avoidance, introducing the new annual tax on enveloped dwellings, and continue to close loopholes as quickly as possible after they emerge. In the summer, we publish a consultation entitled Raising the Stakes on tax avoidance, seeking views on proposals for a new set of obligations for promoters of high-risk tax avoidance schemes.

HMRC does an excellent job defeating tax avoidance schemes in court and making sure that people know that many of the schemes simply do not work, but we

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know that there is much more to do. That is why the consultation also encouraged users of avoidance schemes to settle their tax affairs after similar cases have been lost in court or tribunal. The GAAR is an important step to increase the pressure on the tax avoidance industry, but it is only one step, and we continue to take further action and devote more resources to the fight against tax avoidance in all its forms.

With those reassurances, I hope that the noble Lord will feel that he does not need to press the point.

Lord Davies of Oldham: I am grateful for both contributions to this debate. I particularly appreciate the noble Lord, Lord Razzall, coming along just to discuss GAAR with us in the hope that the Labour Party would make an almighty blunder by the amendment. Far from it; we are guided by safe hands. I also congratulate the noble Lord on finding the time to be present in the Committee when there are so many absorbing issues which affect his party, to which I have no doubt he is devoting an inordinate amount of time to get an effective resolution.

As for the Minister, I recognise that any returns from GAAR are to be appreciated. The fact is that the product thus far in several instances falls far below expectation and will, if we go on for much longer, leave the public enormously dissatisfied because we are not implementing an effective strategy to deal with significant employers, particularly the great multinationals. That disillusionment among the electorate will be so manifest that the Government will be driven to improve their performance.

We used the Motion on clause stand part to look at the way in which GAAR might contribute. A little is better than nothing; that is why I will not oppose the clause; but I tell the Minister that the present rate of progress on GAAR, which is evident in this measure but is certainly the case in much more significant terms across the country, falls so far short of public expectation that the Government will be much criticised on it.

However, that is probably a debate for another day, so I do not oppose the Motion that the clause stand part.

Clause 10 agreed.

Clauses 11 and 12 agreed.

Clause 13: Class 4 contributions: partnerships

Debate on whether Clause 13 should stand part of the Bill.

Lord Davies of Oldham: My Lords, if I may, I would like to include Clause 14, which we indicated that we wanted to debate, in this discussion.

The Minister has been constructive in his responses this afternoon, and I thank him for that. If I am less than precise about the issue which I am seeking to identify here, I hope that he will recognise the complexities of the issues involved. We have had one or two late missives. I got my letter from him a mere three-quarters

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of an hour or so before I came to the debate and, although his prose is lucid and readily comprehensible, I cannot pretend that I am able fully to address that to the Bill in the way that I would like.

If I establish in my argument the broad terms of the issues that give cause for concern, but they lack the absolute precision that we would normally expect, I hope that the Minister will forgive me. I have no doubt that he is both capable himself and will have expert advice to ensure that we have a fruitful discussion about the precise point.

3 pm

The first one I can summarise briefly. I could read out what the Delegated Powers and Regulatory Reform Committee said, but that may detain us unduly. The Minister knows of its concerns about the legislation, and we share those concerns. The committee is concerned about retrospectivity and whether there are two concepts relating to two different dates. It is concerned about regulations under new Section 4AA in existing Section 4B of the 1992 Act. It indicates that it recognises the value of the retrospective position but it is having difficulty squaring it with Section 4B(5), which appears to constitute retrospection going back for a very long time to December 2004.

I have no doubt that the Minister and his department have been much exercised about this, because the committee drew this to the attention of the House. It would be remiss of me if I did not give him the chance to respond to what is an analytical piece of work on its part, which I cannot hope to match. I know that the Minister has been busy in this respect and I apologise if I have not been able to assimilate all the responses. I am sure that I have given him a clear enough steer for him to indicate why the Government are either secure about the framing of the Bill, or if not, will take steps to effect an amendment that we would otherwise be obliged to do.

Lord Razzall: My Lords, the noble Lord has proposed that Clauses 13 and 14 should not stand part of the Bill. The clauses relate to tax avoidance and the abuse of limited liability partnerships. The Minister will be aware that there is concern among professional organisations, particularly the Law Society—not in relation to the Bill itself, but about what will happen in relation to the regulations that will be brought forward. Noble Lords will have received a briefing from the Law Society, because limited liability partnerships were introduced some time ago for professional partnerships, not primarily for tax purposes but to limit the liability of what were previously general partnerships to actions for negligence. That was the major driver for the creation of limited liability partnerships. Most significant law firms and firms of accountants now operate as limited liability partnerships, so there is clearly concern among them that the definitions of employees and partners should be clear.

I received representations from the Law Society this morning, but the basic thesis is that the consultation exercise to determine how a limited liability partner should be properly treated as a partner, or how they should be treated as an employee, was based on the

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wrong assumptions. The consultation went out on certain assumptions and the proposals on the implementation of the regulations, which I have not seen, change that basis. Therefore, the consultation itself is ineffective.

I appreciate that this does not go to Clauses 13 and 14 of the Bill, because they simply provide for the regulations to be brought in. However, between now and Third Reading the Government ought to respond, saying either that the Law Society in its representations is wrong, and why, or alternatively explain how they propose to deal with what I suspect the Law Society is asking for, which is further consultation before the regulations are brought in. I do not know which of the two is correct and I have not had time to form my own opinion on that. This is an important issue because the limited liability partnerships are important structural mechanisms for professional partnerships. We clearly need to get this right before we change the law in this respect.

Lord Newby: My Lords, I am grateful to both noble Lords for their contributions to the debate. I apologise to the noble Lord, Lord Davies, for the fact that he has only just received the letter. As he pointed out and knows very well, it has been a somewhat unusual week in terms of my ordered conduct of business and the letter was sitting on my desk for rather longer than it should have been. It is only fair to point out that this is no failure on the part of officials to respond in a timely manner; it is my failure. I am sorry that the noble Lord has only just got the letter.

Two points have been raised. The second was raised by the noble Lord, Lord Razzall, with regard to consultation. He asked whether the legislation had gone beyond the proposals set out in the consultation document. The Government believe that it does not go further than originally proposed or go beyond the original policy intention. In fact, as a result of the consideration of the consultation responses, the Government dropped the first of the original two conditions which were broadly in line with the employment status tests, which would have meant that even senior partners in major professional firms might have been reclassified as employees. The second condition, which contains ownership or economic interest or risk tests, has been slightly broadened because of this change, but it is still a narrower measure than if both conditions had been implemented as originally proposed. The Government also made clear in Budget 2013 and in the consultation document that the proposals will apply to higher-paid staff in the professional services sector and the lower paid if they are LLP members who receive a largely fixed reward and carry little economic risk or interest.

As regards the status of the secondary legislation and the issue of retrospectivity, the noble Lord referred to two sets of secondary legislation. The first, in Clause 13, had already been published in draft and the second, in Clause 14, was, I believe, enclosed with the letter to the noble Lord and has been put in the Library.

This legislation introduces half of a series of provisions that relate to income tax and national insurance. Slightly unusually, we are legislating for the national insurance part first because we happen to have this Bill before us.

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The relevant identical provisions relating to income tax will be in the Finance Bill, which will be introduced later in the year and will become the Finance Act 2014. The intention is that the provisions in respect of income tax and national insurance will not apply retrospectively but will apply from April 2014. That is made absolutely clear and set out in the secondary legislation.

I am told that the use of the earlier date in the primary legislation follows precedent in respect of other pieces of legislation and does not mean that the Government will introduce this measure going back a decade or, indeed, going back at all. There are technical arguments for putting that earlier date in the legislation, but the secondary legislation, as I said, makes it absolutely clear that the provisions will come into force from this coming April. Therefore, there is no question of an undue degree of retrospection. I hope that the letter which I sent to the noble Baroness, Lady Thomas of Winchester, set that out clearly and, I hope, satisfies the committee and the noble Lord.

Lord Davies of Oldham: My Lords, if it satisfies the committee, it will certainly satisfy this noble Lord, because I hold the committee in the greatest respect and I know how thorough it is in its work and its cumulative expertise, which I could not hope to match—so I am reassured on that front, which is why I thought that I did not need to go into an inordinate degree of detail. I am grateful to the noble Lord, Lord Razzall. I have seen no communication from the Law Society, but one or two people have made representations to us. They do not represent any particular group or

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profession, but are people who look at these matters closely and thought that they had identified an area of difficulty, which is what I sought to air under the amendments.

I am largely satisfied with the Minister’s response and will of course not press the Motion. I wanted to give him the chance to identify the Government’s position. He knows that we will ensure that those who have made representations to us and others get the chance to examine this thoroughly. I appreciate that, in the spirit of good will that obtains in the Committee, and obtained on Second Reading, the noble Lord is looking forward to a fairly straightforward exercise on Report and at Third Reading. I think that I can go 97% of the way to promising that, but this issue concerns the 3%. I cannot give a full assurance at this stage, because I do not know what the response of others will be, but I am sure that he will have worked hard enough to guarantee that the response is favourable, particularly from the Delegated Powers Committee. I will not press the Motion.

Clause 13 agreed.

Clause 14 and 15 agreed.

Schedule 2 agreed.

Clauses 16 to 21 agreed.

Title agreed.

Bill reported without amendment.

Committee adjourned at 3.13 pm.