It is a free-poor policy, say peers

The Bill allows the Government to implement two new national insurance reliefs to support employers to hire new staff. It contains just 14 clauses and introduces four new measures:

• an employer national insurance contributions (NICs) relief for new employees in freeports
• an employer NICs relief for employers of veterans
• an exemption for test and trace support payments from self-employed NICs
• changes to Disclosure of Tax Avoidance Schemes (DOTAS) legislation with regards to NICs.

The Bill passed its second reading and heads to a debate in Grand Committee.

Government spokesperson Viscount Younger of Leckie insisted that freeports will attract new businesses and regenerate communities by creating jobs, boosting investment and spreading prosperity. The first eight freeports in England will become ‘hubs for trade, innovation and commerce’ because of the wide variety of tax reliefs. To these benefits he added the enhanced 10 per cent rate of structures and buildings allowance, an increased 100 per cent capital allowance for companies investing in plant and machinery and full relief from stamp duty on land or property purchases. The employer NICs relief for new workers in freeports applies to all new workers who spend 60 per cent of their working time at a freeport tax site in the first three years of employment. It will be reviewed in April 2026. The Government’s intention is to legislate for this relief in Northern Ireland, too.

NICs relief for employers of veterans reflects their ‘extraordinary service to our nation’, combined with the great challenges they face in obtaining secure and fulfilling employment, Viscount Younger said, adding that the proposal amounts to a saving of up to £5,500 per hired veteran for the 2021-22 tax year.

Last year, the Government introduced secondary legislation to exempt test and trace support payments from employee and employer, class 1 and 1A, NICs. The measure contained in this Bill will extend this exemption to the self-employed for consistency and fairness. It will retrospectively exempt test and trace support payments from class 2 and 4 NICs for the 2020-21 tax year. It will also ensure that, in future, test and trace support payments will not be included in profits liable to class 2 and 4 NICs.

On the DOTAS change, the peer said it ensures that HMRC can warn taxpayers about suspected avoidance schemes earlier and places responsibility for the obligations within DOTAS and any failure to comply with them on both promoters of these schemes and their suppliers.

As an aside, he said the Government is ‘carefully considering’ the recommendations of the Lords Delegated Powers and Regulatory Reform Committee. That committee assessed the Bill and spoke of the need, at committee stage, to deal with Henry VIII and other powers in ways that provide more parliamentary scrutiny.

Labour’s Lord Davies of Brixton (photographed below thanks to Parliament UK) was upset that successive governments have used the National Insurance Fund as a catch-all source of short-term political fixes that are nothing to do with a logical system.

Lord Davies complained about the ‘complete absence’ of financial information on how the Bill will affect the financial state of the National Insurance Fund. He cited the OBR as saying the main impact of freeports will be to alter the location rather than the volume of economic activity, and the OBR will find it difficult to discern any additional activity. He cited the doubts from the Chartered Institute of Taxation about the chances of freeports achieving their goals, that economic activity will be diverted from other fully taxed areas and the impact felt through a rise in commercial property prices in the areas concerned, rather than fully in increased activity.

Lord Davies said that if the Government is serious about the employment prospects of our veterans, they should undertake a comprehensive review of the difficulties they face. On the DOTAS changes, he asked for examples of NICs avoidance where action has proved difficult or impossible under existing arrangements. What about the example of salary sacrifice? (This was not dealt with by Viscount Younger.) These are arrangements that are established specifically to permit employees and employers to pay less in NICs, he said.

His Labour colleague Lord Sikka complained that this Bill hangs on the ‘failed concept’ of freeports, which are effectively a state within a state where vast amounts of money are showered on few, with little, if any, tangible benefits for the public at large. Freeports morphed into enterprise zones after 2012; the Government promised 54,000 new jobs in zones – but BBC-commissioned research found that by 2017, only 17,307 jobs had been created. These jobs were created in 24 zones, and in two others, the number of jobs fell.

Lord Sikka wants an impact assessment of the Bill assessing the assumed gains in freeports and the losses that will be caused to other parts of the economy. He wondered why there is no estimate of the cost of the zero-rate secondary class 1 contributions for freeport employees, when there is an estimate for the cost of zero-rate secondary Class 1 contributions for armed forces veterans. He was worried that the Bill does not require the Government to remit or repay the cost of the national insurance concessions to the National Insurance Fund account. He asked why NICs are not on unearned income, too.

On DOTAS, Lord Sikka commented that Ministers constantly refer to laws tackling tax abuses but it is the enforcement which is a big problem; he remarked on the partners of the big four accounting forms sitting on the GAAR panel and determining what counts as abusive, comparing it to ‘foxes guarding the henhouse’.

On freeports, Lord Tunnicliffe, Labour Treasury spokesperson, said it is unclear to what extent they are merely displacement benefits and there are certainly risks of tax evasion, smuggling and other forms of criminal activity. We need transparent evaluation of the success or otherwise of each individual freeport site. He wondered whether it is counterproductive for the NICs relief for employees at freeports to only start in April 2022. He said some in the sector have expressed concern that the Government’s actions on tax avoidance are limited in scope and ambition and have reached the point where they are achieving diminishing returns.

Lib Dem Treasury spokesperson Baroness Kramer was concerned that the Government is now choosing to use the National Insurance Fund, meant originally for pensions, as a piggy bank for all kinds of other purposes, adding that the new levy for the NHS and social care should have been raised through income tax for a host of reasons. Kramer was concerned at NICs holidays to support niche activities, such as freeports, while at the same time the NICs burden for SMEs is increasing.

On freeports, Baroness Kramer remarked that, in the UK, tariffs on intermediate goods are either non-existent or tiny, making the savings on duties negligible. Indeed, these tiny savings will be completely wiped out by the new costs of trading with the EU, she said. There are no meaningful benefits to removing duties and the NICs relief in this Bill is for low-paid jobs only - that tells you everything about the true expectations of this project. It is virtually impossible for enforcement agencies to be effective in a freeport, she said. The baroness was worried about any implications for small businesses that hire freelance contactors and that no new burdens will be placed on freelancers themselves because of extension of DOTAS to cover NICs.

Crossbencher Lord Bilimoria called for a higher threshold than the £25,000 limit on employer NICs relief for new workers in freeports saying ‘more generous it is, the more it will attract investment – if that is the objective’. For ex-service personnel, the NIC relief is only for 12 months, while for the freeport scheme it is three years. Why cannot the relief period for ex-servicepeople be longer? he asked.

The Bill could have gone so much further in incentivising investments and reducing taxes, said Lord Bilimoria, citing various research to prove that tax increases are almost uniformly harmful, while tax cuts seem to have their strongest positive impact during recessionary environments. We should ‘flip’ business taxes on their head and reward firms which invest, he argued. We need to do things such as reform business rates to increase investment. He said we need to stop hiking taxes and focus on boosting investment, because that will create the jobs that will pay the taxes that will pay for the debt.

Closing the debate, Viscount Younger of Leckie claimed the take-up and use of NICs relief in freeports will be monitored and told peers a TIIN (tax information and impact note) has been published alongside this Bill. The OBR approved costings, including estimates, for all the tax and customs reliefs within the wider freeport offer. NICs receipts are paid directly into the National Insurance Fund and are kept completely separate from all other tax receipts.

The Government spokesperson told Lord Sikka NICs is part of an earnings replacement scheme to provide help to workers when they are unable to work or retired. Unearned income is excluded as it does not rely on a person’s labour, the viscount said. But Lord Sikka came back and said many a person, instead of taking wages, draws dividends (which do not have NICs). The viscount went on to say the new freeports offer a more attractive overall package of incentives for businesses than the pre-2012 freeports. NICs relief for employees at freeports to only start in April 2022 is to give a ‘clear start date’ but is also down to ‘complexities within HMRC’. On displacement caused by freeports, he said the Government’s focus is on encouraging new investment from around the world and within the UK to create new businesses and new economic activity in freeports. And employer NICs relief can be claimed only for new employees.

On the issue of displacement of economic activity, the viscount defended the Government. He said: “When designating freeports, the Government require bidders to explain how their choice of tax site location minimises displacement of economic activity from wider local areas, especially other economically disadvantaged areas. Displacement will be assessed in greater detail as part of the formal tax site approval process. Tax sites will be designated only once mitigation of displacement and other factors has been demonstrated by the successful bidder.

The veterans relief has been kept in line with similar reliefs that aim to boost employment of a particular group of people while the freeport relief has been designed to support new businesses during their infancy. DOTAS has been in play for several years, which has led to many promoters leaving the avoidance market.

The full session is here.

By Hamant Verma, CIOT Senior External Relations Officer