Peers accuse Government of misuse of National Insurance Fund

The claims were made during debate at committee stage of the National Insurance Contributions Bill 2021-22 earlier this week. Opposition peers also criticized the concept of freeports, the limited nature of help for veterans, poor government publicity over avoidance schemes and the granting of what they considered excessive powers to create new self-isolation support schemes.

The Bill was not amended during Lords committee. For background, the Bill contains four measures:

• a new zero-rate of secondary Class 1 National Insurance contributions (NICs) for employers taking on employees in a freeport. Employers would be able to claim relief on the earnings of eligible employees up to £25,000 per year, for three years. The zero rate would apply from April 2022.
• a new zero-rate of secondary Class 1 NICs for employers who hire an armed forces veteran during their first year of civilian employment after leaving the armed forces. Employers would be able to claim relief on the earnings of an eligible employee up to the NICs Upper Secondary Threshold. Employers would be able to claim the relief from April 2022 and transitional arrangements will allow retrospective claims for the 2021/22 tax year.
• an exemption for COVID-19 Test and Trace Support Payments for Class 4 and Class 2 NICs, which are paid by the self-employed. An exemption already applies for Class 1 and Class 1A NICs – paid by employees and employers – and this measure would be formally retrospective for the 2020/21 tax year.
• a provision to allow changes to the Disclosure of Tax Avoidance Schemes (DOTAS) regime as it applies to NICs avoidance schemes. These changes would mirror amendments to the DOTAS regime as it applies to other tax avoidance schemes, made by provisions included in the Finance Bill 2021.

The one day committee stage for the Bill took place on Monday 10 January in Grand Committee (rather than on the floor of the House of Lords) and unfolded like this:

Clause 1: Zero-rate contributions for employees at freeport tax sites: Great Britain – PASSED

Clause 2: Freeport conditions - PASSE

These clauses were debated alongside a Lib Dem amendment (amendment 1) which sought to ensure employers have declared the beneficial ownership of goods or assets in a freeport before being eligible for zero-rate contributions under this Bill. This was not pushed to a vote by Lib Dem spokesperson Baroness Kramer.

In her remarks Kramer observed that freeports have historically been a magnet for illicit activity, especially money laundering. She cited RUSI’s Centre for Financial Crime and Security Studies finding that there is evidence of criminal activity taking place in multiple freeports around the world. Although details on beneficial owners of businesses in a freeport will be available to UK authorities, it will not be available for public scrutiny, she complained. She went on to say that the freeport enforcement body will be the National Crime Agency which, even without the addition of freeports, is significantly under-resourced and needs to upskill. The measure seems to go against the Government’s wish for a public register of beneficial ownership to create a new situation with freeports where one of the primary tools will be a register of beneficial ownership that is not being made public, she said.

In response to Baroness Kramer’s amendment, government spokesperson Viscount Younger of Leckie emphasised that the Government have taken steps to ensure that only those whom this policy is intended to benefit will benefit. Specifically, he said, the Government have included conditions requiring freeport employers to have a physical business premises in the freeport tax site, employees are required to spend 60 per cent of their working time in the freeport tax site, each freeport has to agree its proposed tax sites with the Treasury and HMRC, and each business within a tax site will need to submit a return to HMRC. The Government has learnt from other freeports in the world how to ensure that cross-border illegal activity is ‘thwarted’. Freeport operators and businesses will be authorised by HMRC and Border Force and must meet robust security requirements to mitigate risks, he said, adding that HMRC and Border Force will continue to conduct compliance checks on goods within the freeport.

Clause 3: Freeport conditions: supplementary - PASSED

Clause 4: Anti-avoidance - PASSED

Clause 5: Zero-rate contributions for employees at freeport tax sites: Northern Ireland – PASSED

These clauses were debated together, along with amendment 2, proposed by Baroness Kramer and co-signed by Labour spokesperson Lord Tunnicliffe, which sought to limit the regulations that could be made under section 3(3) to those that would ensure compliance with the UK’s international obligations with respect to subsidy control.

Baroness Kramer explained that the amendment reflects the concerns of the Lords’ Delegated Powers and Regulatory Reform Committee. The committee, and Kramer, worried that the clause gives inappropriate powers to the Government, enabling the Treasury to rewrite the conditions that employers must meet to receive NICs relief. Kramer said she wants to limit the ‘untrammeled’ nature of the powers. Lord Tunnicliffe argued for ‘some middle way’, which would give the Treasury some but not all of the flexibility that it seeks.

But Viscount Younger said the subsidy control landscape in this case is complicated, uncertain and difficult to predict, and the power needs to be capable of dealing with a wide range of possibilities. The amendment was withdrawn, although Kramer said that she still has underlying concerns.

Proposed new clause (amendment 3) – Review of the impact of section 1

Baroness Kramer’s amendment 3 was a new clause which would have required the Secretary of State to review within six months the impact of section 1 of this Bill. The Lib Dem peer reiterated her concern that freeports displace growth in businesses, jobs and opportunities from other ‘areas of disadvantage’ rather than creating additional growth. She cited the Centre for Cities, which showed that in the first five years of enterprise zones in the UK - 2012 to 2017 - only a quarter of the predicted jobs were created but, of those, a third came as the result of displacement, and the jobs were overwhelmingly low skilled. If anything, it is larger companies that benefit, so it is not a pro-SME strategy, she added. This is why we need a prompt review of the impact of the Bill.

Lord Tunnicliffe, for Labour, added that others, including the National Audit Office, will no doubt analyse the performance of freeports in the months and years to come but, in the interim, it would be a shame if the Treasury were not open about the successes or otherwise of its measures.

Viscount Younger, for the Government, said that the Government have already committed to reviewing the use and effectiveness of this relief before deciding whether to extend it further. But he believes that conducting a review less than six months from when the relief comes into effect will produce an ‘incomplete dataset’ and will not give a fair reflection of the policy.

Baroness Kramer withdrew her amendment but noted with some irony that the Minister suggested that a review in six months is way too soon, ‘yet here we are with a piece of legislation and we do not even know what the monitoring criteria will be’.

Clause 6: Zero-rate contributions for armed forces veterans - PASSED

Clause 7: Veteran conditions - PASSED

Clause 8: Upper secondary threshold for earnings – PASSED

Lord Tunnicliffe, with backing from Baroness Kramer, proposed amendment 4 which would have altered the conditions attached to zero-rate relief for armed forces veterans, ensuring that such relief is available for a period of three years after the veteran begins civilian employment, rather than one.

Arguing for the amendment, Lord Tunnicliffe noted approvingly that it provided him “with a rare opportunity to combine two of my great loves in life: helping veterans while studying the minutiae of fiscal policy”. Explaining that veterans may need longer than a year to move into work, he was worried that, if you are an individual who cannot get up to speed with civilian life within 12 months, there is the chance that you will be left behind as firms seek the savings of hiring somebody from the next batch of new veterans. He added: “Why, given that they have chosen to offer a three-year tax break to businesses operating within freeports, are they able to fund only a single-year incentive to firms hiring Armed Forces veterans?” Baroness Kramer said the cost of providing support is in the range of £20 million a year, which ‘is trivial in terms of any departmental budget’.

Responding, Viscount Younger replied that the amendment would reduce receipts into the National Insurance Fund and therefore create a cost to the Exchequer. He added that although the freeport relief is available for three years, employers of veterans have a higher threshold before they pay any NICs. Again, the amendment was withdrawn, but Tunnicliffe made an additional point that all he and Kramer were asking is to give veterans time to build up a CV in these three years.

Proposed new clause (new clause (amendment 5) – Reimbursement of the National Insurance Fund)

Labour peer Lord Davies of Brixton proposed a new clause to probe whether it might be desirable for the Secretary of State to pay to the National Insurance Fund (NIF) from the Consolidated Fund the reduction in contribution income that will be received by the NIF due to the zero-rate relief in secondary Class 1 contributions introduced by the Bill for employers of freeport employees and the employers of forces veterans.

Lord Davies said he believes in the NIF as part of a comprehensive system of national insurance. His question for the minister was whether he and the Government believe in the NIF. The NIF is not an all-purpose fund or source of funds to cover the Government’s ‘bright ideas’, he argued, adding that it is not the job of the NIF to encourage freeports or to ease veterans into employment. The peer believes his amendment is an important ‘point of principle’ given the real differences between these sources of income.

Baroness Kramer observed that the Government might argue that their new national insurance contribution social care levy sets a precedent for raiding the NIF. However, she argued: “To raid their contributions—which they will have thought are paid towards benefits and pensions—to provide a subsidy for businesses is certainly a fundamental change of purpose.” Lord Tunnicliffe agreed, saying: “The use of this fund in this way pollutes the concept and is a retrograde step.”

Replying for the Government, Viscount Younger argued the cost of the veterans and freeports reliefs are small in comparison to the NIF’s surplus and will not impact on the NIF’s ability to pay out contributory benefits. The Government already has an established process in place to ensure that the NIF always maintains a sufficient working balance to continue to pay out contributory benefits, he continued. Additionally, there are already reliefs in the NICs system with regard to the employment allowance, the under-21 relief and the under-25 apprentice relief, so “this policy and the thinking behind it is not new”.

Lord Davies withdrew the amendment but said he is still concerned about this issue. “I believe in a national insurance system and the National Insurance Fund,” he repeated, but, “If it is to be treated as just a source of general taxation, which effectively this does, it dilutes the principle.”

Clause 9: Consequential amendment – PASSED

Clause 10: Treatment of self-isolation support scheme payments - PASSED

With clause 10 were debated three amendments based on recommendations from the Lords Delegated Powers and Regulatory Reform Committee (DPRRC). Amendment 6 would require the Treasury to make a designation under section 10(2)(d) by regulations, as it would make the power in Clause 10(2)(d) subject to the negative procedure, rather than no procedure. Amendment 8 would subject all regulations under section 3 to the affirmative resolution procedure. Amendment 9 would subject regulations under section 6 to the affirmative resolution procedure. All were proposed by Baroness Kramer with support from Lord Tunnicliffe.

Proposing amendment 6, Baroness Kramer said she does not understand the Government’s argument that they should be able to create new self-isolation support schemes and make them exempt from NICs without even alerting Parliament, ‘never mind providing any public notice or any means of scrutiny’. She continued: “The Treasury’s view, as I understand it as written in the legislation, is that it can create as many schemes as it likes without a statutory instrument, provided that, in its view, they are “similar” to the schemes listed in the Bill. I deal on such a frequent basis with the Treasury, and the Treasury’s view of “similar” is, frankly, as long as a piece of string.”

Lord Tunnicliffe said Parliament should be afforded a proper scrutiny role when it comes to the use of public finances.

Responding to the debate, Viscount Younger said the Government believes that the current procedures remain appropriate. “The Government believe that the power designating self-isolation support schemes to be exempt from self-employed NICs is narrowly drawn in that such schemes have to provide support for those who cannot work due to self-isolation,” he explained. “In addition, the Government’s intention is that they will use this power only where further regulations are made to exempt payments from possible similar future schemes from NICs for employees and their employers.”

Baroness Kramer withdrew amendment 6 (and later did not move amendments 8 and 9) but said: “If the minister seriously thinks that a review of the whole free ports issue will be so completely uncontroversial that the consequences of that review can be implemented through a negative resolution, then he really misunderstands the sense of discomfort that exists around the whole freeports scheme and really has not been listening to Parliament’s level of concern.”

Clause 11: Disclosure of contributions avoidance arrangements

With this was debated amendment 7, again in the name of Lib Dem spokesperson Baroness Kramer. This would have required the Government to publish guidance relating to clause 11.

Proposing the amendment, Kramer remarked that HMRC has a ‘horrible history’ of focusing its might on small businesses and self-employed people who have no idea that they have become entangled in tax or NICs avoidance, especially when they are unrepresented. “They are so small they simply cannot afford to pay legal and accounting fees. It is absolutely critical that those businesses know where they stand, particularly when HMRC is on a new enforcement rampage,” she said. The standard methods of communication, particularly with small businesses, are ‘hideously inadequate’. There are also lists of webinars on a government website that an entity can join and participate in and ‘that is very useful’, she concedes, but the information just does not reach the necessary audience.

Labour’s Lord Sikka does not think the DOTAS legislation, on which this particular legislation in this Bill is modelled, has been that effective. When it comes to national insurance, the Government themselves have created avoidance schemes, he claimed. For example, there is no national insurance payable on unearned income. Accountants are busy, as they will be in these cases as well, converting income to capital gains as it attracts absolutely no NI, he said.

For the Government, Viscount Younger said HMRC will be publishing detailed guidance by the end of February 2022 which will cover the changes to the DOTAS regime and explain when HMRC can issue a notice requiring promoters or suppliers in the avoidance chain to provide information on suspected avoidance schemes. It will also explain what will happen if they do not provide information, or where they do and HMRC consider the scheme is notifiable, the issue of the scheme reference number - the so-called SRN - their right of appeal against the issue of the SRN, and their right to make representations before HMRC publishes details. Finally, the guidance will explain the obligations of the promoter or supplier if the SRN is not withdrawn. He told Lord Sikka that HMRC have undertaken more than 500 compliance interventions on promoters and their supply chains—that takes account of the year 2020-21.

Baroness Kramer withdrew her amendment but said she hopes HMRC will take a much more interactive view of how to talk to small businesses.

Clause 12: Regulations - PASSED

Clause 13: Interpretation etc - PASSED

Clause 14: Short title (This Act may be cited as the National Insurance Contributions Act 2021.) - PASSED

The Bill now passes to its Lords report stage.

By Hamant Verma, CIOT Senior External Relations Officer