National Insurance Contributions Bill

My Lords, I beg to move that this Bill be now read a second time. It may be helpful if I begin by setting out some of the background to the Bill presently before you, before turning to the details of its provisions. As many of your Lordships will be aware, at the time of the Pre-Budget Report on 2 December 2004, the Government made a statement to the other place. This outlined how, despite the best efforts of successive governments, we continue to be presented with ever more complex and contrived arrangements designed to avoid income tax and national insurance on the rewards from employment. That statement made it clear then that the Government intended to close down this activity permanently. That statement mentioned the early attempts at avoidance in this area that took the form of paying bonuses and salaries in gold bullion, diamonds and fine wine. When those routes were closed, employers started to pay bonuses through ever-more sophisticated financial instruments and securities to reduce the amount of national insurance they had to pay, to avoid their obligation to operate PAYE, and to reduce employees’ tax bills. The tax avoidance disclosure rules introduced in the Finance Act 2004 brought to light a large number—over 100—instances of such schemes being devised or marketed by promoters. This showed that a significant minority of employers and their advisers were continuing to devise, operate and market ever more contrived avoidance schemes to disguise what is, in effect, remuneration. Our records show that 60 per cent of disclosed employment schemes involve artificially restricted securities. The remaining 40 per cent are fairly evenly split between employee benefit trusts, options and future contracts, exempting income, service companies and other employment products. Only a handful—some 5 per cent—are what we would consider to be other than contrived avoidance schemes. That sets out the context in which this Bill is being brought forward. To emphasise this point I would mention to your Lordships that there have been numerous examples of contrived schemes that the present Government have had to contend with since 1997. Examples include contrived schemes involving employee benefit trusts; soft currency loans, such as those denominated in Turkish lira; adjustable options; special purpose vehicles; and artificially restricted shares. I do not propose to take up the House’s time with detailed descriptions of these schemes—some of them are very complex indeed. But it is clear that without prompt and decisive action there is a very real possibility of tax and national insurance contributions avoidance schemes continuing, to the detriment of the Exchequer and to the many employers and employees who pay their fair share of tax and national insurance. The Government gave notice in December 2004 of their intention to deal with any future arrangements designed to frustrate our intention that employers and employees should pay their fair share of tax and national insurance contributions on the rewards from employment. Where we become aware of arrangements which attempt to frustrate this intention we will introduce legislation to close these down, where necessary with effect from 2 December 2004. I emphasise that the Government are resolute about this, and that statement still stands today as strongly as it did when it was made. The Government continue to look closely at what has happened since that date. The Government want employers and their advisers to be in no doubt that, if they continue to avoid their responsibilities or are thinking of doing so in the future, we will not hesitate to introduce further legislation to close down their schemes—if necessary, from an effective date earlier than the announcement of such legislation, potentially from the date of the statement of 2 December 2004. As a first step in demonstrating the Government’s commitment to take action, Schedule 2 to the Finance (No. 2) Act 2005 was introduced to strengthen the income tax rules dealing with employment related securities, dating back to 2 December 2004. The Government had already published a draft technical note alongside the Pre-Budget Report in 2004, explaining the proposals, followed by draft legislation in February 2005. Interested parties have therefore had an extensive period to scrutinise and comment on the detail of the provisions that were then fully debated in the other place during the Standing Committee stage of that Act. The second legislative step demonstrating the Government’s continuing commitment to take action against avoidance is the introduction of this Bill. It is key to achieving the Government’s objectives of fairness and opportunity by ensuring that all pay their fair share of tax and national insurance. It is also an essential element in building a serious and credible deterrent against future avoidance activity. The Bill will ensure that the Government can deal with any arrangements that emerge in future that are designed to frustrate its intention that employees and employers should pay the proper amount of tax and national insurance on the rewards of employment. As there is no annual equivalent of the Finance Bill for national insurance, this Bill provides the necessary powers to apply national insurance to payments from these schemes. Where the Government become aware of arrangements that attempt to avoid national insurance contributions as well as tax, they will introduce regulations to close them down, where necessary from 2 December 2004. That action will not affect the vast majority of employers and employees who organise their affairs in a straightforward and transparent way. In particular, genuine employee share schemes and share option plans will not be affected. The Bill provides for a power to make regulations in respect of national insurance that take effect on or after 2 December 2004, to reflect backdated tax changes. The power will allow for national insurance liability to be charged from 2 December 2004, if necessary. The Bill is needed to extend existing regulation-making powers, and to make it possible to impose a national insurance charge on disguised remuneration that is capable of taking effect from that date. Currently, an NIC liability can usually be charged only from the date of NIC regulations, except in limited circumstances where the regulations can be backdated to the beginning of the tax year in which the regulations are made. This is in contrast to the position for tax legislation, where liability can, if the legislation so provides, be applied back to a date preceding Royal Assent. The Bill also allows for consequential changes for the purposes of contributions, contributory benefits and statutory payments to be made where appropriate. For instance, a national insurance charge may be levied back to 2 December 2004, to align with the start date of anti-avoidance tax measures. In this case, the provisions of the Bill, and regulations made under the powers in this Bill, will ensure that those contributions will count for the purposes of contributory benefit and statutory payments. The Bill also provides a power to extend to national insurance the avoidance arrangement disclosure rules that currently apply to income tax. Finally, it provides a power to prevent the use of national insurance contribution elections and agreements over shares and securities that have been targeted by backdated national insurance regulations made under this Bill. That will mean that employers cannot pass on to their employees the national insurance liabilities that they have tried to avoid. The provisions in this Bill extend to Great Britain and Northern Ireland. Clauses 1, 3 and 5 are intended to extend to England and Wales and Scotland only; Clauses 2, 4 and 6 are intended to extend to Northern Ireland only; and the remaining provisions of the Bill are intended to extend to England and Wales, Scotland and Northern Ireland. Your Lordships will of course be concerned to know that the powers provided for in this Bill go only so far as is necessary, and no further. Significantly, the Government have ensured that the Bill also contains important safeguards to ensure that regulations made under the Bill take full account of human rights considerations. This is in addition to the Government’s existing duty to make regulations that are compatible with the European Convention on Human Rights. The power to make regulations altering liability is restricted to reflecting, so far as is possible, employment remuneration measures in tax legislation—normally via Finance Acts—and is intended only to be used to reflect tax anti-avoidance measures. So where such regulations are made, the other place will already have had the chance to consider any relevant human rights issues on backdated tax legislation during the passage of the relevant Finance Bill or other legislation. Furthermore, to ensure that the regulations under this Bill are subject to parliamentary scrutiny by both Houses, they will be subject to the affirmative resolution procedure. This Bill also includes a specific provision to ensure that where, for instance, as part of a package of anti-avoidance measures, there is exceptionally a reduction of national insurance liability for past periods, any existing or future benefit entitlement will not be affected. The Government are committed to publishing draft regulations under the powers in this Bill a minimum of 12 weeks before they are made so that employers and their representatives have an opportunity to comment on the technical content of any proposed NIC changes. Once this Bill has received Royal Assent, any NIC legislation will have to be laid within 12 months of the corresponding retrospective tax legislation. In pursuit of that commitment and to assist in consideration of this Bill, I should mention to your Lordships, if you are not already aware, that draft regulations were published on 14 November in respect of: the first use of the powers in the Bill to backdate national insurance liability to reflect the employment-related securities anti-avoidance provisions in Schedule 2 to the Finance (No. 2) Act 2005; and to prescribe an additional statement to be contained in future forms of national insurance elections that will make clear the election cannot transfer backdated employers’ national insurance liabilities to their employees. This regulation is to be made using existing powers in the Social Security Contributions and Benefits Act 1992; and extends the tax avoidance disclosure rules to national insurance. Before I conclude, I wish to draw to the attention of noble Lords the report of the Select Committee on Economic Affairs on the Finance Bill 2005. In the Summary of Conclusions and Recommendations, the carefully considered report of the noble Lords said:"““We listened with increasing concern to the catalogue of ingenious schemes devised over the years in order to pass remuneration value to employees (particularly bonuses to the higher paid) in a way that attempted to avoid or reduce income tax and NICs. We took note of the view of HMRC that, even after the measures in the present Bill had passed into law, ‘there will be something new, the whole history of this suggests there will be, and we will have to counter that when we get there’. Given the vast amount of tax at stake and in the light of that history we were persuaded that an exception to the normal approach to backdating was justified. Moreover, it seemed to us that the suggestion that professionals might now find it difficult to advise about remuneration packages that included share schemes and share option plans for the generality of employees was an exaggeration.””" I would take this opportunity to confirm to your Lordships that the Government wholly concur with that conclusion. In conclusion, I hope I have explained why the Bill is important and necessary to ensure fairness. As I have said, it will not affect the vast majority of employers who do not seek to avoid their tax and national insurance liabilities through avoidance schemes. I have also explained how a small minority of employers have persistently sought to avoid their obligations. This Bill is an appropriate and proportionate response to national insurance avoidance of that kind, and I commend it to the House. I beg to move. Moved, That the Bill be now read a second time.—(Lord McKenzie of Luton.)