National Insurance Contributions Bill

My Lords, I thank the Minister for introducing the Bill with his customary precision. I also thank my noble friend Lord Skelmersdale for his succinct and targeted comments on retrospection. The Minister will be aware that in another place we did not oppose the Bill and as a headline that remains our position. But we are not completely uncritical and we have some concerns that we will want to explore in more detail as the Bill progresses through your Lordships’ House. It contains a mere seven substantive clauses dealing with three main topics. The easiest for me to deal with is Clause 7, which extends the disclosure requirements that apply for tax purposes to national insurance. The Minister will be aware that these disclosure requirements were controversial when they were announced and to some extent they still are, especially in the light of the Pre-Budget Report proposals on disclosure periods. But this Bill, by adding national insurance schemes, does not add new issues to that and therefore we have no problems with it. The heart of the Bill lies in Clauses 1 to 4, which empower the Treasury to make regulations relating to national insurance contributions—I cannot quite bring myself to call them NICs, even though that would save nine syllables. The regulations will have a retrospective effect going back to the date of the ministerial Statement made on 2 December 2004. That, as my noble friend Lord Skelmersdale has already pointed out, takes us into the issue of the degree of retrospection that can be tolerated within our law. It also takes us into the areas of legitimate tax planning and tax avoidance, as well as the need for certainty among taxpayers. I shall refer to ““taxpayers”” because ““national insurance contribution payers”” is rather a mouthful. Also, nowadays national insurance contributions are only a hair’s-breadth away from being a tax. We might as well regard it as such for all practical purposes. It is the tradition of this country, one that can be traced back to Magna Carta, that citizens should not be taxed except by clear words in statute. That has been modified over the years and there has been an increasing acceptance that statutes can apply retrospectively, particularly in the case of tax avoidance, provided that certain tests are met. When he was in another place, my noble friend Lord Rees set out four tests that such legislation should meet in order for it to qualify for retrospective effect. The first of those tests was that warning should be given in another place and that the warning should be precise in form. Back in 1978 he said:"““A mere suggestion that there are vague schemes of tax avoidance that must be countered should not suffice””.—[Official Report, Commons Standing Committee A, 6/6/78; cols. 718–19.]" That is why the nature of the Paymaster General’s announcement on 2 December 2004 has rightly been the subject of considerable scrutiny. As I understand the Government’s position, that Statement applies not only to the specific avoidance schemes involving securities that were covered in last year’s second Finance Act, as well as in the draft regulations that will come into effect in relation to national insurance contributions if this Bill is passed, but also to any possible scheme which sought to avoid or reduce income tax or national insurance on what the Statement referred to as the ““rewards of employment””. The Government’s position is that that should be the case even if such a scheme had not even been thought of in December 2004. We find it difficult to see how that meets a test of precision. It seems to take the principle of retrospection too far. As I said previously, we understand why the Bill includes a specific extension of the disclosure regime. But we find it difficult to understand why the Government find it necessary to introduce an unprecedented level of retrospection—as I believe it genuinely is—without even waiting to see whether the disclosure regime will prove its worth by providing the notice that the Government require to step in and deal with schemes they regard as unacceptable. When put in the light of the reduction in disclosure periods announced in the Pre-Budget Report, it is increasingly difficult to see why this degree of retrospection is reasonable. When the Government introduced the disclosure regime in the Finance Act 2004, it was in response to a conscious decision not to introduce a general anti-avoidance rule. I understand that one reason for that decision was the complexity and cost of introducing a clearance procedure. I do not want to go into the pros and cons of having a general anti-avoidance rule versus disclosure, but I do want to echo a point made by the noble Lord, Lord Newby. In effect, we now have a general anti-avoidance rule for tax and national insurance on earnings, without having an equivalent clearance procedure. That must raise issues of fairness for taxpayers. The taxpayer ends up between a rock and a hard place. Judging by various comments made by senior officials in Her Majesty’s Revenue and Customs, that is exactly where they, if not the Government, would like to see taxpayers. I suggest that a tax system introducing such a degree of uncertainty is an unhealthy development and potentially unfair to taxpayers. The Government have made much of how they are entitled to collect a fair contribution in tax and insurance, but they seemingly fail to acknowledge their duty to set up a legal regime which has clarity. Surely it should not be the obligation of taxpayers to pay whatever the government of the day deem to be fair in the absence of clear law. We are essentially talking about clarity. The Explanatory Notes are somewhat unusual, since they contain nearly two pages of analysis of the Bill’s position under the European Convention on Human Rights—the Minister referred to that. But the length of treatment demonstrates that, if nothing else, the Bill is clearly in difficult territory so far as the ECHR is concerned. I will not go into detail today, but many tax professionals are clear that the legislation will probably be challenged in the courts on ECHR grounds. The Chancellor told the Treasury Select Committee in another place that the convention,"““gives a government the power on behalf of the tax-paying public to raise taxes in a fair and proportionate way””." So the courts are likely to be asked to rule on whether the blanket retrospection covered in the Bill is fair or proportionate. In the meantime, we have legislation which lacks certainty. I have two detailed questions for the Minister. First, I hope that he can clear up some confusion about numbers; I know that he is very good with numbers. The regulatory impact assessment talks about additional national insurance contributions amounting to £95 million for 2004–05 as a result of the Bill, and £240 million per annum thereafter. Until just before Christmas, the HMRC website referred to £200 million in 2004–05 and £500 million a year thereafter. My honourable friends in another place tried several times to get clarification on that, but they failed. There is a great mystery: during the Christmas recess that reference on the HMRC website to higher figures disappeared without trace. So I am asking the Minister to explain, not the difference in the figures, but what has happened, and also to confirm the Government’s latest position on the estimates of additional national insurance contributions that they expect. My second question is a related one: how will the Government measure how much extra national insurance this Bill will achieve? Will it be based on additional assessments raised under specific regulations made under the Bill, or will it include something for national insurance that might otherwise have been avoided if the 2004 statement had not frightened off employers and employees from doing something fancy? In other words, if I table a Question for the Minister to answer—which I certainly hope to do—will that Answer be real or imaginary? I shall conclude with two general points. First, the Bill continues the blurring of the line between avoidance and evasion that has occurred under this Government. Tax planning is an entirely legitimate activity, which, if successful, leads to the avoidance of tax, and equally in relation to national insurance. It is entirely right and proper that the Government should ensure that the opportunities for avoidance are minimised, and we support them in that. Avoidance is not the same as tax evasion, however, which is not lawful. The Government have never been willing even to measure the scale of evasion, but it is generally believed to be a much greater problem than that of avoidance. Will the efforts of the Treasury and HMRC towards avoidance and evasion be proportionate to the scale of the respective problems? Specifically, what are the Government doing to minimise the much bigger problem of evasion? Secondly, many of the opportunities for tax avoidance arise out of tax incentives deliberately placed in the tax code by the Government. The tax breaks for small companies are a recent example. In the early days Government ministers portrayed these as a positive encouragement for unincorporated businesses to incorporate. Now, however, they describe incorporation as an abuse of the system, and have belatedly reversed their own incentive systems. That tells us that tax incentives are only a nuance away from tax avoidance in the Government’s eyes, but also that complexity—which is brought about in part by the Government trying to use the tax system beyond its natural purpose of collecting revenue—is also a root cause of avoidance. I keep hoping that the Government will find themselves on the road to Damascus, and will be converted to the cause of a simpler tax and national insurance system. That road may well lead to flatter taxes and a reduction in the number of people within the tax net, but it would certainly lead to a reduction in the opportunities and incentives for tax avoidance. It would also lead to a much fairer system that could be achieved without many of the undesirable features of retrospection that have been included in the Bill.