National Insurance Contributions Bill

My Lords, this has been an interesting, if relatively confined, debate about an important Bill that is central to the Government’s aim of deterring tax and national insurance avoidance. Before I address some of the specific points raised, I hope your Lordships will permit me to reiterate the purpose of the Bill. It demonstrates our continuing commitment to take action against avoidance; it is key to achieving the Government’s objectives of fairness and opportunity by ensuring that all pay the correct amount of tax and national insurance; it is an essential element in building a serious and credible deterrent against future avoidance activity; and it is needed to secure a total tax and insurance yield of £200 million in 2004–05, and £500 million per annum thereafter. I stress that the figure is for both tax and national insurance. As the income tax disclosure provisions have demonstrated, it is not possible to anticipate the range and complexity of these extremely contrived arrangements. The Government intend to close down such avoidance activity permanently, and this Bill will ensure that the Government can deal with any arrangements that emerge in future that are designed to frustrate their intention that employers and employees should pay the proper amount of national insurance on the rewards of employment. On the specific issues raised by noble Lords, the noble Lord, Lord Skelmersdale, was critical of retrospection in the Bill and disagreed with the view of the economic sub-committee of your Lordships’ House. I stress to the noble Baroness, Lady Noakes, that the retrospection is limited. It is tied to a tax measure which is retrospective, and would have to be fully debated in another place. It is subject to a three-month consultation process before regulations are made and to the affirmative procedure. It is simply not retrospection at the will of the Treasury. It was suggested that the ministerial Statement of 2 December was not widely understood by taxpayers. I disagree. A lot of publicity was given to the Statement and to the issue itself. We should recognise that these are not in-house schemes devised by ordinary small companies or by individuals watching the television while sitting in their living rooms. These are highly sophisticated avoidance schemes, promoted generally by large accounting and legal firms. They are well aware of Statements of this nature and have significant empires directed to all sorts of legislation. To suggest that this measure will not come within the purview of those who will mainly be affected by it is simply not correct. I was asked why the measure was being introduced now and whether it was an afterthought. The answer is ““no””. It could not be done in a Finance Act; a separate Bill is needed. This is the first opportunity to introduce legislation in the form of a national insurance Bill. That is why on an ongoing basis we need regulations that do not require primary legislation or a slot in the Queen’s Speech and the parliamentary programme. It was suggested that the Government need the money. We could spend a lot of time reviewing the Government’s finances but we should recognise that we are one of only two countries in the G7 with net debt below 40 per cent of GDP. We have met the golden rule and the sustainable investment rule. As I am sure noble Lords will readily recognise, that is not an issue; the issue is about fairness. I believe it was suggested that the schemes that are now being addressed are not illegal until Royal Assent is given to the Finance (No. 2) Act. That may be technically correct but the purpose of the Statement in December 2004 was to give due notice that these kind of schemes would not be permitted in the future. Although the technical legislation followed, given the nature of these schemes there should have been no doubt that both tax and national insurance legislation would be put in place to counter them. I was pressed on the meaning of ““expedient””. Frankly, it depends on the particular circumstances. I would not like to define in detail today the circumstances in which, and how, that might be applied. It depends on individual circumstances. It would be wrong to try to pre-empt that by making a statement from the Dispatch Box. I have dealt with the suggestion that no one knew about the measure. I believe I was asked whether we could point to any schemes that warranted this legislation. The purpose of the December 2004 Statement, this Bill and the Finance Act 2005 is to prevent such schemes coming forward. There has been a deterrent effect. I listed some of the schemes that have existed since 1997. We believe that without both parts of the legislation they would continue to be devised. My noble friend Lord Rosser gave strong support to the provision, for which I am grateful. He itemised the funds which are protected by the measure. He rightly pointed out that the avoidance that is going on is associated particularly, although not exclusively, with bonuses, and generally with bonuses comprising significant amounts. The thing about bonuses is that in a sense they are one-offs, so it is easier without provisions of this nature to direct avoidance, because you can plan the point, moment and manner of payment quite precisely. That is why avoidance has grown up particularly around that. My noble friend talked about ethical behaviour, and I agree with that. The legislation sends a strong message to employers, the majority of whom do not engage in these sorts of schemes. They can now continue not to engage in them with the added comfort that no one is going to get a competitive edge because others are not prepared to adopt the same ethical standards. My noble friend made some very telling points about the comparisons of non-compliance with low pay and what is happening in the tax system. The noble Lord, Lord Newby, gave his support to the Bill, and I am grateful for that. In a sense it is trying to make sure that we garner the revenue to which we are entitled and which was intended under the legislation that is in place. He stressed that the schemes that these provisions are aimed at are highly contrived. The reality is that we talk about certainty in the tax and national insurance system, but generally people know when they are straying into those areas; I do not believe, if you look at the schemes that have come forward, that employers have unwittingly found their way into those schemes. They do it purposefully and often on the back of very strong professional advice, which I imagine is quite expensive. A consultation period of 12 weeks is a clear commitment in the secondary legislation, and it will follow the debate taking place in another place on the related tax provisions. The noble Lord asked me a question about the clawback of national insurance when someone has left employment. An employer will be able to recover the primary NICs from any payment subject to existing limits. The rights of employers have to be balanced with the rights of employees; therefore it is possible that the employer will not be able to recover all the NICs that may be due, but that will not affect most employers, who do not engage in avoidance. I am not sure that deals fully enough with the particular point that was raised, so I will revert to the noble Lord on that. The noble Lord touched on issues of general anti-avoidance rules, and some of the difficulties with those and with clearance procedures are well-aired. As far as the Government are concerned, all measures must be kept under review, because we are absolutely committed to making sure that people pay their fair share. I know that there is a big debate about what that means in any given context. I would take issue with both the noble Lord and the noble Baroness, Lady Noakes, on the issue of simplicity. If you look at what has happened to national insurance, it demonstrates overwhelmingly the reverse of the point that is being made. The complexity has followed the avoidance; not the other way around. You have a relatively straightforward system to start with, someone gets around that with a device that is not caught by it; there is legislation to deal with that; a further measure to get around that; and legislation to deal with that. The complexity has followed the avoidance; not the reverse. Indeed, one of the benefits of this measure is that it negates further complexity because the nature of the retrospection means that it is less likely, going forward, that greater complexity will be needed. The noble Baroness, Lady Noakes, restated the position of the Conservative Party that it does not oppose this Bill. I understand that position, and I recognise that we will probe some of these matters further in Committee. She agreed that the Clause 7 disclosure requirements do not really add new issues to the matter, which has been around for a little while. She referred to the four tests of the noble Lord, Lord Rees, and the issue of how precise was the warning of 2 December 2004. I argue that it was precise enough. I stress again that employers know when they are getting into the ambit of such schemes. If you look at the history of some of the intricate nature of the schemes, people know what they are doing. It has become clear that the existence of that statement and the legislation that has followed, including this Bill, have helped negate some schemes that would have otherwise gone forward. The convention on human rights was touched on. We will have to see how that issue develops, but the clear advice to the Government is that the Bill is compliant and proportionate. I say again that the Bill is targeted on retrospective tax measures, which go through the procedures of another House and the affirmative procedure in this House. I hope that I have cleared up the numbers. I think that the £95 million and the £240 million relate to national insurance only, whereas the £200 million and the £500 million relate to national insurance and tax. If I am not right about that, I will write to the noble Baroness. Quite who was diligent enough over the Christmas break to update the Government’s website, I do not know. I have not checked back to see what the sequence was, but I believe that I have given the correct explanation of the numbers. The debate about the gap between avoidance and evasion is interesting. I guess that, when push comes to shove, the two can adjoin closely. However, that is perhaps a debate for another day. I reiterate the point that the measures in the Bill are proportionate. The point was made that some of the avoidance issues arise from the incentives that are offered. That underlines the difficulties that the Government face in offering incentives through R&D tax credits and lower rates for smaller companies. If you put in place incentives, for which business often presses, there is a risk that there will be abuses and that the incentives will have to be reversed or ameliorated. The more simplicity you have, the less likely you are to have avoidance—the avoidance follows the complexity. The question was asked whether the Government are acting proportionately in relation to evasion and avoidance. I argue that they are. The difficulty with evasion is knowing precisely how widespread it is. One hopes that, if you know that there is evasion, it should be relatively easy to tackle it. These are big issues. We want taxpayers to be compliant, as I believe people in the UK overwhelmingly are. We should be pleased about that, as it is certainly a contrast to what goes on in some countries, although that does not negate the need for anti-avoidance provisions such as those in the Bill that ensure that people do what they are required to do. I think that I have dealt with all the points that have been raised. If I have not, I will look at Hansard and write to noble Lords.