National Insurance Contributions Bill

Amendments Nos. 4, 9, 10, 15, 20 21, 26 and 31 would limit regulations made under the powers in the Bill so that they could take effect only from the date on which a public announcement had been made that such regulations were required. We estimate that these amendments could cost around £240 million per annum in lost national insurance. Over many years, as noble Lords have recognised, we have seen a minority of employers using sophisticated tax advice to sidestep the intention of anti-avoidance legislation. Despite legislation effective from the date of announcement, they have managed to continue to avoid paying the amount of tax and national insurance that is properly due on remuneration. They do that because new contrived schemes can be devised rapidly and prepared for use in response to legislation closing down existing schemes from the date of announcement. The revenue remains very much at risk even in the short-term with this approach because employers still have scope to adopt another scheme and get away with avoidance. A lot of those schemes are directed at one-off bonuses. The payment of bonuses is easy to structure at a time of the employer’s choosing making it easier for schemes to come forward on a short-term basis. It is the Government’s intention to shut this activity down permanently. To do that, we must fundamentally undermine the incentives for employers to repeatedly seek out new contrived schemes contrary to the intention of Parliament. The national insurance Bill is intended to deter avoidance by providing a power to backdate a national insurance liability to 2 December 2004, if necessary. With backdating in that way, there is little point in employers and their advisers looking for a new loophole because the national insurance will still become due. That is the deterrent effect that secures the yield estimated at £240 million per annum. Any amendment that removed our ability to make regulations imposing a backdated national insurance charge to a date before the announcement would remove the deterrent effect of the Bill and put the whole amount at risk. I think that noble Lords opposite are concerned that, without the amendments, businesses would lack certainty—those points were also made at Second Reading. They may also be concerned about retrospection. I shall deal first with uncertainty. I must tell those who say that the Bill increases uncertainty that the reverse is the case. The Government have made it abundantly clear in Statements to Parliament and, where appropriate, through legislation, what those who enter into contrived schemes can expect if they seek to avoid income tax and national insurance on employment rewards. Those who comply with their tax obligations will expect to pay the proper amount of income tax and national insurance on their employment rewards. On that subject, people can find certainty by not engaging in avoidance in the first place. The Statement made at the time of the 2004 Pre-Budget Report in the other place, and the context in which it was made, made clear that successive governments legislated to deal with the avoidance of income tax and national insurance on remuneration. At every point when one scheme closes another opens. In the intervening period, the honest taxpayer who has discharged his obligations loses because such revenue is not collected. On the question of retrospection, where necessary, it has been the practice of the Government—as it was of previous governments, as the noble Baroness, Lady Noakes, said—that anti-avoidance legislation should be effective from the day it is announced. The noble Baroness’s point, I think, is that the Government will be imposing a national insurance charge that could not have been anticipated by those affected. I do not agree. The Statement made alongside the Pre-Budget Report on 2 December 2004 made clear the objective of permanently closing those contrived and complex arrangements that are designed to avoid income tax and national insurance on the rewards from employment. Those who make future attempts to frustrate that intention despite those warnings will have been well aware that legislation will be introduced to combat such avoidance. I shall try to deal with some of the specific points raised. On existing share schemes that are tax-advantaged and agreed to do so by the Government, I was asked: what happens if the Government change their mind about that in future? The safeguard in all of this is the process of Parliament. If the Government sought to act unreasonably in introducing retrospective provisions, Parliament would be the safeguard, because it is with Parliament that we must start on income tax: until that legislation is passed, the national insurance regulations cannot be made. I should prefer not to be drawn extensively into the alleged flip-flop on small companies, but that highlights the challenge of continuing to be vigilant on avoidance issues. On compatibility with human rights legislation, the Government’s advice is clear. The noble Baroness is right that we must consider individual regulations in due course, but the Government’s advice is that the provision is capable of being compatible with the Act. That is the basis of the statements made. Reference was made to the position set down by Lord Rees. We take the position that the Statement made in December 2004 is of itself a sufficient warning of the sort of schemes that will be subject to the legislation. In any event, that may be argued to be a new approach, but we maintain that sufficient notice has been given. The sort of schemes that have been used are incredibly sophisticated. Anyone indulging in them is well aware that they are in the danger zone. The noble Lord, Lord Newby, asked about what will happen in years to come, how long this will continue for and how far the retrospective would go back. The importance of the legislation as a deterrent is that it is an ongoing provision. I suppose one could say that something may come to light in 20 years’ time that could be subject to a retrospective charge. In practice, given the disclosure and compliance rules, that is unlikely. If proposals could be judged to be unreasonable, I stress again that Parliament is the safeguard both for tax legislation, which is an integral part of the provision, and through the affirmative procedure that must be followed for the regulations. I was asked what other schemes are lurking around that the provision might be applied to. The importance of the provision is not only to capture schemes that emerge but to deter them and stop them emerging in the first place. Given our knowledge of what was potentially in the system and what has come forward, we can already say that that deterrent effect is working. The measure of the effectiveness of the legislation is not only what it may capture in national insurance and income tax but the collection that it maintains because people are deterred from using avoidance schemes. On the question of what companies are setting up in the UK or otherwise, the UK has generous tax advantage schemes that recognise the value of company share schemes in incentivising employees. Many companies participate and find them very valuable. The view that UK tax law disadvantages the setting-up of business in the UK is certainly not universal. According to the foreign direct investment figures announced earlier this week, the UK is again at or near the top of the league. That tells a story of how people want to invest in the UK. The noble Lord, Lord Skelmersdale, also touched on the point about what happens in 20 years’ time. I reiterate that this is primarily a deterrent to have on the statute book. If we were to limit it in any way, that would weaken the deterrent. We want to avoid doing that. I stress again that Parliament acts as a safeguards. Legislation would have to go through the proper parliamentary processes as part of a Finance Act and then as part of the affirmative procedure for regulations. In those circumstances, I ask the noble Baroness to be kind enough to withdraw the amendment.