National Insurance Contributions Bill
October 30, 2005
I reckon there are few subjects of debate more likely to empty this Chamber than National Insurance Contributions!
In an age where consecutive Finance Acts create and then abolish new fangled tax instruments, NI contributions have proved remarkably resilient. We are now in the 58th year since their coming into force as part of the post ? WW2 welfare state establishment.
Back in 1948 those at work, except married woman, paid the princely weekly sum of 4s 11d (that’s 24 1/2p for all those Members of this House younger than me!) in a flat rate compulsory contribution.
How times have changed! The only thing ‘flat’ about National Insurance today is the spin which government finds itself at trying to raise as much money as possible in its frantic attempt to balance its books.
As I said during committee consideration in June (SCB; Sch2, col43, June 21) of the Finance Bill:-
"for our part, it is difficult to avoid the conclusion that many of the anti-avoidance proposals are driven by an increasingly desperate Treasury desire to fill its revenue black hole without regard to the damaging effect that it will have on the development of start-up ventures, and indeed some bona fide remuneration scheme."
The Finance (No. 2) Act 2005 made a number of amendments to the Income Tax (Earnings and Pensions) Act ("ITEPA") 2003 with the aim of closing down schemes to avoid income tax using employment related securities. These amendments had retrospective effect, going back as far as 2 December 2004.
It is not currently possible to extend retrospective provisions on income tax to National Insurance Contributions ("NICs"), as liability to NICs can only be charged from the date on which NICs regulations are made (except in limited circumstances where the regulations can be backdated to the beginning of the tax year).
The stated purpose of this Bill is to align NICs legislation with income tax legislation, which allows tax liability to be applied back to the date of an announcement. As the Minister pointed out the Bill also contains provisions that restrict the ability of employers to pass on any secondary NICs liability to employees, and extends the existing tax disclosure rules to NICs.
Yet there is good reason why existing NICs legislation does not allow regulations to take such retrospective effect. Only in the rarest of circumstances should government contemplate retroactive or retrospective legislation. I fear that the effect of this Bill is to institutionalise retrospection. We shall certainly need to explore this in greater detail at Committee Stage.
The substantive clauses of this legislation put into place the intention of the Paymaster General’s statement of 2 December last. Recognising the difficulty of anticipating "the ingenuity and inventiveness of the avoidance industry", she gave notice then "of our intention to deal with any arrangements that emerge in the future designed to frustrate our intention that employers and employees should pay the proper amount of tax and NICs on the rewards of employment. Where we become aware of arrangements which attempt to frustrate this intention we will introduce legislation to close them down, where necessary from today."
The key issue is whether the importance of protecting tax revenues outweighs the need for certainty in commercial forward planning.
The threat of retrospection came as a great surprise to many tax professionals. Clearly it falls foul of one of the great canons of taxation ? certainty.
Arguably retrospection is unconstitutional; and if not it should be regarded as acceptable only when couched in clear and unambiguous terms. The government has made much in its admirably comprehensive Explanatory Notes of what it regards as the Human Rights Act position.
In spite of characteristically robust protestations of Human Rights compatibility by the Chancellor of the Exchequer, his of course is the position of an interested party. He needs the money to keep flowing in. Several experts in this novel, but complex, area of law take a different view.
No-one disputes that it is the duty and responsibility of government to devise policy. Equally parliament must retain effective control over how that policy is implemented by legislation.
Yet parliament will have only cursory scrutiny, because this Bill is designed to enable HM Revenue & Customs to backdate to December 2004 those National Insurance Contributions on which the Finance Act (No.2) 2005 changes apply.
Let’s look at the practical effect here.
Remember that NICs come from both employer and employee.
Is the government seriously suggesting that erstwhile employers of someone who has died since December 2004 or of a former employee who has been fired in acrimonious circumstances should have disputed NICs clawed back? This has all the making of yet another farce on the lines of the tax credits fiasco. How much contingency has the Minister made for writing off sums that can neither be claimed nor easily traced?
But it gets worse. By the time this Bill makes it through parliament, 2006 will be upon us.
Unravelling NICs arrangements already over a year old will also most likely have knock-on implications on disclosed employer company profits in previous tax years. This may have a crucially important impact especially if the tax avoidance in question is widespread, as may be the case in certain industry sectors. What if the company concerned has been sold in the meantime? Perhaps at what becomes clear, eventually, is with the benefit of vastly inflated profits?
The sheer certainty and potential for unfairness outweighs the benefits of this innovative attempt to deal with the avoidance problem that the Treasury seeks to tackle.
Given the Paymaster General’s broad-brush assertion in her statement of 2 December, how can we be sure that the scope of these retrospective powers will be used only sparingly? Ultimately the crux of the question is this ? who judges whether something is to be regarded as "unacceptable" avoidance?
Most of the provisions included in the Bill have retrospective effect. The Government is becoming increasingly open about passing such provisions. Previously such provisions were always described as "retro-active" ? now the word "retrospective" is openly used in the Bill’s language.
While most of the Bill’s provisions cannot take effect before 2 December 2004, the effect of sections 5 and 6 is potentially unlimited as any past agreements and joint elections to transfer secondary liability to NICs to employees can be disapplied. Under these elections, employers were able to pass the NICs cost risk to employers without limit as to when the election was entered into.
The Bill’s retrospective effect necessarily causes uncertainty for UK businesses. Businesses should be able to plan their activities and cost base in a stable framework. This is difficult if the Treasury has the power to pass new tax provisions with retrospective effect.
The Government justifies its approach by pointing out that the new provisions will not affect the "overwhelming majority of employers and employees [who] pay their fair share of tax and NICs", but only a small minority who unreasonably have "sought to use sophisticated and complex tax avoidance schemes to pass more of a burden onto the rest of us". In other words, businesses that have attempted to reduce their liability to pay NICs in accordance with existing legislation are being vilified as antisocial.
Ideally we need the HMRC to set out their thinking on the principles which guide the way they intend to implement this policy announcement. We repeatedly called during consideration of the Finance Act (No.2) 2005 for more attention to be paid to the pre-clearance procedure. The spectre of retrospection, and with it uncertainty, makes a pre-clearance process ever more important. Otherwise the Treasury seems to be relying upon making any such schemes of arrangement so commercially unattractive that the need for retrospective legislation will be rendered redundant.
We understand that the first use of powers in this area will be to bring in NIC regulations to parallel the charges imposed in the Employee securities elements of the 2005 Finance Act.
This is unobjectionable, although it begs a more fundamental question. Now that National Insurance involves only a notional contributory element, is it not time that the rules surrounding NICs are changed to work alongside those of income tax?
This Bill highlights once again the problem of having two taxes that basically cover earnings. The only reason for having NICs and income tax is to uphold the fiction that the basic rate of tax is 22% when it is really 33%. This is an expensive fiction that costs businesses millions of pounds in administration each and every year. Perhaps things have now got to the point that it is necessary to consider a single standalone income tax with a basic rate of 33% and an employers’ portion of 12.8%. This would cut costs, complexity and prevent the slight differences in the rules of the two taxes being played on by tax avoiders.
Indeed clause 1 appears to be worded with this sort of change in mind ? perhaps the Minister is summing-up can confirm the Treasury’s intention and indicate how this process might be managed.
There are three other aspects I wish to touch on here.
First, Regulatory impact assessment. The Government has attempted to assess the Bill’s potential impact in its RIA and has come to the conclusion that the combined impact of the measures included in the Bill "will not affect small businesses disproportionately. However, it should be remembered that it is small businesses that are most dependent on attracting quality personnel and therefore need to be able to offer tax efficient employee incentive schemes. As the Government has already announced, the powers in the new Bill will first be used to tackle NICs avoidance through employment related securities. It is suggested that this will disproportionately affect those businesses that the Government originally intended to promote by introducing tax efficient employee incentive schemes.
This is made worse by the fact that employers cannot share any new unexpected liability to NICs with their employees.
Secondly disclosure. Clause 7 indicates that the regime for NICs and income tax will be similar. It would be useful to have an indication from the Treasury as to how it will work alongside taxation specialists to ensure a smoothly operating system. Naturally all sides would prefer as long a lead-in time frame as practical.
Finally, much hinges in the future implementation of the intentions set out in this enabling legislation on regulation?making powers.
In summary this Bill brings NICs into the world of Tax Avoidance Disclosure and opens the way to retrospection. However, its operation, achieved by specific regulations, highly technical and complex, will not be subject to full parliamentary scrutiny.
Let’s be honest ? without significant outside expert help, there is little headway that Opposition spokesman can forge even in Second Reading debates such as this. However, if such technical legislation with its retrospective element is brought in only via regulation, even where approved by Statutory Instrument, we run the real risk of adding to the statute book a series of poorly thought through laws.
My biggest worry is that this will result in employers and employees alike running the risk of being deprived of their property in an arbitrary manner.