Clause 2 - Exceptions

National Insurance Contributions Bill – in a Public Bill Committee am 2:00 pm ar 21 Tachwedd 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Question proposed, That the clause stand part of the Bill.

Photo of David Gauke David Gauke The Exchequer Secretary

I do not intend to say much in my opening remarks, but I am keen to respond to any questions that might arise as the debate progresses.

Clause 2 lists the exceptions when an employer cannot qualify for an employment allowance for a tax year, and the liabilities to pay secondary class 1 contributions that are excluded for the purpose of the allowance. A number of groups are excluded, including public sector employers, such as Departments, local authorities and NHS bodies, unless that employer is a charity. That is in line with the Budget announcement that the purpose of the employment allowance is to help businesses and charities with the cost of employing people, rather than helping to boost funding across the public sector.

The second excluded category is domestic employers, which we discussed at some length in the evidence sessions. By domestic employers, we mean persons who employ personal or domestic staff at home, such as nannies, cooks and gardeners. Also excluded are personal service companies that are caught under IR35 rules; managed service companies on deemed payments of earnings to the worker; and persons carrying on a business as a result of the transfer of an existing business in the tax year in which the transfer takes place. A person will be excluded when they would qualify for employment allowance as a result of avoidance arrangements, including attempts to bring forward or delay an employee’s earnings. The term “avoidance arrangements” is given a wide meaning and includes any arrangements where the main purpose, or one of the main purposes, is to secure the benefit of, or an increased benefit from, the employment allowance.

Photo of Anne Marie Morris Anne Marie Morris Ceidwadwyr, Newton Abbot

We talked about this in the evidence sessions and I understand the reasons for the excluded groups, but I am concerned that a good lawyer looking at the Bill’s provisions might wonder how the terms will be properly interpreted. Public authority is defined in the Bill as

“any person whose activities involve, wholly or mainly, the performance of functions (whether or not in the United Kingdom) which are of a public nature.”

Will the Minister clarify whether there is any case law that would make the interpretation of that easy and beyond dispute?

Likewise, personal services are defined in the Bill as

“an employed earner who is employed (wholly or partly) for purposes connected with P’s personal, family or household affairs.”

Is that the subject of any case law? I am concerned about that. For example, someone might run their business from home and work at home, and they might employ an accountant to come into their home. Can the Minister give some clarity so that I do not need to be concerned about how the definition will be interpreted in practice?

Photo of David Gauke David Gauke The Exchequer Secretary

I am grateful for my hon. Friend’s intervention. She brings her experience and background as a lawyer, if I remember correctly, to the Committee. That is obviously a good background for a legislator to have, and I suspect that that view might have cross-party agreement.

The Bill defines a public authority as

“any person whose activities involve, wholly or mainly, the performance of functions…which are of a public nature”,

as my hon. Friend has said. That broadly means that the organisation is providing a public service, rather than being a business providing a service to a public sector body. For example, functions of a public nature would include collecting household waste on behalf of a local authority, GP services, running a prison, collecting debt on behalf of a Department and providing meals on wheels on behalf of a local authority. The following examples, however, would not be regarded as functions of a public nature: providing security and cleaning services for a public building, such as Government or local authority offices, or supplying IT services for a Department or local authority.

My hon. Friend asked about personal service companies and gave the example of employing an accountant. First, one has to remember that the employment allowance relates to an employment relationship as opposed to a contractual relationship. One might use the phrase “employing an accountant” but in terms of contracting with an accountant to provide some support, the employment allowance would not be relevant. The measure applies only if employers’ national insurance contributions are going to be paid. The area of personal service companies has, over the years, attracted much interest in terms of legislation and there has been well developed treatment within the tax system of what constitutes a personal service company and what does not.

Personal and managed service companies, as my hon. Friend says, will be excluded from the entitlement to the employment allowance on secondary class 1 contributions due on deemed payments of earnings to the worker. There is a good reason for that. It would not be right to give them the benefit of a relief against aid contribution liability that arises as a result of anti-avoidance legislation—the so-called IR35 rules for personal service companies and the managed service company rules. However, where such companies pay the worker a regular wage or salary that attracts a liability for class 1 contributions, they will be able to claim the employment allowance on the secondary class 1 liability on those earnings. In that respect, the employment allowance is following the precedent of the regional secondary class  1 national insurance contributions holiday, which we discussed this morning. The question was whether there is a precedent, and there is a precedent in that particular.

I hope that those introductory remarks are helpful. I intended to let the debate progress and then pick up any questions that flow. I hope the clause will have the support of the Committee.

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

I am grateful to the Minister for his introduction to clause 2. I shall take each of the exceptions in turn very quickly.

We had a very helpful evidence session on public authorities and a line of questioning was followed by my hon. Friend the Member for Scunthorpe in his exchanges with Mr Manclark, who is in the Public Gallery today. For the sake of clarity, I would like the Minister to respond when he winds up the debate on the clause to my questions. The situation is that set of employees work for a local authority. Their function is contracted out to company A, which is then taken over by company B—the normal TUPE regulations apply to the treatment of the employees. As long as company A does 50% or more work that is private in nature, it will be able to claim the employment allowance when the employees carrying out that public function move from the local authority to company A. Will the Minister confirm that that understanding is correct?

Mr Manclark has said that the 50% test for deciding whether somebody is wholly or mainly carrying out either a public or a private function is helpful. He clarified to my hon. Friend the very point the Minister has just made by giving the Committee examples of functions that would be considered to be public and those that would be considered to be private. We might consider the running of a prison or a cleaning contract for a set of government or public buildings that may or may not include a prison. Of course, it is often the case that one or two very large companies have contracts that encompass parts that would be considered public in function and others that would be considered private. I am interested in what the Minister has to say about the boundary close to and just over 50%. Presumably Her Majesty’s Revenue and Customs has some experience of policing that boundary and of applying tests to determine whether a company carries out a function in whole, in part or in the main. Will the Minister give us further details on how those boundaries are policed and the way in which that test is applied, perhaps with some real examples of previous HMRC experience? That would be very helpful to the Committee.

Even when Government buildings are cleaned by private companies, public money is used to pay them. For the benefit of the Committee, it would be helpful if the Minister could set out the rationale for allowing that set of transactions to be subject to the employment allowance. In contrast, it is easier to understand the rationale for allowing other types of businesses engaging in normal business activity to flourish, create jobs and, I hope, increase wages and so on by using the employment allowance in that way.

Will the Minister talk the Committee through what assessment HMRC has made of potential pressure points in the legislation? I appreciate that he probably will not want to tell us in detail what those pressure points are  —he does not want to alert tax planners. Immediately having discussed something, he might close it down, but I leave that to his discretion and judgment. The point was raised in oral evidence that the Bill will be looked at from the point of view of efficient tax planning. It would be helpful to know what HMRC has done to try and pre-empt that and how that process works in practice when we have new legislation of this nature.

The legislation will stop an employer from claiming the allowance and transferring the business to another employer—the second employer will not be allowed to claim the allowance for the same employees in the same tax year. That is sensible and clearly necessary in the legislation. Was consideration given to a slightly different scenario in which company A transfers to company B in April 2014, just as the employment allowance kicks in, but company A had not claimed any part of the employment allowance? My reading of the Bill is that company B would still not be able to claim any allowance for that tax year, and it would be helpful if the Minister could clarify whether that is correct. Did he consider whether a partially claimed allowance from company A might be allowed to transfer to company B, so that the full £2,000 benefit can realised for one set of employees in a given tax year? Will he set out the Government’s thinking on that scenario?

Photo of David Gauke David Gauke The Exchequer Secretary

I am grateful for the questions that have been raised on employment allowance. To provide some context, we are talking about a £2,000 allowance. It is unlikely that that sum will drive a great deal of avoidance behaviour. We believe £2,000 will make a substantial difference for a lot of businesses, but it is unlikely to motivate very complex structures. I suspect the Committee fully appreciates that point. It is worth considering—this is why we cannot be complacent—whether there is a way in which one could structure such arrangements so that one got paid £2,000 repeatedly. That is what we are seeking to address.

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

Just to pick up on that point, I fully take on board that the allowance is not large enough to make wide scale avoidance behaviour likely. We discussed franchises in oral evidence and how each individual franchise could claim the allowance. Across a franchise it might be the norm to behave in a certain way in order for each of those individuals to get the £2,000 allowance.

Photo of David Gauke David Gauke The Exchequer Secretary 2:15, 21 Tachwedd 2013

Yes, I take that point, but there may be circumstances in which it is entirely justified—different franchises are run in different ways and that might be appropriate. Our concern in such circumstances is contrivance and artificiality. Given that there are costs in setting up a new company and time involved in debating contracts and so on, in the great scheme of things the measure is unlikely to be particularly high on the list of compliance risks that HMRC deals with. None the less, we should not be complacent. There are provisions in the Bill to prevent the artificial, contrived fragmentation of businesses in order to get the allowance several times over. That is why, in subsections (5) to (9), there are provisions to counter arrangements under which persons might seek to exploit the employment allowance by restructuring or fragmenting a business.  In addition, the connected persons rules in clause 3 and part 1 of schedule 1 will ensure that, when companies control one another or are under the control of the same person or persons, they will receive just one employment allowance overall.

Photo of Ian Swales Ian Swales Democratiaid Rhyddfrydol, Redcar

We will discuss limited liability partnerships later. I do not suppose that we expected LLPs to be used as a way of avoiding national insurance for low-paid workers, but that is one of the abuses that have arisen. May I press the Minister further on that? Does he see any threat that people’s employment status will be changed, because £2,000 for each individual is a lot of money? Does he see any potential loopholes that will mean people’s employment status is changed in some way? For example, they could become entities in themselves.

Photo of David Gauke David Gauke The Exchequer Secretary

If anything, the employment allowance might put in place a countervailing pressure on what exists currently within the tax system. If looks through the various employment statuses that may be available, generally one tends to see the argument that the least tax efficient is standard employment status, whereby employers’ national insurance is paid. Legislation is often designed, for example, to prevent false self-employment, which is seen as a more favourable structure because of the treatment of employers’ NICs and NICs as a whole. I do not see the measure as one that is likely to drive behaviour whereby people put themselves into one employment status when they previously had another.

The Bill contains measures to prevent artificial or contrived behaviour. There will be no particular drive to incorporate because employers who are sole traders or partnerships will be able to benefit from the employment allowance in the same way as companies, so the measure has no effect.

The Bill prevents a second employment allowance being enjoyed in the same year when arrangements are in place to transfer a business, such as when a sole trader decides to incorporate and become a company. If the concern is the transitional point and status changing over the course of a year, which could conceivably be a problem, it is addressed in the Bill.

On the point about public bodies—we debated in the evidence session the phrase “wholly or mainly” in relation to functions of a public nature—the Government believe that a 50% test is appropriate. As Mr Manclark pointed out in the evidence session, a 50% test is in some respects easier to police than a 100% versus 0% test. I hope that that is properly appreciated.

The hon. Member for Birmingham, Ladywood, asked about pressure points and successfully anticipated my answer—we do not want to go into detail. However, I can assure the Committee that the appropriate anti-avoidance safeguards are in place. We have looked at the matter carefully. Notwithstanding the points I made about the allowance being £2,000—I said that that, in itself, is unlikely to justify complex restructuring arrangements—we have put in place provisions to provide some legislative protection. Of course, HMRC will take steps as and when necessary if the employment allowance provokes any avoidance behaviour. As I have said, that is in the context of a relatively small sum of money.

The connected persons rule is applied at the start of the tax year to see whether two companies are connected to each other. That sets the employment allowance treatment for the rest of the tax year. However, when there is a transfer of business, for example with a merger or de-merger, the allowance is enjoyed up to the point of the transfer, but not for the rest of that tax year. I hope that provides useful clarification to the Committee. With those answers, I hope that clause 2 can stand part of the Bill.

Question put and agreed to.

Clause 2 accordingly ordered to stand part of the Bill.