Examination of Witnesses

National Insurance Contributions Bill – in a Public Bill Committee am 8:57 am ar 21 Hydref 2014.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Gillian Wrigley and John Whiting gave evidence.

Photo of Annette Brooke Annette Brooke Chair of the Liberal Democrat Parliamentary Party 12:00, 21 Hydref 2014

May I welcome our witnesses? We are going to hear oral evidence from Gillian Wrigley, technical officer, Low Incomes Tax Reform Group, and John Whiting, tax director, Office of Tax Simplification. I should remind all Members that we must stick to the scope of the Bill and we have very strict timings. Could the witnesses please introduce themselves for the record and then I will ask Members to start the questioning.

Gillian Wrigley: Good morning. I am Gillian Wrigley from the Low Incomes Tax Reform Group. We seek to represent unrepresented taxpayers.

John Whiting: I am John Whiting. I am here as tax director of the Office of Tax Simplification. I also represent the Administrative Burdens Advisory Board.

Q 1

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

I thank both witnesses for coming to give us evidence today. I should like to start with Gillian. Thank you very much for your very helpful written evidence and the various briefings provided throughout the course of the Bill so far. I wanted to ask you about the interplay between the changes introduced by the Bill and universal credit in particular. Could you set out your key concerns about the impact of claiming universal credit? What do you think is the best way to try to manage that issue, given the changes that have been introduced in the Bill?

Gillian Wrigley: Thank you for inviting me here today. Perhaps I can give a bit of background about how universal credit works. If you are an employed person, such as I am, universal credit depends on both my family circumstances and the amount of net income that I receive from my employer on a monthly basis. In other words, what is looked at is my income after tax and national insurance contributions. To try to put self-employed people on a similar basis, their income is looked at after various trading expenses, if I can call them that, but also looking at their income after their tax and national insurance payments. The issue that arises here is that currently many self-employed individuals pay their class 2 national insurance on a monthly basis by direct debit, presumably because that helps them budget their payments.

Universal credit for self-employed people also has another slight nuance to it in that there is a device called the minimum income floor. The minimum income floor  is designed to stop people having hobbies rather than trades. It says that for a particular month an individual will have a minimum amount of income, regardless of what their income actually is. The effect, if you like, of making people pay all of their national insurance contributions in one lump sum is that it could push people’s income below that minimum income floor and so people would not get full relief for that national insurance. The implication is that they would get a smaller overall award of universal credit. That seems quite unfair when they are in exactly the same position that they might have been had they paid that on a monthly basis. Our view is that it would be much easier for people to budget if it were possible for them to have a proper, well communicated budget payment plan, so that they were able to continue paying on a monthly basis both national insurance and income tax.

Q 2

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

How many people would benefit from a budget plan of the type you are describing? What are the numbers we are talking about?

Gillian Wrigley: I understand that currently approximately half of people pay their national insurance by some form of direct debit. You are talking about approximately 2 million people. I saw figures that said approximately half a million might be expected to claim universal credit of the self-employed. It is a huge number of people.

Q 3

Photo of Jonathan Evans Jonathan Evans Ceidwadwyr, Gogledd Caerdydd

I am going to speak rather loudly, not because I want to shout at you, but because I am told that otherwise Hansard might not pick up what I say. I can understand that in the context of so many very wealthy celebrities who end up before the bankruptcy courts and explain the circumstances on the basis that they live for the moment and then along comes a big tax bill that they are not able to settle.

For people who are on low incomes and have difficulty budgeting it is an even more serious problem. That is the way that I read your evidence. You say towards the end of your evidence, however, that you have been speaking to Treasury and other officials and are hopeful of finding a solution. Can you give an idea for those of us who are concerned that a problem may be emerging if we do not take money on a regular budgeted basis and so end up presenting people with a large bill that looks beyond their means to settle?

Gillian Wrigley: I am sorry that I cannot give you any direct confirmation. We have been in discussion with Treasury as part of the consultations. We made it clear that it was essential that there was a budgeting plan available for them. We do not have any details of that so far.

Q 4

Photo of Jonathan Evans Jonathan Evans Ceidwadwyr, Gogledd Caerdydd

My second question is related to statistics produced by the Government that tell us that since 2010, 2 million more jobs have been created in the country. I am not sure what the split is in those statistics between those people who are in employment and those who are self-employed or, more particularly, self-employed people on low incomes. Has your group done any research in that area?

Gillian Wrigley: I am sorry that I cannot provide you with any figures on that. Perhaps I could come back to the Committee on that.

John Whiting: May I make a brief comment on the first part of the question? The Office of Tax Simplification has regularly looked at the difficulty that the self-employed have in paying their taxes in two large chunks annually rather than through the traditional PAYE. In a report we published last week, we pointed up as an example a system that operates in Sweden via a composite monthly payment plan for all taxes. That does not necessarily affect only the low paid. It could be, as you alluded to, quite high-earning people who would benefit from spreading their tax payments. That could encompass VAT if they were registered for VAT, not just income tax. We have suggested that is something that could usefully be looked at, basically to help people budget their tax payments.

Q 5

Photo of Jonathan Evans Jonathan Evans Ceidwadwyr, Gogledd Caerdydd

Although it is not the case for national insurance, we have a system in self-assessment for taxation where you make your first payment to cover the preceding year if you are self-employed but are also then invited to make a contribution in advance for the next year. That, in a sense, exacerbates the problem.

John Whiting: It does, particularly when you are first starting in business. I appreciate that this is slightly going off the tangent, but it is very relevant to the whole process of budgeting and paying all the taxes.

Q 6

Photo of Jonathan Evans Jonathan Evans Ceidwadwyr, Gogledd Caerdydd

It may be relevant in the context of national insurance. If people come into the employment space and are making their first tax payments as well as their up-front payments for the next year, and someone then comes along and asks for their national insurance, it can become much more of a burden than just looking for national insurance payment.

John Whiting: Exactly. They might be used to paying PAYE national insurance every month in their previous job.

Q 7

Photo of Michael Crockart Michael Crockart Democratiaid Rhyddfrydol, Edinburgh West

In your evidence, Gillian, you talk about the difference between an ability to make in-year payments and the current system. What sort of thing are you looking for?

Gillian Wrigley: We would want something very flexible. The issue for a lot of self-employed people is that they do not receive money on a regular basis—they might receive a large lump sum and then nothing for a period of time. While there are currently certain payment plans with Her Majesty’s Revenue and Customs, those are not adequately flexible. People on a low income might receive money and want to put some aside, but the current plans mean that they have to set aside a regular sum. It needs to be something very flexible.

Q 8

Photo of Michael Crockart Michael Crockart Democratiaid Rhyddfrydol, Edinburgh West

Your argument seems to be that making in-year payments is better because it adds to the flexibility.

Gillian Wrigley: I think so.

Q 9

Photo of Michael Crockart Michael Crockart Democratiaid Rhyddfrydol, Edinburgh West

Would the Bill be a move in the right direction?

Gillian Wrigley: What is being suggested here is that national insurance is paid after the end of the year. The Bill states that the whole class 2 national insurance will be paid afterwards.

Q 10

Photo of Michael Crockart Michael Crockart Democratiaid Rhyddfrydol, Edinburgh West

I accept that, but you said in your evidence that one of the annexes

“makes reference to an ability to ‘make in year payments’”.

Does that answer your worry? Could the Government do more to add flexibility and to allow those on low incomes—incomes that might change month to month—to cope with this and not end up with a big national insurance bill at the end of the year?

Gillian Wrigley: Yes. There has to be an ability to make in-year payments. The issue is that the current plans are not adequately flexible. There has to be far more flexibility.

Q 11

Photo of Michael Crockart Michael Crockart Democratiaid Rhyddfrydol, Edinburgh West

Okay. You raised a concern about the definition of “worker” in terms of foster carers and Shared Lives carers. It seems to be about the difference between a self-employed earner and someone

“in employment as a self-employed earner”.

Can you elaborate on your worries about that?

Gillian Wrigley: Foster carers or qualifying carers in general have experienced a favourable tax and national insurance regime for a long time. My concern is that the change in definition might be intended to change the regime for foster carers. The word “employment” is defined in the social security Acts as someone being in a trade profession or vocation, which is quite wide. My concern is whether that is adequately wide to include the carers. I suppose I would have liked something explicit to include qualifying carers.

Q 12

Photo of Michael Crockart Michael Crockart Democratiaid Rhyddfrydol, Edinburgh West

In the discussions that you have been having, have you had any response that deals with those concerns?

Gillian Wrigley: In our discussions it was made clear that there was no intention to exclude them. But, as I say, I would have preferred something definitely inclusive.

Q 13

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

I have a question for John. The simplification in the Bill comes as a result of the work that your team did. When you were looking at this, did you consider the impact on those with very low incomes, particularly around the impact on accessibility to benefits, and particularly universal credit? Is that something that you modelled or thought about when you were putting together the proposals for the change?

John Whiting: Yes, clearly we acknowledged that although from an administrative simplification point of view, merging class 2 and class 4 together is in many ways an obvious step, that has the clear implication and the clear issue that class 2 brings with it the entitlement to benefits, so one has to look at how that will be addressed. In the programme of reforms that we suggested in our initial report, which in many ways has given rise to this, we did point out that in many cases the contributory link is disappearing, and we felt it was not impossible to tie the contributory entitlement to possibly the combined class 4. That would be from a simplification route—our preferred route. It raises the issue—clearly within Gillian’s area—of the very low paid who might be paying class 2 and getting entitlement, but are below the class 4 limit. Like so many things, it is something that would need to be addressed with decisions taken as to what happens at the margins.

Q 14

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

Do you have a view about the numbers that we are talking about? Gillian thought about half a million. Is that something that you looked at?

John Whiting: I do not have an exact figure, although I recognise that figure. It was discussed when we were looking at it, but we did not go as far as research. Inevitably, what we are supposed to do is come up with ideas that can, if Ministers are inclined, be gone into in far more detail in terms of the impact.

Q 15

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

A question for both of you. How the changes are communicated to the group of people affected will be really important. What do you think good communication would look like in respect of the changes? What would you like to see happen to make sure that those affected know what is going on and know what they need to do to organise their affairs?

John Whiting: Given that all the class 2 payers are known to HMRC, a fairly obvious first step is that they should all be written to and have it carefully explained. It will need a certain amount of following up, quite careful and directed. At the same time as one writes generally to class 2 people that life is changing for you, you could imagine, I hope, as follow-up, targeting it very much at the low-earning class 2 payers. That would be a potential second round, and you could imagine, after the change has happened, potentially a third round of, “This has happened; have you seen it? Are you absolutely sure what is going on?” That starts to get us into the possibility of voluntary class 2, and there is this extra little tweak of the difference between voluntary class 2 and voluntary class 3. So there is quite a communications exercise, as I see it.

Gillian Wrigley: I think it is necessary to write to people. We understand the will to have things done digitally, but lots of low-income people are in fact digitally excluded. Although it would be good to have a digital resource for those who might wish to refer to it, writing to people is probably key. If we look back to when self-assessment was first brought in, there was a huge campaign. For the low-income people, such a campaign is probably needed.

Q 16

Photo of Andrew Robathan Andrew Robathan Ceidwadwyr, South Leicestershire

This is a question for Mr Whiting. I understand that the proposals are, to a large extent, yours or, should I say, your Office’s?

John Whiting: You are very kind.

Q 17

Photo of Andrew Robathan Andrew Robathan Ceidwadwyr, South Leicestershire

Most laymen, such as me, would view the integration of national insurance contribution and income tax as inherently desirable in the long term, in terms of simplification. We are constrained by time so could you, in general terms, explain how this step is leading towards that, what further steps are necessary, what sort of time frame one might have, and anything else you would like to say? Is there opposition to it?

John Whiting: To pick up your opening comments, most businesses say that the difficulty caused by national insurance and income tax being on very different systems and computation is one of the greatest sources of complexity, confusion, error and so on; ABAB and OTS have long argued that they should be brought together. I do not need to tell you that combining the two major levies into one tax is clearly a major undertaking with huge political implications.

At the OTS in the early days, we said that that is clearly a desirable goal but that what could and should be done is to set out a programme to bring them closer together, of which—you are right—this is one step. Others are, as far as possible, common definitions of income, if I can use a fairly neutral term, for income tax and national insurance. If there are to be differences—for example, pension contributions are deductable for income tax but not for national insurance—one should be clear about what those differences are. Then, why not put national insurance on to an annual cumulative basis, in line with PAYE, so that it can be calculated accordingly? This little change is a move in that direction. That itself has further implications but it makes it much easier to run.

Is the contributory principle, to which we have alluded, really worth it? Is it really necessary in this day and age? If one is subtle, we have done a later report looking at employee benefits and expenses. Generally, employee benefits are taxed to class 1A national insurance, that is, employers only, rather than employers and employees. Should that subsist? There are a number of stages where, as we put it, useful simplification dividends would accrue at each of those that are tackled; it could stop short of merging the two levies formally into one.

Q 18

Photo of Andrew Robathan Andrew Robathan Ceidwadwyr, South Leicestershire

That is extremely useful context for a layman such as me. Apart from obvious difficulties, some of which you have mentioned, is there much resistance to the principle of having one single base, given that, as you alluded to, national insurance does not seem quite the contribution that it was initially when it was, indeed, national insurance?

John Whiting: If you are talking to somebody who I might call a technician or, indeed, to a business man who, as an employer, has to run the payroll, you will probably find very little opposition to it. However, we have to acknowledge that they are separate levies, and they are known and managed as such. Clearly, to many people, national insurance still pays for the health service, pensions and whatever. If you ask people, that is probably what many of them believe. There are huge issues to be tackled. From the point of view of simplification and an employer’s administrative burden, there is surely a huge win for bringing the levies together, but in no way do we belittle the difficulties that causes. Going back to Shabana Mahmood’s point on the low paid, those are some of the issues that would have to be tackled through this merger. The current Government have started some work in the integration of the operation of the two taxes. Inevitably, it has been slightly sidelined because of universal credit, but a lot of work has been done, at least on a preliminary basis.

Photo of Annette Brooke Annette Brooke Chair of the Liberal Democrat Parliamentary Party

Are there any further questions for our witnesses? I would like to thank both of our witnesses on behalf of the Committee for their evidence this morning. We will now move on to the next witnesses.