Examination of Witnesses

National Insurance Contributions Bill – in a Public Bill Committee am 12:00 pm ar 21 Hydref 2014.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Frank Haskew and Andrew Hubbard gave evidence.

Q 19

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

Welcome. We will now hear oral evidence from Frank Haskew, head of the tax faculty at the Institute of Chartered Accountants in England and  Wales, and Andrew Hubbard, a partner at Baker Tilly. Would the witnesses introduce themselves for the record? A sentence will be fine, then we will ask questions.

Andrew Hubbard: My name is Andrew Hubbard. I am a tax partner at Baker Tilly. I am a former president of the Chartered Institute of Taxation.

Frank Haskew: I am Frank Haskew. I am the head of the tax faculty at the Institute of Chartered Accountants in England and Wales.

Q 20

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

Thank you both for coming to give evidence. I would like to put some questions about clauses 3 and 4, which relate to the provisions for follower notices and accelerated payments, and promoters of tax avoidance schemes. Some of these provisions have already been made in the Finance Act 2014, so the sister provisions have been in place for a short period. How do you both think that they are working so far?

Andrew Hubbard: I think it is slightly too early to say in terms of their actual impact, because the follower notices and accelerated payment notices have only started to be issued. I think the prospect of those notices being issued has had quite an impact on taxpayers. In my experience, a significant number of taxpayers, who perhaps in the past have used fairly aggressive avoidance schemes that they now regret, are using the opportunity to say, “Right, it is time to sort matters out.” In the past, there was a little bit of a head in the sand attitude in thinking, “Well, at some point something may happen.” So, the fact that the notices may come quite soon is having some impact. I think it will mean that those who were not quite sure whether avoidance was the right thing to do, will pay their tax and settle. I am not sure how much impact it will have on those people who are determined to see it out to the end.

Frank Haskew: I entirely agree with Andrew. It is still very early days with these provisions. I know that HMRC has a rolling programme to put out letters over almost two years to address the number of cases, so it is early days. We are starting to see a few comments coming through, but I think we will see a lot more over the next six months. In terms of the market, we are already seeing things like professional indemnity insurance starting to get quite interested in this area and whether people have been involved in aggressive tax avoidance schemes. So I think the market is starting to move already in relation to things such as insurance.

Q 21

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

Do you mean in respect of potential professional negligence claims?

Frank Haskew: Yes.

Q 22

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

In a way that was not already the case?

Frank Haskew: Like all these things, you pick up a number of comments and it is at this stage fairly anecdotal. I have heard now from a number of different sources concerns about the PI insurance renewal process. PI insurers are starting to ask much more searching questions about the business and whether you do tax advisory work and, if so, what sort. The market is already shifting in that way. Obviously our members have to have professional indemnity insurance. That is already becoming quite an issue.

Andrew Hubbard: It is part of a continuum. If you look at the changes that have happened in tax avoidance policy and practice over the last four, five, six, seven years, this is another element in that chain of people saying, “Well, okay, it might have been the ‘right thing’ to do five years ago, but it ain’t the right thing to do now.” It is undoubtedly having an impact on the delivery and the number of firms that are promoting schemes. Taken as a whole the market and the environment have changed quite rapidly.

Q 23

Photo of Michael Crockart Michael Crockart Democratiaid Rhyddfrydol, Edinburgh West

According to your written evidence you both seem to agree that while what is proposed is generally okay, we should have gone further. Is that fair?

Andrew Hubbard: In the specific reference to the class 2 reforms, I welcome the changes to class 2. But if you were designing a system from scratch would you have two different classes of NIC for the self-employed? Or would you roll it into a single class of NIC, as in an ideal world that is what would have happened. Class 2 is essentially the relic of the old days of the stamp. Some people still talk of it in those terms. I think it is the right thing to move from the weekly basis to a class 4 basis. It would have been interesting to see whether it could have all been rolled into a single revised class 4.

The mechanics of class 2 and the deferments, small incomes, exceptions, all of those were immensely complicated. If I could just say from a personal point of view, I had a time when I was an earner and had a small amount of self-employed income. Dealing with the complexities of the deferment of NIC in those situations was quite messy for tiny amounts of money. It is a welcome change but I should like to have seen it all rolled into a single self-employed national insurance rate.

Frank Haskew: Again, I entirely endorse what Andrew has just said. We have made similar representations in the past on this. Page 9 of your research paper 14/45 sums up some of the problems with class 2. It says that less than 0.3% of the NICs collected accounts for about 40% of admin burden of HMRC. That seems totally out of kilter. Given HMRC is under pressure, we all need to help streamline and reduce costs. It was essential that class 2 was looked at. Given those statistics it must make sense to bring it closer to class 4. But as we say, in the long term you have to ask whether class 2 can survive in its current form.

Q 24

Photo of Michael Crockart Michael Crockart Democratiaid Rhyddfrydol, Edinburgh West

You are making a strong case for why it is better for HMRC. But we have just had evidence about the impact that it may have on the low income self-employed. Are you at all worried by the difficulties the simplification may cause for that group of people?

Frank Haskew: Under the new rules you will not have to make class 2 if you are below the £5,885. You can still make voluntary contributions. There is some concern about the universal credit purposes. If you are paying every six months rather than as you go through it can make a change to your universal credit. So there are still concerns about that. Again, time will tell how that will impact in practice.

Q 25

Photo of Michael Crockart Michael Crockart Democratiaid Rhyddfrydol, Edinburgh West

You both agree, once again, on one of the other parts of the proposed Bill, which is introducing a targeted anti-avoidance rule for intermediaries relating to national insurance, and you are both quite critical of it. Could you elaborate a little on why that is?

Andrew Hubbard: I am not critical of the fact that there needs to be national insurance avoidance legislation; there needs to be, just as there needs to be anti-avoidance legislation for PAYE. The question is whether or not there is a need for a specific TAAR as well as all the other issues that bear into this area, because we clearly have a large number of specific provisions: IR35, the agency legislation and the managed service company legislation. You also have the general anti-abuse rule itself, and one of the questions in my mind is this: is there, on top of the GAAR, a need for a specific TAAR? My fear with all of these things is that they overcomplicate matters, and that the more different ways you have of slicing things up the more opportunity there might be to fall through the gaps between the various anti-avoidance provisions. I am not yet convinced that there is a need for a TAAR as well as everything else we have.

Frank Haskew: That is very much our view, as well. Just to reiterate what Andrew said, we support the fact that the Government need to take steps. They have obviously created provisions in relation to the income tax, and it makes sense to cover off national insurance too. However, we are a bit concerned that we now seem to have what Andrew said in his evidence is a plethora of all sorts of different anti-avoidance rules. Given that we now have the GAAR for both direct tax and national insurance, and given that people are normally looking to avoid income tax and national insurance, we wonder whether we have already got enough, with a separate TAAR for income tax and effectively a GAAR that covers both income tax and national insurance. So, is it, if you like, overkill? We have got the longest tax code in the world and we think that anything we can do to make it shorter must be encouraged.

Q 26

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

Off the back of those questions, I want to come on to the GAAR and the TAAR. Obviously, abuse and avoidance are two different things. I was just interested, Mr Hubbard, that you said you were worried that we may be creating more opportunities for schemes to fall through the cracks, but I wondered if the reverse was actually the truth, because you have to go quite a long way to fall foul of the GAAR, which has been one of the criticisms that some people have made of it. If you are not caught by the TAAR in respect of this measure, you will still be caught by the GAAR. Is it not the case that, one way or the other, you will be caught rather than slipping through the cracks?

Andrew Hubbard: Time will tell. We have very little experience yet of how the GAAR is operating, and I think it will be several years before that comes through. It may be that in the end the TAAR and the GAAR operate in different spaces, and it may be that in the end there was almost no need for the GAAR because the TAAR catches this activity. However, having gone through the process of creating a GAAR, with all the very important defence mechanisms within it and the checks and the balances, it almost feels like, “Well, we’ll put that to one side and we’ll put a TAAR in place, because it’s much easier to do that.” There is less in terms of balance and defences. The issue is that there are so many things going on in this space that we wonder if there is time to consider how each one of them moves before you go on to the next one, because potentially next year something else could come in.

Frank Haskew: We did a lot of work around the introduction of the GAAR, which was a seminal moment in UK tax. We hoped that the introduction of the GAAR would cut out the need for things such as TAARs, so the Government could rely less on them. We are still at the early stage of the GAAR. We have not seen a lot of activity relating to it, and we do not know the sort of things it might catch. We still need the belt and braces of the TAAR, but over time, as the GAAR starts to catch things, we will not need those sorts of provisions, but we are probably talking 10 to 15 years.

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

Thank you for that. Before I call Fiona O'Donnell, may I ask everybody to keep their voices up, as I am struggling to hear the speakers?

Photo of Andrew Robathan Andrew Robathan Ceidwadwyr, South Leicestershire

Is there a reason why we are in this room?

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

I think we have to cope with this room today, but it means that we must keep our voices up.

Q 27

Photo of Fiona O'Donnell Fiona O'Donnell Llafur, East Lothian

I am very glad to lead by example.

Mr Haskew, you said that there may be no need to separate the avoidance regulations for national insurance and income tax, but with the possible devolution of income tax to Scotland and the other devolved institutions—who knows?—do you think that is a sensible way for the Government to proceed?

Frank Haskew: I will follow your example and speak loudly.

I did not anticipate that question. Clearly, with the devolution settlement we are going to see a lot of activity over the next few years in this area. For that reason, one can understand why the Government adopted the approach they did, but the balls have been thrown in the air and is difficult to know where they will land, in tax and NIC terms. The Government adopted a pragmatic approach, but in the long term we will look at whether things such as TAARs are necessary, given that we are going to have an overarching GAAR.

Q 28

Photo of Andrew Robathan Andrew Robathan Ceidwadwyr, South Leicestershire

Our previous witnesses were asked about information campaigns, particularly for the lower paid. Do you think—this is quite a general question—that your fellow accountants and their clients will be sufficiently well-informed about these complicated changes? Are you content that the information will be passed on by you and the Government?

Andrew Hubbard: I think it will be a bit haphazard. We in the profession will pass on that information and the Government will pass it on. As with all these things, getting to the right people with the right message at the right time is difficult. If the e-mail lands at the wrong time, people do not read it. It is all about having sustained and regular communication. I think HMRC does some communication extremely well, but some of it does not work well; it is a little haphazard. Some of the stuff on the website is well signposted and is very clear and good, but some of it is not. I would wait and see what happens here. The message has got to be that this is not a once-only campaign. We as advisors and HMRC need to continue reinforcing the message about these significant changes. I imagine that a lot of people will forget that the changes to class 2 have happened and will continue to pay the money in the normal way.

Frank Haskew: Going back to your question, we agree that not enough has been done in this area because it is poorly understood. We consider ourselves tax specialists, but the people who have a real grasp of the national insurance rules and the state benefit rules are very few and far between. Yet it is hugely important for an awful lot of people. Funnily enough, I was looking at my own state pension position only a few weeks ago, and I was struggling to understand what my entitlements were going to be. If I am struggling then—I hate to say this—I think it is understandable that the average citizen is going to really struggle to get to grips with just how complicated the NIC rules can be in terms of your contribution record. When you add all that up, it is a very complicated area. The amounts of money are significant, particularly if you are not well paid. We need to do more as a country to ensure that citizens understand the NIC rules and what that gives them in terms of entitlement. What also comes over is that it is a very complicated system and I think people will struggle. There probably is a need to try to see if we can do some further simplification.

Q 29

Photo of Andrew Robathan Andrew Robathan Ceidwadwyr, South Leicestershire

You have reassured me that I am not the only person that finds it rather difficult to understand.

Andrew Hubbard: Obviously, we have class 3 national insurance contributions, which are voluntary. Under this regime there will be a form of voluntary class 2 contributions. I was trying to work out exactly what the difference was, because the rates are quite different, and what each of those two voluntary contributions will get you in terms of benefit. I found it very difficult to actually dig down anywhere to find out the answer to that question, and it is not fully addressed in the briefing notes. One of the things that everybody needs to do some more work on is saying what a class 3 voluntary contribution entitles you to, what the importance of that is and what a class 2 contribution entitles you to. I do not think there is enough information about that yet. If there is, I have not spotted it.

Q 30

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

I wanted to ask about the ICAEW’s written evidence to the Committee. You say:

“A power is needed to give HMRC the legal vires to repay NIC that is found to have been overpaid in connection with an accelerated payment notice.”

Can you set out why you think that and whether you have had any discussions with HMRC or others about how that has come about?

Frank Haskew: The particular problem that you mention is the way the current wording in the Bill talks about payment on account of unpaid contributions. There is a concern that if that is the case, if they were subsequently found to not be due, they could not be repaid because they were effectively already gone and could not be reclaimed. I am aware that there has been correspondence between the Chartered Institute of Taxation and HMRC on this and I think the view is that HMRC thinks that it has the powers and will repay NIC in this position. However, like all these things, it would be helpful to have that explicitly stated in the legislation. HMRC accepts the principle so we are all on the same page in that way, but I think it would be good to ensure that it was absolutely crystal clear in the legislation.

Andrew Hubbard: The issue goes back to the fundamental different legal basis of income tax and national insurance. Effectively, the mechanism for repayment of overpaid income tax is very straightforward and is almost automatic, whereas, because the national insurance provisions rely on certain court rules, it is not an automatic thing that if you have overpaid NIC you get it back. There are various claims mechanisms and also various limitation issues in terms of time scales for NIC payments and repayments. It is because, in the income tax version of this, accelerated payments are effectively payments on account, whereas here, for reasons we understand, they are final. It is just not crystal clear that NIC paid under an accelerated payment notice that is ultimately found not to be due will come back. I have seen some correspondence with HMRC, but I agree with Frank that it would be better to make it crystal clear and it is not quite that at the moment.

Q 31

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

Any further comments on that? Do we have any further questions? Is there anything that either of our witnesses would like to add very briefly?

Andrew Hubbard: The only thing I would like to add—it is the final comment I made in our firm’s representation—is that we understand completely why NIC has to go through a different process, but I think it is extraordinarily confusing that essentially the same provisions are dealt with in a different context at different times. We saw, when the disguised remuneration provisions came in a few years ago—those were effectively all about PAYE and NIC avoidance—that the effective starting date was different for those, and it came up with some very peculiar results indeed.

Here, because the power to issue an accelerated payment notice in an employment case for income tax is going to have a different starting date to the power to issue one in relation to NIC, we have this strange position at the moment in which NIC had the power to issue accelerated payment notices in relation to PAYE, but they are not doing it; they are holding back until the NIC rules are in place, so they can do a notice for both at the same time. That makes sense, but it is odd from a practitioner’s point of view, and I think from a taxpayer’s, that these provisions, which effectively do the same thing, have different commencement dates and different sets of parliamentary process.

Frank Haskew: I refer the Committee to paragraph 6 of our evidence, in which we talked about the Social Security Advisory Committee’s paper on NIC for the self-employed, and recommended that the DWP sets up a working group to examine the balance in social security coverage and entitlement to contributions between the self-employed and employed. That was an interesting and thought-provoking paper and I commend it. I hope that this Committee supports that important work.

There is still a need to look at simplifying and maybe rationalising NIC. I understand that from 2016, effectively the difference between what employed people and the self-employed will get from benefits will just be jobseeker’s allowance, which is not necessarily a particularly large difference. I wonder whether, in the longer term, there needs to be a single coherent state NIC and benefits system that works for both employed and self-employed. That will help in the long term to make people have a better understanding of the system, which at the moment I think they do not.

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

Thank you for those comments. There are no further questions. I thank you both on behalf of the Committee for your evidence.

Sitting suspended.